Loan options for vacation rentals getting better
By JEFF LAZERSON / CONTRIBUTING COLUMNIST
With real estate in mind, what’s a good return on investment or ROI?
It depends. Most investors primarily earn returns on either cash flow or property appreciation. Lower-priced properties, often outside of Southern California can generate respectable cash flow. Five percent or more ROI is considered a healthy return.
Higher property prices, associated assessments and carrying costs tend to favor longer term property appreciation as California’s more-traveled road to riches.
What if you could hit the jackpot with both cash flow and long term appreciation in the Golden State?
I’m talking short-term vacation rentals.
Jason Kuncas purchased a property just three blocks from the San Clemente pier in 2014, paying $600,000 and investing another $125,000 for improvements. Today, Jason is pulling in rents of about $80,000 per year on this duplex primarily via tenants who stay an average of four days through FlipKey, Airbnb and HomeAway.
This compares impressively to annual neighborhood leases for this property that fetch $37,800 in Jason’s estimation. And, his property is now worth about $900,000.
“I had three friends in the area doing it and watched how much money they were making,” Kuncas said.
Commonplace with owners of short-term vacation rentals is this bug to buy more and get a double whopper of an ROI. Often, these entrepreneurs find themselves wanting to pull cash out from the existing property as a down payment on the next purchase.
The traditional world of conventional loan underwriting wants long-term lease agreements to use as qualifying income. Being honest John, reporting all of the rents typically gets shot down because the appraisal that the lender requires has a market rent survey component.
If your reported rents are more than the average area traditional market rents, be prepared for a slap-down. If you are very lucky, the lender might use average rents.
Many borrowers don’t have enough wages and other income to make the qualifying ratios work when the rents are ignored.
One non-Fannie Mae or Freddie Mac program offers an attractive 4.5 percent interest rate on a 5/1 adjustable rate mortgage if you can cough up 30 percent down for short-term vacation rentals.
Another investor will provide a loan with as little as 15 percent down on a 5/1 adjustable rate mortgage. But, you are taking on a 6.99 percent interest rate. Ouch!
At the end of the day, if you can earn some eye-popping income, you can afford a 6.99 percent interest rate.
A word of caution: Find out what the local ordinances are regarding short-term vacation rentals. Even if they are allowed today, it doesn’t mean that a legislative swipe of the hand can’t change that tomorrow.
" If you prefer to select one loan provider rather than spend time shopping, Mortgage Grader looks like a good choice" - Washington Posts
Website May Lead to Fairer Loans
"It's a noble proposition; getting folks a square deal on a mortgage using the ubiquity of the internet." -Jonathan Lansner, Business Columnist
"My post was about the difficulties inherent in getting consumers to choose this superior model for getting financial advice."
- Justin Fox, Business and Economics Columnist