Question for the STR finance gurus

10 Replies

So I had the opportunity to buy a cabin near Gatlinburg in January at a great price.  I paid cash.  It produces about $36K a year.  Well I had an opportunity to buy yet another cabin nearby and I closed on it today, again with cash.

The only problem is, I'M BROKE NOW!  ;)  

I'd like to take out a mortgage on one of the properties and take a chunk of cash out.  But I have now 6 rental cabins.  Don't mortgage underwriters want you to have substantial cash reserves to fund expenses for all of your rentals?  Does anyone know what that number is?  What if I don't have it because I've written checks for two cabins in the last 4 months?  

Any suggestions?

@Collin H.

See if you can get a commercial line of credit on the ones you own free and clear.  I don’t know if two properties will be enough but a lot of people move towards portfolio type loans when they end up with too many properties.  Start talking to local banks there and see what type of products they have to offer.

Originally posted by @Chris Watson :

@Collin H. Heloc one to get the 4% reserves required by fannie mae for four or more financed. Then cashout refi the others.

I only have 2 of my cabins financed with a conventional mortgage.  I have two more free and clear (and I'd like to get a mortgage on one of those), and two more (both properties together) that are worth around $500-600K that I owe $102K on, but it isn't a mortgage per se - they are collateral on a business loan - not a mortgage per se, but kind of.

In theory, you should be able to refinance a property and take money out so you have cash reserves. I believe they'll look primarily at your debt to income ratio. You have no debt on your new properties (yeh!) but the income isn't on your tax returns yet for new properties (boo). Since it seems like overall your properties have low debt, you should be a good candidate for a cashout refi as long as past tax returns show good income. It's harder if you don't have a w2 job.

The good news is a loan professional can probably tell you the exact answer in 30 seconds. Just pick a recommended one and shoot them an email with your rough details!

If you are going to owe taxes this year on the income from the rentals, I would get a no cost estimate on what additional cash-flow you can get with a cost segregation study and other tax benefits on properties you purchased in previous years. Right now and before the end of 2021, as a RE professional you can even get refunds on taxes you paid in 5 previous years. 

@Collin H.

There is a valid point that is brought up. You purchased these properties all cash...which means you won't have mortgage interest as a deduction.

Short-term rentals are great because they bring a lot of cash-flow compared to their long-term counterparts. However, a negative thing to consider is that you may be subject to taxes on the rental income.

There are potential ways to defer that by taking an immediate write off(if eligible) on furnishing the house. You may also want to see if a cost segregation makes sense. You have until you file your return as a deadline of when the cost segregation needs to be completed by.