Vacation Rental Financing 10% Down?
Real Estate Broker · Staunton, VA · Member since 2019 · 194 posts · 216 votes
I decided to post this in the STR forum instead of Loans because I think we'll get better responses from those of us in the STR world. In recent podcast #364, Avery Carl discussed her ability to purchase vacation rental homes with a 10% down loan. Can anyone recommend lenders with this option?
@Chase Hoover I am happy to provide info or speak with you about the 10% option and qualifications for that. The STR market is my lending specialty! @Karen Chenaille it is not really feasible for spouse's to get another second home loan in the same market within a short time-frame. Keep in mind the second home loan with 10% down is underwritten with the intent of the property being used as a second home so it is not typically seen as reasonable that a married couple would have separate vacation homes in the same market and this may cause underwriting issues. In the last couple years technology has gotten a lot more efficient at flagging these situations, so it is not something I would recommend taking a risk on.
Hey Chase! Any conventional lender can do this. However, I would definitely recommend that you use a local one to your market as they will be more familiar with doing transactions in your area!
@Parker Borofsky do you want to elaborate here?
@Chase Hoover if you buy it as a 2nd home you can put just 10% down. @Parker Borofsky posted on @Avery Carl podcast discussion board on the in’s and out’s of this. We have used this approach to acquire 1 property in all the markets we have properties in. If you and your spouse both make enough individually you could each get a loan in a single market.
@Avery Carl @Karen Chenaille Thanks for the quick responses! Gotta love this forum. I'll check out the podcast discussion board.
Do a search for lenders that finance short term rentals.There are specific ones that specialize in that niche.
The property I am looking at actually has 4 cabins on it, so based on what I'm reading it looks like it would not qualify for Fannie Mae's eligibility of "one-unit home".
@Chase Hoover Form my experience, less then 20% is always possible but you will likely pay a higher interest rate or points most of the time (and PMI). That being said, I would strongly caution that you do not over leverage yourself on a sub 20% financing. Make sure that property pen's out in the worst condition and make sure that if you had to pivot it to a standard rental (due to forced regulations in your market) that it still cash flows or you are not underwater in a market correction.
Best of luck!
I had a question regarding the 10% down "Vacation/2nd home" loan. I was going to start a new thread, but I think I can sneak it in here!
From everything I've read, the IRS requires you to spend 14 days or 10% of the number of days it's rented to be considered a "second home" vs an "investment property." There are obviously tax implications to differentiating between the two...the biggest being that you can only deduct a portion of the depreciation on a "Second home" (based on how many days you, personally, spent in it the previous year).
Is everyone staying in their STR the 14 days/10% when they take out their 10% down/lower rate "second home" mortgage? Are folks doing this the first year to get the better "Second home" mortgage terms and then just converting it to an "investment" property the next year to reap full tax benefits? My reading seems to indicate the IRS couldn't care less if you call it a second home or investment property, as long as you claim the income if it's rented over 14 days...but your lender could go after you if you tell them you want a "second home" mortgage with full intent to use it as an "investment" property.
I'm not trying to be a negative Nancy I swear! Just trying to make sure I understand how this works before some bank is trying to come after me! Thanks!
https://www.fool.com/millionacres/taxes/second-home-vs-investment-property-comparing-tax-differences/
https://www.mortgageloan.com/mortgage-rules-differ-for-second-homes-vs-investment-properties
https://www.valuepenguin.com/mortgages/second-homes-vs-investment-properties
I decided to post this in the STR forum instead of Loans because I think we'll get better responses from those of us in the STR world. In recent podcast #364, Avery Carl discussed her ability to purchase vacation rental homes with a 10% down loan. Can anyone recommend lenders with this option?
No specialty lenders needed. As others have said, this is a standard Fannie/Freddie conventional "2nd home" loan - any lender can do it, from the big to the small. You should be able to get 3.75% APR or so, maybe lower
@Chase Hoover I am happy to provide info or speak with you about the 10% option and qualifications for that. The STR market is my lending specialty! @Karen Chenaille it is not really feasible for spouse's to get another second home loan in the same market within a short time-frame. Keep in mind the second home loan with 10% down is underwritten with the intent of the property being used as a second home so it is not typically seen as reasonable that a married couple would have separate vacation homes in the same market and this may cause underwriting issues. In the last couple years technology has gotten a lot more efficient at flagging these situations, so it is not something I would recommend taking a risk on.
I had a question regarding the 10% down "Vacation/2nd home" loan. I was going to start a new thread, but I think I can sneak it in here!
From everything I've read, the IRS requires you to spend 14 days or 10% of the number of days it's rented to be considered a "second home" vs an "investment property." There are obviously tax implications to differentiating between the two...the biggest being that you can only deduct a portion of the depreciation on a "Second home" (based on how many days you, personally, spent in it the previous year).
Is everyone staying in their STR the 14 days/10% when they take out their 10% down/lower rate "second home" mortgage? Are folks doing this the first year to get the better "Second home" mortgage terms and then just converting it to an "investment" property the next year to reap full tax benefits? My reading seems to indicate the IRS couldn't care less if you call it a second home or investment property, as long as you claim the income if it's rented over 14 days...but your lender could go after you if you tell them you want a "second home" mortgage with full intent to use it as an "investment" property.
I'm not trying to be a negative Nancy I swear! Just trying to make sure I understand how this works before some bank is trying to come after me! Thanks!
https://www.fool.com/millionacres/taxes/second-home-vs-investment-property-comparing-tax-differences/
https://www.mortgageloan.com/mortgage-rules-differ-for-second-homes-vs-investment-properties
https://www.valuepenguin.com/mortgages/second-homes-vs-investment-properties
Ok, so that is not quite right. There is no requirement for you to stay 14 days. If you want to keep the tax deductions for the home as a vacation rental, you can use it yourself for personal use for up to 14 days in a calendar year. Any more than that and you lose all deductions for the year.
The other 14 rule is that you can rent the home for up to 14 days tax free. That is called the Masters Rule for the Golf Masters in Augusta Georgia. People there will clear out of their homes for up to 14 days for the Masters and it is tax free.
It is true that most mortgages will spell out the requirements of a second home vs a vacation rental and that they can come after you for the full amount of the loan if it is violated, but I personally have never heard of that happening.
We bought our home as a second home as we weren't sure we were going to rent it. We then finally decided to go the STR route when we were not using it, but our loan was sold almost immediately so I didn't give it any thought.
@Michael Baum Thanks!
@Chase Hoover I am happy to provide info or speak with you about the 10% option and qualifications for that. The STR market is my lending specialty! @Karen Chenaille it is not really feasible for spouse's to get another second home loan in the same market within a short time-frame. Keep in mind the second home loan with 10% down is underwritten with the intent of the property being used as a second home so it is not typically seen as reasonable that a married couple would have separate vacation homes in the same market and this may cause underwriting issues. In the last couple years technology has gotten a lot more efficient at flagging these situations, so it is not something I would recommend taking a risk on.
I did not know that you can get "another" vacation home as long as it's in a different market. I assumed that only one was allowed. Is this true @Parker Borofsky ?
@Tim Schroeder it is! You can have more than one second home if they are in other markets :) I have one in Pigeon Forge and one in Nashville.
@Parker Borofsky @Tim Schroeder Is there a specific definition for "other market"? Distance? Or is it more subjective to the lender?
@Chase Hoover "other market" is not defined necessarily, just a general sensibility rule. Keep in mind, a vacation home/second home would be purchased with the intention of personal use to visit the area for leisure, business, etc.. for example, it would not typically be reasonable that someone would use more than one second home in the Smoky Mountain area, even if the properties were in two different towns i.e. Gatlinburg and Pigeon Forge. Whatever the situation is, it would definitely need to be reasonable and not raise red flags. Occupancy fraud (scary word) is the most common type of mortgage fraud (even scarier word!), and while the line is sometimes skirted, I do not recommend ever crossing that line. Since the crash of 2008 - loan audits have become much more customary and everyone from the PMI companies to the investors and loan servicers are all looking much closer at the loans that come their way. I feel comfortable with the second home loan option for myself and clients as long as they meet the guideline definitions which I provide all of them including the parameters of STR's in a second home. My professional goal is to help clients maximize their options, but stay within the guidelines and out of trouble. Single family investment occupancy loans have a min 15% down payment per the Conventional guidelines (some lenders and banks may require 20% or 25%), and investment occupancy rates still tend to be under 5% for most scenarios so if your situation does not fit the second home box, the investment loan may not be too much of a stretch.
@Parker Borofsky what if you purchased a second home in 2019 and then wanted to convert it to a full time rental or STR after a year, and wanted to buy another vacation home in the same market a year or more later? Would that be a concern to underwriting?
@Parker Borofsky
Alittle confused about the second home option. If I purchase a second home in Florida just say, I can put 10 percent down and occupy it for 14 days out of the year or more. I can rent it out the rest of the year but I cannot place the property in a rental program I must be in complete control?
If I go the vacation home investment property route I need to put 15 to 20% down and there are no rules to occupancy or putting into a rental management company?
Hi Everyone,
I was wondering if anyone knew if it is possible to purchase a home as a "vacation home" with the 10% down loan even if you do not own a primary residence.
I had a question regarding the 10% down "Vacation/2nd home" loan. I was going to start a new thread, but I think I can sneak it in here!
From everything I've read, the IRS requires you to spend 14 days or 10% of the number of days it's rented to be considered a "second home" vs an "investment property." There are obviously tax implications to differentiating between the two...the biggest being that you can only deduct a portion of the depreciation on a "Second home" (based on how many days you, personally, spent in it the previous year).
Is everyone staying in their STR the 14 days/10% when they take out their 10% down/lower rate "second home" mortgage? Are folks doing this the first year to get the better "Second home" mortgage terms and then just converting it to an "investment" property the next year to reap full tax benefits? My reading seems to indicate the IRS couldn't care less if you call it a second home or investment property, as long as you claim the income if it's rented over 14 days...but your lender could go after you if you tell them you want a "second home" mortgage with full intent to use it as an "investment" property.
I'm not trying to be a negative Nancy I swear! Just trying to make sure I understand how this works before some bank is trying to come after me! Thanks!
https://www.fool.com/millionacres/taxes/second-home-vs-investment-property-comparing-tax-differences/
https://www.mortgageloan.com/mortgage-rules-differ-for-second-homes-vs-investment-properties
https://www.valuepenguin.com/mortgages/second-homes-vs-investment-properties
Ok, so that is not quite right. There is no requirement for you to stay 14 days. If you want to keep the tax deductions for the home as a vacation rental, you can use it yourself for personal use for up to 14 days in a calendar year. Any more than that and you lose all deductions for the year.
The other 14 rule is that you can rent the home for up to 14 days tax free. That is called the Masters Rule for the Golf Masters in Augusta Georgia. People there will clear out of their homes for up to 14 days for the Masters and it is tax free.
It is true that most mortgages will spell out the requirements of a second home vs a vacation rental and that they can come after you for the full amount of the loan if it is violated, but I personally have never heard of that happening.
We bought our home as a second home as we weren't sure we were going to rent it. We then finally decided to go the STR route when we were not using it, but our loan was sold almost immediately so I didn't give it any thought.
Michael, I was reading through some old post to help me put together a presentation for my local RE club.
My understanding is that if you use the property for more than 14 days per year then you have to start prorating deductions including depreciation. Have you heard differently? Do you know where you got this information so I can educate myself is this is true?
Hey @John Underwood! From what I understand and have read. You can use your property for up to 14 days with no penalty in deductions. Now, if you use it more than 14 days you do prorate the deductions.
BUT, how much, if any will depend on the amount of days rented vs days of personal use.
It is either 14 days or 10% of total time rented. So if you use it for 15 days, but rent it out for 200+ days then there is no prorate. Also, if you "use" your property, but spend time working on the unit, then those days do not count towards personal usage. They are owner maintenance.
We are going to our lake house in a few days to spend a week. All the kids/grand kids are coming and we will be there a week. But I will be doing some maintenance while we are there. Working on the beach (lots of logs roll in), repairing anything, replacing a toilet seat and doing some general deep cleaning. It is only 7 days and we are rented for over 100 days so far this year. So zero prorating.
Here is the IRS statement on personal use rules: https://www.irs.gov/taxtopics/...
If you rent a dwelling unit to others that you also use as a residence, limitations may apply to the rental expenses you can deduct. You're considered to use a dwelling unit as a residence if you use it for personal purposes during the tax year for more than the greater of:
It's possible that you'll use more than one dwelling unit as a residence during the year. For example, if you live in your main home for 11 months, your home is a dwelling unit used as a residence. If you live in your vacation home for the other 30 days of the year, your vacation home is also a dwelling unit used as a residence unless you rent your vacation home to others at a fair rental value for 300 or more days during the year in this example.
A day of personal use of a dwelling unit is any day that the unit is used by:
I had a question regarding the 10% down "Vacation/2nd home" loan. I was going to start a new thread, but I think I can sneak it in here!
From everything I've read, the IRS requires you to spend 14 days or 10% of the number of days it's rented to be considered a "second home" vs an "investment property." There are obviously tax implications to differentiating between the two...the biggest being that you can only deduct a portion of the depreciation on a "Second home" (based on how many days you, personally, spent in it the previous year).
Is everyone staying in their STR the 14 days/10% when they take out their 10% down/lower rate "second home" mortgage? Are folks doing this the first year to get the better "Second home" mortgage terms and then just converting it to an "investment" property the next year to reap full tax benefits? My reading seems to indicate the IRS couldn't care less if you call it a second home or investment property, as long as you claim the income if it's rented over 14 days...but your lender could go after you if you tell them you want a "second home" mortgage with full intent to use it as an "investment" property.
I'm not trying to be a negative Nancy I swear! Just trying to make sure I understand how this works before some bank is trying to come after me! Thanks!
https://www.fool.com/millionacres/taxes/second-home-vs-investment-property-comparing-tax-differences/
https://www.mortgageloan.com/mortgage-rules-differ-for-second-homes-vs-investment-properties
https://www.valuepenguin.com/mortgages/second-homes-vs-investment-properties
Ok, so that is not quite right. There is no requirement for you to stay 14 days. If you want to keep the tax deductions for the home as a vacation rental, you can use it yourself for personal use for up to 14 days in a calendar year. Any more than that and you lose all deductions for the year.
The other 14 rule is that you can rent the home for up to 14 days tax free. That is called the Masters Rule for the Golf Masters in Augusta Georgia. People there will clear out of their homes for up to 14 days for the Masters and it is tax free.
It is true that most mortgages will spell out the requirements of a second home vs a vacation rental and that they can come after you for the full amount of the loan if it is violated, but I personally have never heard of that happening.
We bought our home as a second home as we weren't sure we were going to rent it. We then finally decided to go the STR route when we were not using it, but our loan was sold almost immediately so I didn't give it any thought.
Michael, I was reading through some old post to help me put together a presentation for my local RE club.
My understanding is that if you use the property for more than 14 days per year then you have to start prorating deductions including depreciation. Have you heard differently? Do you know where you got this information so I can educate myself is this is true?
Thanks for clarification!
When I am at our lake house I am working on something constantly. Always maintenance that needs to be done and my wife has a long list of more improvements she wants us to do. A labor of love.
Does anyone know if you can get a 2nd home loan through an LLC with a partner? For example, start an LLC with 50/50 equity between two people. One person uses 2nd home loan mortgage to get the 10% down and favorable rates, other person manages the STR and manages.
Hey @Alex S., I don't believe so. A 2nd home loan is a personal mortgage whereas an LLC is a commercial entity.
@Parker Borofsky
Alittle confused about the second home option. If I purchase a second home in Florida just say, I can put 10 percent down and occupy it for 14 days out of the year or more. I can rent it out the rest of the year but I cannot place the property in a rental program I must be in complete control?
If I go the vacation home investment property route I need to put 15 to 20% down and there are no rules to occupancy or putting into a rental management company?
I have these same questions. Was anyone able to answer this?