All Forum Posts by: Seth Wilcock

@Dan DeGroff - I appreciate the reply and additional details.  From a lending perspective, the home in Colorado should be purchased and occupied as a 2nd home (yes, even if you're a first-time home buyer and don't own a primary residence currently). The scenario as a 2nd home will make the most amount of sense to an underwriter (traveling to a different location for work and the property is located in a resort-type area).  The truth is, you don't have the intent to occupy this home year-round as a primary residence, but you do have the intent to occupy it for a portion of the year (during ski season).

A primary residence is a place you plan to live for pretty much year-round. A primary residence is not intended to be a rental property. Even Robert Kiyosaki calls a primary residence a liability, but we all need a place to hang our hat, right?  If you're getting a roommate to help cover the costs of bills and expenses, that's one thing, but you would need to be living there. 

House hacking: you would actually occupy the home for a minimum of the first 12 months. You can get roommates during this time, but YOU need to live there too. After 12 months, you've met the occupancy requirement on your deed of trust, and you can convert the property to a rental property after that.

There's nothing in the Fannie Mae/Freddie Mac guidelines that says you can't rent out a 2nd home when you're not occupying it, and you could rent it out as a short-term rental or long-term rental when not in use (double check the local laws regarding short-term rentals). You can not rely on rental income to help you qualify on a 2nd home transaction, and you can put as little as 10% down on a 2nd home.

As for the 2nd part of your question: "Cash offer on distressed home in the Winter, rehab etc" - if you're paying cash, there isn't a loan, so you don't need to declare/specify occupancy when paying cash. On the refinance (take-out loan) you would need to declare occupancy, and I'm guessing the plan is to fully rent the property at that time (e.g. BRRRR), so you would run the cash-out refinance as an investment property/occupancy on that loan. $100K is enough to get you started. I've done multiple deals for that amount or less, and I actively have clients working in that range right now too.

In short, you get one primary residence.  If you decide to house hack, you must live there for the first 12 months. You can have roommates while you're living there, but you can't occupy the home for only 5 - 7 months, move out, and completely rent it out.  After 12 months, you can fully rent out the property if you desire, without needing to occupy.

2nd homes are designed to have another place to live in a "resort type" area or when commuting to a different state for work. You can rent these out (STR or LTR) when not in use, but you can not use rental income to help you qualify for the loan.

Investment properties = you have no intention of ever occupying the home. You can use rental income to help you qualify for the loan.

Additional Resources:

Occupancy Types | Fannie Mae
Occupancy Fraud May Be the Next Risk for the Mortgage Industry | CoreLogic®

Feel free to reach out if you have any additional questions.

@Dan DeGroff - I think you can probably do this as a primary residence since the scenario makes sense (e.g. you travel to Aspen for work during ski season), however, there are some major red flags here that you will need to explain and support during underwriting (e.g. I imagine there are some ski resorts in Washington you could work at that are closer to the subject property?  Why are you traveling  all the way to Colorado for work?). 

It sounds like you will actually occupy the home in Washington for a majority of the year, and then travel to Aspen during ski season. I think if you can write a solid letter of explanation stating that you are going to commute to Colorado from Washington for 4-5 months out of the year for your job (and why), that should be sufficient enough to run this as a primary residence. You need to ensure the letter you are writing is truthful and that you are not making misrepresentations. If you don't have the intention to actually occupy the home in Washington as your primary residence for the majority of the year, then that is occupancy fraud (investigated by the FBI), which would likely include some jail time if you are found guilty of making misrepresentations. The underwriter is likely going to ask you about housing expenses in Colorado for the 5 months (December - April) when you're in Colorado. Do you have employer-paid housing, or do you need to pay rent while you're in Aspen for 5 months? If you pay rent while in Aspen, that housing expense will be factored into your DTI ratio (e.g. total rent paid in 5 months divided by 12 months).

You should be prepared for your loan file to go to an underwriting manager for second-level review on account of the occupancy risk associated with your primary home being located so far away from your work. This is a very risky scenario to a lender. 

I don't think any lender will approve you if you are trying to buy multi-family in WA as your primary residence with your work being in located in CO.  Additional units will add a HUGE layer of risk that will be accounted for during underwriting with this scenario as you are very clearly purchasing the home in WA with the intention of renting it out for cash flow (that's not a primary residence, but an investment).

Personally, I would advise you to do this as a second home transaction, as the second home scenario makes a lot more sense to me from an underwriting/guideline perspective.  The second home transaction would require 10% down, carry a higher rate, and you can NOT use rental income to qualify.

I'm happy to help!  Let me know if I can help answer any other questions or be a resource for you, and good luck with next steps.

Hi @Meghan Begue,  

Welcome to BP and thank you for your service!  I love the vision and plan.  It sounds like you're off to a good start and I think putting together 2-3 rentals in Colorado by 2026 is certainly doable/attainable.  I know a few Realtors that have created their own property management company.  They do real estate as their main job, and property management as a secondary stream of income.  It sounds like you have a good amount of expertise in management and oversight, so that will definitely be a plus in the property management area.  You may want to consider partnering up with a realtor or someone that already has a property management company that is looking to scale.  I think it would probably also be a good idea to work in property management for at least a year to see if you even like it before fully committing to starting a property management company.  With switching to an entirely different field, it would probably be a good idea to get a little bit of experience in the day to day operations of property management, as well as familiarizing yourself with some of the Colorado fair housing laws, minimum property requirements, etc.  I would also recommend partnering up with someone that has experience in the repairs/construction side of things as that will come up quite often in property management.  Lastly, if you're considering a career change or starting your own business, it will be difficult to qualify for a mortgage until you can show stable/consistent income.  With a brand new W-2 job in a different trade/profession, you may need to be in that new job for 6 months.  If you end up starting your own business and getting out of your current job, you'll generally need to provide 2 years of self-employed tax returns to support your income.  This should be something to consider since you're planning on building up the rental portfolio in the next couple years as well.

I can do a DSCR loan and close in a multi-member LLC, however, the loan is not truly non-recourse. There will be a personal guaranty, and the interest rate will be determined on your personal credit. The loan would report on your personal credit report. The only true non-recourse loan I'm aware of is when you use your IRA to purchase the home. I believe FirstBank does these. Definitely consult with your CPA before you go through this though, as you will need to work with an intermediary (like New Direction IRA) to handle funds and management of the property.

@Eric Sato - Welcome back state side! I may need to pick your brain about the best places in Japan to visit for a family vacation. Personally, I would recommend purchasing the primary residence first, mainly because of how the DTI is calculated.

Scenario 1: If you were to purchase the STR first, and then the primary residence, you will likely need to qualify with the full payments on both properties depending on your timeline. Lenders won't let you add any rental income from the STR until you have that income filed on your most recent tax return. There will need to be some sort of established history (rental income and operating costs) in order for a lender to calculate the income. When there is a recently acquired long-term rental, lenders can simply throw in the lease agreement and use 75% of the rental income from that, but on a short-term rental, there is no lease agreement, so the only way to document what the actual cash flow is, is by using Schedule E of your most recent tax return filing. Purchasing the STR first could delay your primary residence purchase.

Scenario 2: If you purchase the primary residence first, the primary residence payment may or may not be included in your DTI calculation for the STR purchase. The neat thing about buying the STR subsequently, is that you can use estimated short-term rental income to help qualify for the STR purchase, but only if you purchase the STR after your primary (not the other way around - see Scenario 1 above). Most DSCR lenders I'm aware of will let you use 80% of the income from AirDNA towards qualifying for the STR purchase as long as there is a 60% minimum occupancy rate on the subject property. If you did pursue a DSCR loan (debt service coverage ratio loan), your primary residence payment wouldn't even be counted in qualifying for the STR purchase later.

Definitely purchase the primary first.

Hi @Brittany Stradling - Thank you for your service! I'm located in Greenwood, IN and would love to help. I'm a Certified Veterans Loan Specialist and a Veteran Mortgage Advisor. I do a lot of VA and have several active VA transactions going on right now. I also regularly work with investors and have a portfolio of my own (22 doors as of now). Regarding estimated rental income, we can use that right now on a multi-family property (2-4 units) as long as you have the intent to occupy one of the units. The VA loan is a government insured loan and is designed for veterans to occupy the home they are financing, for at least 1 year. Of course, there are some exceptions for active military that are mobilized/deployed and or PCOS'd, but you must have the intent to occupy the home by the time the loan closes.

Are you looking at multi-family (2-4 units) or 1-unit property for this purchase? Do you own any real estate currently? Have you ever used your VA entitlement before? Are you active duty or separated from service?

I'd be happy to be a resource!

Thank you for input and insight @Lee Wilber! This is what I need to hear. 🤜🤛

@Jacob Brown - I didn't even think about running this as a short-term rental, but that's not a bad idea.  The increased cash flow could certainly make this deal more attractive.  Thank you for helping me to think outside the box!

@Caleb Brown - The area is decent.  It's probably a C+ neighborhood.  Lot's of blue collar workers with a low vacancy rate (I have another LTR in St. Louis since 2019 that's been doing well).  I did not have a structural engineer come out, but that's a great suggestion.  I'll send one out right away.