Financing for a short term rental condo on a resort

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Financing for a short term rental condo on a resort

Joanne Hanson
Realtor · Minneapolis, MN · Member since 2019 · 64 posts · 16 votes

We’ve found a great deal on a 3 bed 2 bath detached cabin at a ski/golf resort in Minnesota. We’d like to buy it as a vacation home for ourselves and rent it out as a short term vacation rental throughout the year. I’ve been trying to get $100k mortgage for it and keep getting told that it’s not mortgagable as it’s a condo on a resort. None of the major banks seem to want to touch it, and the non conventional private lenders I’ve tried aren’t lending on this type of property in Minnesota either. I know this deal will give a great cashflow with how we’d manage it, so I don’t want to pass it up because of financing. Has anyone else had any experience with condos on resorts? Or condotels as someone are classed? How do you find out the exact classification? As people keep telling me different things. Thanks!!

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Nancy Bachety
Rental Property Investor · North Fork, NY · Member since 2016 · 1k+ posts · 631 votes
6y

It's non-warrantable. 

Non-warrantable features for conventional loans

Common non-warrantable properties include condotels, timeshares, fractional ownership properties, multi-unit condos (the condo unit itself is two units), condos in a permanent care/assistance residence, and other projects which require owners to join an organization, such as a golf club.

Manufactured housing projects and other developments which are not legally considered real estate are also excluded from warrantability. These include houseboat and motorhome projects.

A condo in monetary litigation will likely be disqualified from financing by the major agencies.

When buying a condo, ask your real estate agent or lender about the building’s warrantability before you go any further.

A warrantable condo typically gets you lower mortgage rates than a non-warrantable condo. Warrantable condos create lower risk for the bank.

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  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    6y

    Try smaller banks and credit unions.

    Many of these keep loans in house.

    Also ask owner if they are willing to owner finance.

    1Reply
  • Collin HaysBusiness Member
    Property Manager · Gatlinburg, TN · Member since 2020 · 3k+ posts · 4k+ votes
    6y

    Big banks aren't much into local lending, unless you want to buy a car or need a vacation loan.  Going to Wells Fargo for an investment loan is like going to Dollar General to buy your kids' Christmas presents - not much to offer, it's not what they do.

    [email protected]806-672-7102
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    1Reply
  • Paul Sandhu
    Investor · The worst town to live in, KS · Member since 2016 · 4k+ posts · 4k+ votes
    6y

    Future economic conditions put a red flag on any property that has the terms "vacation" "resort" or "rental" in the property description.  If the country goes into a recession, these properties will suffer.  I'm hoping for a recession, and not a depression.

    Source: Me, I studied economics and finance. My uncle was Ike Mathur.

    0Reply
  • Robert TinkerPro Member
    Rental Property Investor · Round Rock, TX · Member since 2019 · 251 posts · 159 votes
    6y

    Might be the time we are in right now. Guild mortgage got us a loan on a condo, when other lenders had some rules about loaning on condos where a certain  number are not owners occupied in the complex

    0Reply
  • Nancy Bachety
    Rental Property Investor · North Fork, NY · Member since 2016 · 1k+ posts · 631 votes
    6y

    It's non-warrantable. 

    Non-warrantable features for conventional loans

    Common non-warrantable properties include condotels, timeshares, fractional ownership properties, multi-unit condos (the condo unit itself is two units), condos in a permanent care/assistance residence, and other projects which require owners to join an organization, such as a golf club.

    Manufactured housing projects and other developments which are not legally considered real estate are also excluded from warrantability. These include houseboat and motorhome projects.

    A condo in monetary litigation will likely be disqualified from financing by the major agencies.

    When buying a condo, ask your real estate agent or lender about the building’s warrantability before you go any further.

    A warrantable condo typically gets you lower mortgage rates than a non-warrantable condo. Warrantable condos create lower risk for the bank.

    3Reply
  • Donado Manuel
    Rental Property Investor · Stockbridge, GA · Member since 2015 · 12 posts · 4 votes
    6y

    @Joanne Hanson I would suggest you speak with Adam at Host Financial. There website is https://www.hostfinancial.com/. I haven’t used them yet but plan to in the near future. You can find them in the marketplace. Looks to be a pretty solid company. Good Luck with your search! 

    0Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    6y

    @Joanne Hanson

    Major problem is the condo complex needs a minimum of 70% owner occupancy to be warrantable, which won’t happen in most vacation condos. When selling new, the developer will line up a lending institution and pay that institution a buy down for every loan they make on new purchases. As a buyer of a resale, you may be able to find a lender at a higher , perhaps much higher than current rate. If the seller really is motivated to sell he’ll have to come to terms with a buy down or price cut to reflect the lack of financing available.

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  • Joanne Hanson
    OP
    Realtor · Minneapolis, MN · Member since 2019 · 64 posts · 16 votes
    6y

    @Don Konipol Thanks Don. It’s a real minefield. There’s also a 1 bed condo that’s priced around $70k that we could buy with cash with a similar cash flow pm. The smaller unit do seem to sell quicker than the larger ones. Do you think this would be a better option? 

    0Reply
  • Joanne Hanson
    OP
    Realtor · Minneapolis, MN · Member since 2019 · 64 posts · 16 votes
    6y

    @Donado Manuel Thanks! I’ll give them a try! 

    0Reply
  • Joanne Hanson
    OP
    Realtor · Minneapolis, MN · Member since 2019 · 64 posts · 16 votes
    6y

    Thanks @Nancy Bachety. That’s what I kept finding. However you can get loans for non-warrantable condos right? I’m just struggling to find any in MN. 

    0Reply
  • Joanne Hanson
    OP
    Realtor · Minneapolis, MN · Member since 2019 · 64 posts · 16 votes
    6y

    Thanks @Robert Tinker I’ll give them a try too. Worth a shot. 

    0Reply
  • Joanne Hanson
    OP
    Realtor · Minneapolis, MN · Member since 2019 · 64 posts · 16 votes
    6y

    Thanks @Collin Hays I’m starting to realize that. The only reason our first mortgage is with them is because they’re the bank my company guaranteed us for a mortgage with when we relocated from the UK. 

    0Reply
  • Joanne Hanson
    OP
    Realtor · Minneapolis, MN · Member since 2019 · 64 posts · 16 votes
    6y

    Thanks @Paul Sandhu. Insightful. Agree that seems to be the case. Although maybe with longer haul travel being out the window right now with COVID more local getaways may do well? As long as people don’t loose their jobs. The resort was pretty busy when we went last week. 

    0Reply
  • Joanne Hanson
    OP
    Realtor · Minneapolis, MN · Member since 2019 · 64 posts · 16 votes
    6y

    Thanks @John Underwood. I tried the local banks and they only had a 5 year balloon. Which I’m not familiar with. Need to read up on what it is. I wondered about owner financing, but not exactly sure how that would work either. Given we wanted around $100k. We were going to take out a 30 year loan. Do you have any experience in owner financing? 

    0Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    6y
    Originally posted by @Joanne Hanson:

    Thanks @John Underwood. I tried the local banks and they only had a 5 year balloon. Which I’m not familiar with. Need to read up on what it is. I wondered about owner financing, but not exactly sure how that would work either. Given we wanted around $100k. We were going to take out a 30 year loan. Do you have any experience in owner financing? 

     I am providing owner financing on a property I am selling to a long term tenant. The owner is just the bank and you pay the owner monthly payments instead of a bank.

    The 5 year balloon just means you make normal payments like you have a 30 year mortgage, but you have to pay the loan off prior to 5 years or get it refinanced before 5 years is up.

    Can this property make enough money in 5 years to pay off the loan? Most of the stuff I buy can easily pay for it self it well under 5 years. But these are long term rentals. I do have a mortgage on my lake house that is a vacation rental.

    Also if a bank won't loan on this type property think about why that is and consider do you want to buy something a bank is scared to loan on?

    Also one day if you decide to sell you will have the same problem and may be forced to have to owner finance it to be able to sell it.

    1Reply
  • Dave Widgeon
    Member since 2018 · 2 posts · 0 votes
    6y

    @Joanne Hanson. We purchased a condo which is classified as a condotel in the Pigeon Forge area in February. We used Sprout mortgage. They were horrible to work with in terms of customer service but they did eventually get

    The loan to go through.

    0Reply
  • Joanne Hanson
    OP
    Realtor · Minneapolis, MN · Member since 2019 · 64 posts · 16 votes
    6y

    @Dave Widgeon thanks for the tip. I’ll try them anyway! 

    0Reply
  • Joanne Hanson
    OP
    Realtor · Minneapolis, MN · Member since 2019 · 64 posts · 16 votes
    6y

    @John Underwood very true. That’s why we were a little hesitant to start with. But the cashflow is really good. But you’re right, I think that’s why the 3 beds struggle to sell quickly. We inquired about a 1 bed too, but looks like it’s already sold. I’ll run the numbers to see how long it would take to payoff a seller financed loan or balloon mortgage. Great idea. Thank you! 

    0Reply
  • Avery CarlBusiness Member
    Real Estate Agent · USA · Member since 2016 · 909 posts · 1k+ votes
    6y

    @Joanne Hanson in the markets that I’m in it’s pretty easy to get commercial financing on condotel properties. Although I don’t think any of the lenders that I know and use are licensed in Minnesota so that’s of no help to you. :( Host Financial might have an option for you!

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  • Joanne Hanson
    OP
    Realtor · Minneapolis, MN · Member since 2019 · 64 posts · 16 votes
    6y

    Thanks @Avery Carl! I’ll check them out. That’s what I’m finding, condotel lenders but not in MN. Wished we lived nearer to TN! :-(

    0Reply
  • Avery CarlBusiness Member
    Real Estate Agent · USA · Member since 2016 · 909 posts · 1k+ votes
    6y

    @Joanne Hanson Also try Visio. When I last spoke to them they were not doing loans for a bit because of Coronavirus, but that may have changed since then as that was back in March!

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    0Reply
  • Joanne Hanson
    OP
    Realtor · Minneapolis, MN · Member since 2019 · 64 posts · 16 votes
    6y

    Thanks @Avery Carl I’ll try them too! 

    0Reply
  • Armin Nazarinia
    Saint Paul, MN · Member since 2018 · 189 posts · 107 votes
    6y

    @Joanne Hanson- Have you looked at financing this as a 2nd home/vacation property primarily? I know of a couple portfolio lenders in the cities but haven't asked them about if they would do vacation rentals

    0Reply
  • Joanne Hanson
    OP
    Realtor · Minneapolis, MN · Member since 2019 · 64 posts · 16 votes
    6y

    Hi @Armin Nazarinia. I have been asking for a loan for a vacation home / STR. The problem is more that some are classing it as a condotel rather than just a condo. I've managed to find two lenders today that have offered conventional lending on it. Thanks to the help from everyone on this forum post (THANK YOU!) Now we just need our offer accepting. Then it'll be Deal No.1 and counting! :-D

    1Reply
  • Joanne Hanson
    OP
    Realtor · Minneapolis, MN · Member since 2019 · 64 posts · 16 votes
    6y
    Originally posted by @Dave Widgeon:

    @Joanne Hanson. We purchased a condo which is classified as a condotel in the Pigeon Forge area in February. We used Sprout mortgage. They were horrible to work with in terms of customer service but they did eventually get

    The loan to go through.

    Hi Dave, Sprout were able to offer me a loan on the property so thank you! Just wanted to let you know. :) 

    0Reply
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