Vacation rental financing

18 Replies

I am looking to purchase a vacation home/investment property in Rhode Island. I am currently in NY, my initial idea was to use home equity loan or LOC from my current home for the down payment. 1. Is this a good idea? 2. Should I use a bank in NY or RI for the loan/financing? Any one have any recommendations for lenders etc. in the Narragansett area? Thanks in advance...

Banks are not going to consider short-term income when they evaluate whether or not to give you a loan, unless you have it established on two years of tax returns on Schedule E.  So, make sure your debt-to-income ratio is going to support the mortgage, regardless of what you use as a down payment.

As for using a HELOC or LOC as the down payment, consider the risks just as you would if you were using them for any other kind of property purchase. Personally, I wouldn't; too much expense/risk for my blood.

As for which bank, in my experience it doesn't matter where they're located - my first VR was financed through an online lender who I had a great experience with (piles of paperwork, though).  My second VR was financed through a small local bank - which was located in a totally different part of the country from the house!  But, if you're looking for flexibility in terms, you probably want a bank local to the property you're buying (RI, in this case).  Shop around, don't rule anything out just because they're not in the area.

Good luck!

Hi @Matt B.

It sounds like you've done research on the market you're looking at or have experience there. You can get a vacation or second home loan as long as you qualify based on your income. No need to tell them your intentions since they'll approve you based on your ability to pay. 

Before you take that on, you have already probably looked at things like occupancy rate and potential income from STR on airbnb or the like.

The same holds true whether you take out another loan or HELOC or LOC. And with that much at risk, you'll want to factor in what your annual rental would be just in case.

There are a bunch of local BP folks meeting up tomorrow night at the Bay Shore Brewery at 7 pm. @Kevin Myhre is hosting and it's a casual friendly way to meet other area investors, some in STR's. Good luck to you.

@Julie McCoy is always right (although it may be schedule C if your average booking is 7 days or less). 

Just run the numbers! This question is really not VR or STR specific. It's all about math. If you can make enough to make up for the interest you're paying and the numbers work for you then go for it. If the interest is going to cause you to lose money then maybe don't go for it. Also, check with Brandon Hall but it's my understanding you can still write off HELOC interest (It's not called a LOC if it's attached to your house, you should add an H to it) IF You use the HELOC to buy an investment property. If you use a HELOC to put a new deck on your primary you can't write off the interest. (Referring to the new tax reform)

Good Luck! 

Just to add my personal experience... while I agree your projected VR income won't matter on the front end, it may help a ton on the back end with the right bank who will look at your Debt-service coverage ratio ( NOI / debt service ) . Meaning, you can build up some "instant equity" within 6-12 months if your NOI is high enough.

I have a local community bank who is willing to loan me money as long as I keep a 1.25x debt-service coverage ratio. The higher the better. 

Hi Matt, I'm a Rhode Island native and a Realtor / Investor. I can connect you with a lender in Narragansett. I also have a off market property in South Kingston near URI that's coming on market. Email or pm and I'll send you the details.

@Michael Bowie That's very fascinating about your community bank - just to make sure I understand correctly: as long your overall debt-service coverage ratio (same as debt-to-income ratio, yes?) is at least 1.25, taking into account STR income, they'll continue to offer you loans? I love that! The issue I ran into on my last purchase was they wouldn't consider the income of my already-operating STR when figuring my DTI, and if I'm already running into that, I'm worried about how I'll expand with any speed.

@Lucas Carl I *believe* that banks won't consider Schedule C income but will consider Schedule E - however, I am perfectly willing to be wrong on that!  Can a lender or someone with direct experience comment?

Thanks everyone, I appreciate the comments! @Julie McCoy , you mentioned limiting risk, are you typically saving a down payment and financing these or paying cash for VR? Just interested in how everyone is setting them up. Do you have them in an LLC?

Thanks again, your feedback is great!

@Robin Adams I will definitely connect with you, having some problems on my app right now so feel free to send an invite and I’ll accept, would love to talk to you about the area.


Hey @Matt B. I've heard of people using Clearbanc to finance VR purchases.  They lend up to $100k and factor in revenue from Airbnb when securing the loan.  To my knowledge they are the only ones doing this and they also finance furniture and things like that for your VR.  Might be worth looking into! 

@Julie McCoy That is correct. Since my properties have to be zoned commercial in my area they were willing to look at it like any other commercial, income producing property. 

I admit, I'm not exactly sure about the nuances the difference between DSCR and DTI bring up. However, DTI is measuring your net profit (income) while DSCR is measuring your NOI.

@Matt B. I provide the down payments myself and finance the rest. Personally, I wouldn't want to also finance the down payment. I don't currently have them in an LLC, but that is definitely on the agenda to discuss with my CPA to see if the new tax law incentivizes that structure (seems like it does to my layperson's eyes).

In reference to what @Tyler Work said about Clearbanc - I've discussed financing a VR purchase with them and found their methods and costs prohibitively expensive.  Of course, feel free to do your own analysis, but their fee structure is crazy IMO.  

@Michael Bowie Ah, if your properties are commercial then that makes sense.  (are these STRs that have to be zoned commercial?  If so, do you mind if I ask where they're located?)

@Lucas Carl, I just went through this with a property with 18 months of rental history. The bank included it but spread the total over 24 months. So it helped some...

A local bank should have a better grasp of what they are financing and more willing to offer other options if the loan doesn’t meet secondary market guidelines. out of state lenders may or may not have an understanding of local markets, or, private road agreements, etc. and can slow down the process. If you use a home equity for your down payment just realize that you are risking your other property if the VR ever runs into problems. Also, if you state that you are using the new property for rental income the lender will not consider this a second home. As far as the other lender using a 1.25 debt coverage, that sounds like it’s a commercial loan, as only commercial lenders use that type of factor

I did things a little backwards. I purchased my STR first then after I had it on two tax returns was able to qualify for a more valuable primary residence. My bank didn't use it as income per se. They just used it to cover it's own mortgage debt. If you are interested in any kind of real estate investing and have done your research it's a good idea to take out a HELOC regardless if it's for an STR or a typical long term rental. As a side note is there any part of your own home with a private entrance you could convert into an STR? Think of it as a modified house hack.