Many second-home owners - especially those in the full-time vacation rental business - are looking to purchase another property yet have faced tougher financing guidelines over the past few years.
The purse strings appear to be easing now, however, according to several lenders.
"We have financed second homes for years," said Tracy White, branch manager at 1st Security Bank in Poulsbo. "That has usually meant property that a family plans to use for its own personal vacations and enjoyment. If the home will be rented out, it becomes an investment property. So we just have to be clear on the intended use. Vacation properties now mean different things to different people."
The best way to impress a lender with cash flow is to document the property's previous rental history. For example, if a lake cabin has been booked for 10 summer weeks the past two years, make that information available when you apply for a loan.
"I think people who have been looking to finance a vacation property might be pleasantly surprised by some of the programs currently available," said Dan Sargent, manager of Alpine Mortgage Planning in Federal Way. "Depending upon the buyer's credit, type of property and where it's located, a portion of the rental income could be used in the buyer's favor."
Christine Karpinski, the author of How to Rent Vacation Properties by Owner and Profit From Your Vacation Home Dream, offered some recent financing observations:
It's cheap to borrow . . . but have your ducks in a row. Rates remain low but remember that the easy money days are over. While lenders will now consider your vacation rental package, they will scrutinize your deal. If you plan to take out a mortgage on that vacation home you want, be prepared to put more money down - 20-30 percent is the going rate for investment properties.
Some homeowner associations and building associations raise a red flag. It probably will be easier to get a vacation property loan if your property is in a four-season area and outside a formal association. Lenders are scrutinizing these associations more closely than ever. When members were unable to pay their monthly dues during the throes of the housing crisis, many homeowners' associations went in the red. Lenders are conscious of these problems and don't want to lend money for a building or property where there is no money to take care of it.
Expect appraisers to be more stringent than they once were. This is actually a bittersweet thing for the buyer because it means the appraisal amount will be more accurate (i.e., not inflated) than it might have been years ago,
Now, let's say your financials are in order. The bank informs you that it will underwrite your loan. Is there a break-even, rule-of-thumb to use when considering annual cash flow?
Karpinski developed one of the better second-home rental formulas now used in the vacation property industry. Karpinski's definition of the break-even point is when all of the income (rent) from your vacation rental property is enough to pay all of the bills associated with ownership of the property. In other words, your vacation home should not cost you another dime after your down payment.
According to Karpinski, if your monthly mortgage payment is equal to - or less than - one "peak" week rental rate, and if you rent for 17 weeks, then you should be able to achieve positive cash flow.
Consider a property that rents "by owner" for $2,000 per week during the peak season with a monthly mortgage payment of $2,000. There are 12 peak weeks, most or all of which are generally occupied. Hence, 12 peak weeks rented covers most of one year's mortgage payments.
In addition, you'll need to rent five other weeks to pay for incidentals such as power, phone, association dues, minor maintenance etc. If you handle the rental yourself and have 17 weeks booked (33 percent occupancy), you will have an -even cash flow. Rent more and you have positive cash flow, according to Karpinski.
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