Best way to finance my first investment/short term rental

[Shannon Green]

This will be my first investment property. It will be a short term rental property. When it comes to financing, is it best to finance this first deal as a second home/vacation home? Only 10% down payment necessary. Or, should I be in financing another way? Any advice is appreciated. I am a newbie! 

[Kenneth Garrett]

@Shannon Green

I definitely would go the 2nd home/vacation home. You'll get the primary home interest rate 3% or less at 30 years. Of course you'll pay PMI with only 10% down. If you can swing 20% you get rid of the PMI.

[John Underwood]

Read up on the topic in this forum.

You generally have to say you this be a 2nd home for you and you will not be renting it to get a 10% down mortgage. 

[Kenneth Garrett]

@Shannon Green

Let me add to what @John Underwood stated. You cannot have a long term tenant. No lease. You are committing you will use it during the year as a second home. Once a year, twice a year, etc. It's STR only from a rental perspective.

[Shannon Green]

@Kenneth Garrett the way you stated it is what I understand as well. Thank you @Kenneth Garrett and @John Underwood.  

I was also told by another investor that I could finance as a second home and then put it in the Llc I’ve created subsequent to close. Then I can open a bank account for this specific property to keep things organized. I’m going to do more research on all of this so I have a better understanding as I am completely green and new!

[Michael Baum]

Hey @Shannon Green, I agree with the other statements, but the LLC could be a problem. Financing as a second home usually precludes moving it to an LLC without incurring automatic repayment. It will depend on the lender of course.

Plus there is no real good reason to put them in an LLC at this time with just one place. You can still have a specific account for the house to keep things organized.

[Luke Carl]

@Michael Baum

The knowledge available on this forum never ceases to amaze me.

[Marc Rice]

@Shannon Green

As @John Underwood said, most lenders have covenants that prevent your 2nd home 10% down from being used as a rental. You may want to talk to some local smaller banks or credit unions to see if they have any portfolio products in house.

[Shannon Green]

@Luke Carl i’m so glad I found this group and the podcast! So much to learn and I definitely appreciate it!

@Marc RiceThanks for the tip! I will discuss with my lender tomorrow any restrictions regarding short term rentals.

[Corwin Lyvers]

Shannon we just closed on a property and went with a second home/vacation home mortgage. 10% down and paying PMI. As long as the property is not in the same area as your primary and the loan amount is under 510k you will have no problems. With rates as low as they are right now this is the only way to go. Technically you can have an unlimited number of these loans as long as they are not in the same area and you qualify of course. Do your research and get multiple offers but partnering with a mortgage company that specializes in investment properties is a must. We used Mortgage Investors Group and love them. They service the south East. Our property is in Gatlinburg.

[Shannon Green]

@Corwin Lyvers great information! I really appreciate it! One question: Is there a difference between a second home mortgage and a vacation home mortgage? Is there actually such thing as a vacation home mortgage? 

[Jeff Chisum]

Vacation home/Second Home all the same loan.  It's all about intention.  Fannie has the most liberal policy that states as long as your intention is to occupy the property at some point during the year the requirements are met.  Second home occupancy can be rented on a short term basis and you have to keep control of the property.  This means no leases of 30 days or more where tenant rights would be involved.  Fannie Mae second home rider confirms they allow short term rentals and your commitment to occupy the property in this manner is for a year.  That means you could do another one in the same market a year later.  All with 10% down.  Purchasing power- $548,250 conforming loan limit + 10% down= $615,000 purchase price.  $548,250- 1st mortgage, add a $200,000 piggy back second + 10% down = $830,000 max purchase price.

[Jonathan Stone]

@Jeff Chisum That's interesting.  We are closing this week and have been working with our loan officer on how to structure and which loan types to get.  We have a second/vacation home loan and can't hire a property manager and must use the home 14 days a year.  Again with the intention clause.  After the first year much like a primary mortgage property use can change without the loan coming due.  Our mortgage team we have been working with at Sierra Pacific has been very helpful.

[Jeff Chisum]

Originally posted by @Jonathan Stone:

Those are the more restrictive Freddie Mac requirements.  

http://www.freddiemac.com/unif...

vs Fannie Mae. Fannie Mae will also allow for you to transfer title into an LLC after a year and will not execute the due on sale clause.

https://singlefamily.fanniemae...

Additionally Freddie doesn't release you from that one year time frame to occupy the property or agree to those terms for a year like Fannie states in their rider

[Jonathan Stone]

@Jeff Chisum are you an underwriter?

[Jeff Chisum]

Originally posted by @Jonathan Stone:

@Jeff Chisum are you an underwriter?

Loan Originator. I specialize in 2nd Home/STR financing Nationwide

[Shannon Green]

@Jeff Chisum

Dang!  You know your stuff!  I closed on the house in the beginning of March and have my first rental this weekend!  So exciting!  And, I already have bookings after it went on the market last Tuesday!  More than 50 days booked through February next year....in one week!

[Jeff Chisum]

That's awesome!!  Congratulations.  Yeah about two years ago I happen to read one of the 100's of emails I get a day and it covered the changes Fannie was making with Second Home Occupancy.  After I bought my first property I really became interested in how I could scale so I dug in even deeper.  That lead me to find a huge opportunity to educate and re-educate because of misinformation from lenders.  I went live on my second one about a month ago.  Love it!  Big mailbox money.  

[Shannon Green]

@Jeff Chisum Congratulations! My goal is to have 5 STR, 5 LTR and then see what happens from there. A little at a time! It will take me a while to get to this goal! LOL!

[Matt Lyons]

@Shannon Green

Do it as a second home... 10% down and 30 year fixed. YOU CANNOT DO BETTER THAN THIS LOAN!

Don’t tell anyone you will be renting it out in Airbnb the mortgage company will not care! At this stage they all know that most everyone will be renting out second homes when not used and short term renters don’t use it for a residence

Also the mortgage company or bank you finance with will likely sell off the loan anyway.

And finally, you can technically have 50 second homes... the only issue is you can’t have two in the same state but you can have a second home in every state and often deal with the same lender

For example Mr Cooper (mortgage company out of Dallas TX) can do loans with 10% down for second homes in all 50 states and rates are very fair

Good luck

[Jeff Chisum]

Originally posted by @Shannon Green:

@Corwin Lyvers great information! I really appreciate it! One question: Is there a difference between a second home mortgage and a vacation home mortgage? Is there actually such thing as a vacation home mortgage? 

 One in the same.  10% down and it is allowed to rent out on a short term basis

[Jeff Chisum]

Originally posted by @Matt Lyons:

@Shannon Green

Do it as a second home... 10% down and 30 year fixed. YOU CANNOT DO BETTER THAN THIS LOAN!

Don’t tell anyone you will be renting it out in Airbnb the mortgage company will not care! At this stage they all know that most everyone will be renting out second homes when not used and short term renters don’t use it for a residence

Also the mortgage company or bank you finance with will likely sell off the loan anyway.

And finally, you can technically have 50 second homes... the only issue is you can’t have two in the same state but you can have a second home in every state and often deal with the same lender

For example Mr Cooper (mortgage company out of Dallas TX) can do loans with 10% down for second homes in all 50 states and rates are very fair

Good luck

 No need to keep it a secret if you want to list the home you purchased with a 10% down second home occupancy loan.  Fannie Mae allows it.  You can have more than one of these properties in the same state.  You can have up to 10 mortgages in your name.  So you could have 50 of them but only 10 mortgages out at one time.  Hope that helps.

[Craig Curran]

@Jeff Chisum Hi There. I have two specific questions if you don't mind.

1. How do I know if my mortgage is Fannie Mae or Freddie mac? It has a second home rider but also states "MULTISTATE SECOND HOME RIDER – Single Family – Fannie Mae/Freddie Mac UNIFORM INSTRUMENT
Form 3890 1/01 (rev. 4/19)" So it seem it's both?

2. You say you can qualify for up to 10 mortgages in your name. I'm assuming this also means you need a personal DTI ratio to qualify again and again. I can imagine this is only possible if you existing STR income is counted toward your DTI ratio as income instead of debt. If that is the case, and let's say you consistently get a new "second home mortgage" with the same lender over and over again. At what point do they usually allow the income from your existing STR Second Home to qualify as real income? (After a year, or do they required 1 or more Schedule E tax returns or are Income statements after 3 months ok, Projected income is enough? etc)

Thanks so much!

[Jeff Chisum]

Hey Craig!  Sound like you may have purchased your property prior to the split when Fannie created their own.  You can call your servicer or sometimes it will say on your credit report

Fannie allows for STR income to be used after it's been documented on your tax return

[Jeff Chisum]

Fannie Mae 10% down loans for second homes/STR properties are not going away April 1st just in case you heard something different.

[David Green]

@Jeff Chisum Thanks for sharing all this awesome info! So, for the Fannie Mae loan, you cannot count the rental income of a current STR property, correct? So, if I buy an existing property that is currently a STR, I'd have to qualify for the mortgage without counting the rental income? That would make this loan harder to obtain for most (myself included).

If that is correct, what is the next best loan product that would allow you to count the rental income of an existing STR? Are you pretty much stuck in 20% down land or a portfolio lender at that point?