If you are on the lookout for a vacation rental, one thing you always consider is how you intend to finance the purchase. This consideration is an extremely important one for real estate investors since most are well past purchasing their first rental property. Several already have numerous properties, meaning they are almost at the limit of what they can borrow.
This article will reveal the various ways you can finance a vacation home. Let’s begin!
Raise the Money
Raising money is generally more open to veteran real estate investors. This is because passive investors are unlikely to give their hard-earned capital to real estate investors with little experience.
Nevertheless, there are circumstances where new real estate investors can raise funds. In these instances, family and friends are a financing source. The process surrounding raising money is quite simple.
As a real estate investor, you must conduct all the background work, which involves finding the property, getting said property under contract, and managing the property. You then own around 10-40% of the entire property without having to put any money into the deal.
Furthermore, with such a deal, you can charge fees for management and operations. The most common fees associated with this are disposition fees, asset management fees, and acquisition fees.
You should bear in mind that this is more of a job and less investing. This financing method is what professional syndicators do, and it can be quite lucrative. However, you should note that you are simply trading one job for another.
Private Lending
Private lending is typically a temporary source of funding; however, it is still a great option when searching for financing for vacation homes. It remains on this list as sometimes it can be the only financing source for an individual that has stretched their funding.
The source of such a mortgage loan is typically private funds or individuals that loan real estate investors money. These loans generally come with higher interest rates; nevertheless, they do have the benefit of speed. Since the funding source is private, there aren’t as many requirements as one would get from going through a commercial loan program or a second home loan.
As stated before, these loans are temporary funding sources, and they can be helpful in situations where you need to close quickly. This mortgage loan can also be useful for properties that do not meet the criteria for conventional loan funding. These could be properties that require significant rehabilitation or ones that have foundation problems.
Learn how you can invest in multi-family properties.
Seller Financing
Another option for vacation home financing is seller financing, also known as seller carry. This happens when the seller transforms into the bank to avoid paying a large tax bill at the time of the deal. This results in them paying taxes, little by little.
Seller financing is rarely used for a vacation property since most buyers rarely ask the seller about it. However, if you don’t ask, you will never know. This can be a great option the next time you are stuck for funding.
Partner Up
While partnerships tend to get a bad reputation due to fallouts, there are reasons why this can be a great way to finance vacation homes. Most people tend to avoid partnerships because they believe it could limit them; however, there are ways to make a partnership work for a vacation home mortgage. You have to set them up properly and need the right partner.
Figuring out how everything works is simply about being able to find a money partner. The money partner is typically the silent partner that foots the bill. To ensure everything is above board, you can draft a contract that ensures both parties are protected and their interest rate is highlighted.
Commercial Loans
Commercial loans, by design, are extremely variable products. Since these loans are not governed by the FHFA rules that regulate others, they can vary in design. This means you can find low-money commercial loans or even second home loan products. The major thing to remember when trying to get a vacation home loan product is to have a good relationship with the lender. A good relationship can be the key to getting funding through a loan program.
You should also note that commercial loans are a great source of finance for those without a W2 job. This means if you pay yourself in dividends from your business or have a 1099 income. Regardless of what the case is, a commercial lender can breeze through the technicalities to get you your required funding.
Jumbo Loans
Jumbo loans are like any other high-credit quality mortgage; however, they tend to provide amounts far beyond the conventional loan limits. You can put down as little as 10% with this type of loan. You should note that the number of financed properties you have and your debt-to-income ratio determines the amount you can borrow. These factors also determine how many jumbo loans you can apply for.
Jumbo loans typically come with more requirements, such as a lower debt-to-income ratio or higher credit score and high-interest rates. However, this isn’t always true. Just as with commercial loans, the terms you get with jumbo loans are extremely varied, so you should take the time to speak to various lenders.
How to Finance Vacation Home: Conclusion
There it is! Now you have a large list of options on how to finance a vacation home. It doesn’t matter if you are starting out and don’t know how to go about it or are a veteran in the real estate investing scene; you can never have enough financing options at your disposal.
