Are 10% Down loans still a good idea?

Question

Collective,

I bought my first STR with a 10% down second home loan. Used a heloc on my primary residence to do it. Now I've got that heloc paid back down to zero, so I have reset my down payment engine. BUT... interest rates, amiright?

If I use my heloc again, I'd be paying 8.75% interest before I could even make headway on the principal.

But there are other factors in play as well, right? I've heard that if I use a 10% down loan, that my terms would not be as good (rate, points).

I know it's not 2020 anymore, but is 10% down still a workable strategy?

Thanks,

Steve

Matthew Masoud · Answer

My lending contacts tell me fewer and fewer lenders are doing second home mortgages due to the economy.

Good job paying the HELOC off quickly but you're right. HELOCs are adjustable-rate mortgages and they have gone up.

Your HELOC rate is a huge factor here. You're essentially financing 100% of the new property at high-interest rates.

You may be overleveraging. I urge you to be cautious.

Eliott Elias · Answer

If you’re making more of a return than your interest rate, do it.

Leslie Anne Morris · Answer

Investors are still using the 10% down option in 2023. It is more expensive yes…and in your case even more expensive since your down payment isn’t cash. I’d underwrite the entire scenario and see if the numbers work. I look at NOI and cash on cash. I did a call a few weeks ago about underwriting metrics that’s out on YouTube.

John Underwood · Answer

It depends.

Can you find a great property in a great location that will cash flow?

If so then do it again.

Jon Martin · Answer

If that's what it says in your rider then yes, I would adhere to that. Mine is very similar but does not have that specific line.

Robin Simon · Answer

Generally the legal interpretation to my understand that the word "primary" means >1/2 the first year needs to be reserved for personal use

Jon Martin · Answer

Doesn't this depend on what exactly is written into the 2nd home rider in the loan paperwork? I have a 10% down loan and all that there is no clear rule about how much personal use is required, only that it's "some of the time". Which a lawyer could argue is 1-3 days a year.

I think a lot of the confusion in general is conflation with what is considered a rental vs a personal use 2nd home for taxation purposes. Not saying that your post is that, but I see a lot of that in general.

Robin Simon · Answer

not the time to be overleveraging (and if you are using the 2nd home loan to finance a STR for cash flow then you are likely breaking rules due to the restrictions on use that come with it - >180 days rented, no management, etc.)

Andrew Steffens · Answer

It depends on cash flow and your personal financial situation.  STR returns should be higher than 8.75 so I would borrow at that rate and keep what cash I can in my pocket.

Are 10% Down loans still a good idea?

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