Whats my best option?

Question

Hi all-

My husband and I currently own 4 rental properties.  We have no mortgage on any of them.  Current market value for all 4 combined is $325000.  Rental income $4424/month.  Currently have 20k in reserve and another 32k by end of September.  Total cash approx. 50k.

Primary residence owe $758k worth approx. 800k, basically no equity to pull.

Looking to purchase a vacation rental for 200-225k. Will be able to get $1000-$1200/week during prime season memorial day thru labor day.

Should we apply for a mortgage loan and use our reserve for 20% down payment? or Try and get a personal or business line of credit?  Not sure what the best financial option is for this deal but do not want to lose the deal.

Thanks,

Jill

Paul Z. · Answer

Steven J. I would analyze all of your possible purchasing scenarios for cash on cash return. NOI / Total Cash Outlay (downpayment and rehab cost) at purchase. If you have a set criteria for the amount of cashflow you must see to even consider investing in a property this could give you some good insight. Whatever the least amount of money out of pocket (downpayment and repairs) that returns an appropriate amount of cashflow after debt service is what could help you make a decision. Since this is a "vacation" rental I'm assuming as well that the purchased property will be at least a B+ area in high vacation demand. You're off season gross income could kill the deal as well if your on-season income doesn't make up for it.

Joshua Nudell · Answer

@Jill Drebing Following up with you to see if you got the information you needed to make a sound decision.  I agree with @Nilesh Makhija that you should leave the reserves alone and use leveraging to complete the deal you're looking at.

Nilesh Makhija · Answer

I would keep the reserves and use leveraging to invest for further expansion of portfolio

Chris Kennedy · Answer

I wouldn't touch your reserves. $20k for four houses is already cutting it thin in my opinion. But since they are cash flowing, pulling out some of the equity to use for downpayment would be a good option instead. Good luck!

Joshua Nudell · Answer

Steven,

Doesn't that apply to monthly rental rates?  I believe that she was talking about $1,000 - $1,200 per WEEK during prime season, which would be more along the lines of $4,000 - $4,800 per MONTH (or 2%+).  HOWEVER, it's a seasonal rental, so I would think that there would need to be some more research done.

Some questions; What is the rental like during off-season times? What is the vacancy rate during prime season (will it sell out all summer, every year)? I would come up with an average (trying to be conservative) of the monthly rental rate to see if you're close to the 1% rule or not.

As for financing, it seems like you have lots of options with your existing rental properties if you wanted to a cash-out refi to use for the down payment on the vacation home and then get a fixed rate 30-year on it.  You would probably only need to pull money out of one of your rentals to come up with a down payment for the new one (20% would be 40K - 45K).  If time is a factor, you could do a equity line of credit against one of the rental properties until you could close on a 30-year fixed product for one of them.  The equity line of credit can probably be established pretty quickly.  Check with your local lenders to see what their current terms are.

Steven J. · Answer

If you're looking at a vacation rental in the 200k range that only pulls 1000 you're hitting the .5% rule! - and only when you're doing great. Which is not the 1% rule. The 1% rule states your rent should equal 1% of the purchase price. Many investors in the past have shot for the 2% rule but its hard to come by in todays markets.

Personally, the numbers don't make sense to me and I wouldn't be looking at the deal.