Banks and mortgage companies haven't caught up to the market when it comes to vacation rentals. Typical purchases and refinances for rental property require an average of 25% of equity in the property or more with few exceptions. Plus, investors have to either prove income with leases, or a rental market survey that gets a 25% or more cut for a vacancy allowance. This works for your very few, very well to do borrowers. But leaves most of the landlords with multiple financed properties with few options. Do you have more than 4 financed properties? Good luck finding a lender.
What have investors resorted to doing?
- * Lying on their application to say it's a second home or even a new primary residence to avoid the lease issue
- * Buy in more expensive areas so that the market surveys cash flow for traditional financing - Requiring a lot of cash down
- * Recruiting partners to share the costs, and dilute the profits
- * Acquiring Hard Money to now pay 8% -15% interest, so that no one asks questions
Are there options other than traditional rental property loans that don't resort to hard money. The short answer is yes, but not all are created equal.
Portfolio Lenders are the way to go hear. These are direct lenders who fund with their own capital and thus write their own rules. Since Private Equity firms across the country are flush with cash, there's been a rise in these types of lenders. However, many of them are just following wall streets collateral model for mortgage backed securities. So, you get more of the same that the banks offer.
There are portfolio lenders who WILL offer loans at competitive rates, and who only care about the asset (your property) value and condition. The caveat is that you'll have to kiss a few frogs before you find your happily ever after.
Look for the following when searching for the right portfolio lender and be able to tell if it's their money to lend:
- Look for private capital lenders - Ask if they fund with their own money (a clue if they really do is ask the next question)
- Ask if their underwriters are in-house or outside their offices
- Ask what the typical underwriting turn time is (all a clue, no underwriting should take more than a week - 3 or 4 days is best)
- What is their typical amount of days to fund (should never be more than 30 days or it's not their money - 15-25 is ideal)
- Ask how they qualify income (THE BIG ONE) -
- No Income Qualifying is BEST (obviously) - Ask if other property income/debt is considered
- Bank statement income - Also Ideal to show true rental income if provable
- Rent roll/Schedule E - Close to a traditional deal so be careful - It usually means they'll consider all your income/debts
- Rental Market Survey - If this is how they do it, walk away - it won't help
Your ideal portfolio lender will require an appraisal and cash reserves (for purchase) and base the loan on the value of the property and it's condition exclusively. They should only consider the subject property and not your total schedule of real estate as well. Does this sound like hard money? Yes, so what's the differentiation? Credit! The better your credit, the better your rate is going to be. This is the difference between a 10% hard money rate, and a 5% investor property rate. Ask what their rates are. If you have great credit but are still being charged 9%, move on, you can get 4.5% on the low end nowadays.
Keep searching and don't settle. Plan ahead and you'll find the few good options there are out there for this rental type.
Good luck investors!