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Does anyone know the rules on taking out a loan as a vacation home vs an investment property? If youre going to rent it out but also use it? Is there a time frame you must spend there per year to have it be considered a vacation home instead of an investment?
This would be a good topic for a CPA. IIRC, and if they've not changed the rules, you can rent for a max of 14 days per year and its still a vacation home. You can deduct the interest on a vacation home.
thanks.. I would be renting for more than that. I wasnt thinking as much in terms for a tax write off or how to list it on my taxes but more so for applying for a mortgage - if I need to apply for an investment loan, or a vacation home loan. Guess it would need to be an investment loan. Now to find some creative financing to make it happen..
The IRS has a publication on treatment for rentals. I don't know if lenders apply those same rules or not, though. Vacation loans would seem to be an OO type of loan, though. Applying for an OO loan when you don't intend to occupy would be bad. I'd have an up-front discussion with possible lenders about the situation.
I agree, which is why I am assuming I will have to go with an investment property loan which is going to be about 20% down that I dont have ;)
You can always look into creative techniques. Subject to, owner financing, hard money/refi. Things like that.
Yeah thats what I came on here to try to learn about.. Its not a rehab so I think that eliminates hard money? It sounds like thats just for flipping/rehabs. I need to learn more about subject to/owner financing. I already asked the owner if they have an assumable mortgage which they dont. I would love to find ways to just take over payments without having to go through the down payment process but I am trying to sift through posts to figure out which is the best way to do this deal.. (it's a tough task - so many posts to go through, ive been up reading since yesterday morning LOL!)
If you post the exact details of the deal you are looking at, perhaps we can throw some creative ideas your way that would make sense for your situation (& the seller's).
Well basically it's roughly a 330k house. The seller is willing to raise or lower the price as needed to help me get whatever I need out of the deal financially (higher price, higher commission, lower price, lower commission, higher price, higher seller assist, etc...) I am going to be the realtor for both sides of the transaction so I will also get the commission from the deal obviously which is sort of like getting money back (altho I have to pay taxes on it) .. So pretty much I am trying to buy the property, would prefer not to have to put more than 10k down total including closing costs. I wish his loan was assumable, I would have loved to just take over the payments, but we checked and it is not. Can't think of anything else "creative" on my own besides fooling with the purchase price and my commission and a seller assist. Soo.. Ideas? :) I'd prefer to save as much as I can of my own money to put towards buying my own personal house sometime in the next 6 months, rather than struggling to put money down at that time because I spent it all now!
A loan doesn't need to be assumable to buy the house subject to. You just leave the existing loan in place and start making the payments. The deed and title insurance will specify the existing loan as an exception. Yes, it violates the due on sale clause, but, at least for now its unlikely to be called. If interest rates go up, though, who knows.
As an investor, you must, must, must buy at very steep discounts. If $330K is the retail prices of the house, you need to pay $230K or less. You cannot be successful as an investor by paying retail.
As an ordinary rental, a $330K house would almost never make sense. Here's how I'd evaluate it to determine the minimum required rent to make it make sense:
P&I payment will be $2200 on $330K at 7% for 30 years. That assumes 100%, which is a good way to evaluate the deal even if you end up having to put money down. No matter how many times people as "will cash flow with 20% down", the down payment DOES NOT change the quality of the deal.
We'll use the rule of thumb that rental expenses are 50% of rent. And, we'll assume you'd like to make $100/month in real cash flow. So, we have to take the $2200, add $100, and double it. That means that as a straight rental, you would need $4600/month in rent.
I'd ask if you think you can get that, but it sounds like this is a vacation rental rather than long term. That topic has come up several times here, and I don't think we've every had a detailed, factual set of data about expenses for vacation rentals. In the 50% rule of thumb, there is something like 10% for property management. And maybe 5-10% for vacancy. I think both of these are much higher for vacation properties, especially seasonal ones. OTOH, the rents are priced on a nightly or weekly basis, so also tend to be higher. So, maybe using the actual collected rent (to negate the higher vacancy) and keeping with 50% (to account for higher management, though I've heard of this as high as 30% for vacation rentals) expense ratio would get us into the right ballpark.
So, can you manage to collect something like $4600/month?
If you're thinking about subject to, you need to evaluate the value of the house vs. the loan balance. Subject to really only makes sense if there's significant equity.
Finally, you list yourself as an agent. If that means licensed, you might want to be sure that doing some of these creative techniques, or for that matter, just plain buying a house below retail value, violates your code of ethics.
Well - I actually own the same house next door and rent it out as a vacation rental. 50% of the rents definitely do not go to rental expenses.. It's less. Maybe 50% if you are using a property management company but I do not. if you want clear facts on vacation rental breakdowns I can provide that as thats what I currently do w my other house.
Here are the details for my other house, and the reason why I am considering buying the 2nd.
Yearly PITI: roughly $28,000
Yearly association fee: $2500
Cleaning fees (paid by renters)
Yearly average utilities (cable, phone, heat, electric): $3240
Yearly advertising costs (vrbo/homeaway.com etc): $600
Total costs: $34400
The house rents solid 3 months in the summer and 3 months in the winter. It also rents during every holiday period. I will not include random off season rentals as they are gravy to me..
A summer week = $1500
A winter week = $1700
Holidays are a bit higher
A full summer season = roughly $18,000
A full winter season = roughly $24,000
Random other holidays = $4,000
Total yearly rentals = $46,000
Total yearly profit = $11,600
Now granted this is assuming full occupancy during high season, assuming some vacancy, you could round down to $8-10k a year profit.
With that being said - my neighbors house is currently for sale.. and seeing how well I do with mine, I don't feel that it is a bad investment. I honestly got into it thinking as long as I didn't lose money I'd be happy - for other investments I do expect at least 100-200 month profit as a general rule of thumb. But those are smaller 100k properties. I guess I figured if I was able to have the rents pay the mortgage for a 330k house, I would be doing pretty well - considering in 10-15 years (if I was making extra payments towards the mortgage) I would have 330k in equity.
Does that make sense now, my reason for wanting to buy it? Does it seem like a better investment from that point of view now? I know it goes against the typical grain of investing, but I think it's worthwhile.
I definitely woudlnt do anything "creative" that would violate my code of ethics. Thats why I am asking for suggestions - LEGAL/ETHICAL suggestions lol.. Also - to answer your question, the retail value for this house is around 350k so I am getting it right around retail value - but even at that, am still managing to make a profit.
And lastly, as far as taking over the payments on the current mortgage, I am not sure I am clear on how that works? The mortgage never gets transferred into my name but the deed gets recorded as transferred? This doesnt quite sound safe to me - who has more of a risk doing it this way, myself or the seller? and if so, what risks are involved and how does one get a seller to agree to such a thing? Sounds complicated/slightly shady almost but that may be because I am unfamiliar with the process.
Thanks for that breakdown. Would you mind splitting the P&I part of the payment from the T&I part. That's a pretty impressive return.
Do you never have to pay any maintenance or have any tenant damage. I guess you wouldn't have any evictions. Legal or accounting fees?
A subject to does involve some risk. The risk to the seller is that you don't make the payments. The mortgage is still in their name, so you can mess up their credit if you do. You do own the property. You get a deed that will say "free and clear of all liens except ." The upside to the seller is that they get a sale, which they may not otherwise. The risk to you is that the bank finds out what's been done and calls the mortgage due. If that happens, you do a refi. For that matter, after you've owned it a year, you may be able to refi anyway. Doing a rate and term refi (i.e., a refi that just pays off the existing lien and doesn't give you any cash) is easier than doing a purchase loan. If you've bought right, meaning well below what an appraisal would show, you should be OK. A 90% LTV rate and term refi should be quite doable, and maybe even with minimal seasoning.
Subject to only makes sense if the loan balance and terms are acceptable. If they owe $360K, its not a good deal. If its an ARM that's about to do a nasty reset, no go. If its a fixed rate, 6% loan with a balance of, say, $300K, offer to just take over the payments.
You might have to search around a bit to find a title company that will do a subject to. Not all will.
All that said, you're paying 95% of retail. Even if this is a good deal, can you find others that would be better deals? Last house I bought I paid 52% of retail.
P&I = 1832
Insurance = 41
Taxes = 416
The neighborhood is actually new construction - and my neighbor just bought last year. It's fully furnished and ready to go (and about 20k less than what I paid for mine, and then had to turn around and furnish the entire thing). So the fact that its close to retail is fine by me, because its basically coming with about 15k in furnishings/tv's etc.. it's completely turnkey (everything from pots and pans).
The idea of the subject to is a little odd to me. I guess because Im not used to it. I just cant imagine a seller ever saying they would go for it, and take all the risk involved in their credit depending on my ability to make payments. I can't believe so many of you do these kinds of loans and get sellers to agree to it! I would almost feel uncomfortable asking him to do that actually. I will probably stick to a conventional loan even if it means higher rates for me and more down payment. I do appreciate all of your advice though. - if you think of anything else, let me know! :)
I am in the market for the same type of house/townhosue but curious what town has a market for winter rentals and summer rentals also? The Poconos?
Yes my home is in the Poconos.
There are a few listings currently that are turnkey and will provide you with both summer and winter rentals. I would be happy to show you some listings if you are interested and share some of my tips for making the rental successful.
A possibly alternative for you is to have the seller sell the property to you via a wrap mortgage. The original loan stays in place, the tiltle transfers to you, and the seller holds a lein against the property. In addition, the seller gives you a "new mortgage" at an interest rate higher than the original (the seller keeps the spread" and thus has less risk and more recourse in case you default (they simply take the home back and keep up the mortgage they have been paying.) A great way to accomplish this and help avoid the due on sale is to have the seller place the property into a single entity LLC or a land trust, and then sell 100% of the LLC shares to you with the new mortgage or in the case of the land trust, transfer the beneficial interests in the property.
So does a mortgage broker do this "wrap" mortgage or is it something we do on our own? I am not familiar with this process. Is there any risk involved in this for me? And what if the seller does not want to put the home in an LLC, will it not work?
You and the seller arrange the wrap. He/she keeps their mortgage in place, gives you a mortagage at a higher interest rate and they kkep the spread and are able to sell the house. You do not need an LLC or land trsut to do so, but it does help conceal the sale and thus the due on sales clause.
Their is no additional risk to the seller (and much much less than a sub to) and no risk to you (at least not in excess from the mortgage an risks involve in any investment)
Keep in mind that the seller should want a down payment to keep in case you default, plus gives them an upfront profit on the sale, plus they have the interest spread as monthly profit (cash flow), and should also want a ballon payment in 2-5 years which would require you to refi at that time or pay off in cash, giving the seller the balance of their proceeds.
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