Quote from @Michael Littleton:
Hi All!
I am a part-time investor, own 5 long-term rentals outright and just getting into the STR's (just bought one in FL a few months ago, using the 2nd home 10% down strategy). I have listened to Avery Carl's book, Short Term Rental, Long term Wealth about 15 times, so far. (shout-out to Avery! this is hands-down the best all-encompassing book I've ever read or listened to, by a mile) .
I have a few questions like:
1) How does everyone get around the debt to income ratio? We have very little debt outside of the STR we just bought on a conventional loan, have excellent income, but I fell like we will basically be limited to buying one more STR. How do you guys get past this hurdle? My goal is to have at least 4 STR's and keep the long terms going to cover for the STRs if occupancy rates decline (ie, another COVID situation or something worse).
2) I have read a lot about maximizing potential and buying many homes in different markets as 2nd homes. That's great, but what do mortgage companies and the IRS consider to be a "different market"? Is this simply a different county within a state (more than 60 miles from the first?), or is it a different state, etc...? I'd like to know the details behind this, as well.
Thanks
Mike
Hey Mike! Congrats on the success so far. I'll try to consolidate some of the thoughts above and give my two cents as an active agent and investor in the Destin and Tampa markets.
1. You're correct in that your DTI will be hit initially as you're trying to season your properties for the banks. Most STR investors simply have to wait to show 1 or 2 years of tax returns to prove to a traditional lender that your business is consistently profitable to offset your DTI. Another potential way around that is to lease the property from yourself (this works better with a partnership); however, it is possible. Banks are much more comfortable seeing a long term lease and consistent income over the variable income of an STR. You'd still be running it as an STR, but you'd be leasing it from another LLC that you'd use to manage and take any additional profits.
To avoid the DTI discussion altogether, you can definitely pursue DSCR or bank statement loans to continue to grow the portfolio while you're seasoning your other properties. These loans will look at your credit only and not your debt. They'll then look at the property to see if it can support the debt.
Beyond that, there's always creative financing to pursue -- You could tackle your next STR via seller financing, loan assumptions, sub-to, seller carryback/down payment with a dscr loan, hybrid models, etc.
In other words, don't think just inside the box.
2. The second home differentiator will be determined by each bank. I bought a second home just 15 miles from my house, and I've helped investors do it just 5 miles from investment properties that they own. The simplest way is to be about 50 miles apart to justify it; however, a good loan officer can tell you if there is a way to help justify a second home loan status to the underwriter.
For example, if you have a 2 bedroom condo in Destin, and you want to justify a second home for your next purchase, it's really tough to justify that if your next purchase is another 2 bedroom condo. However, if you end up purchasing a 5 bedroom, beachfront home as your next purchase, we can probably justify that to the bank that your family really wanted an upgrade and can't wait to enjoy this new luxury purchase on the Gulf of Mexico.
I hope that helps! Best of luck!!
