Newbie needs advice - Posted by Christie

Posted by Christie on May 16, 2006 at 16:38:09:

Thanks, John!! This information was all extremely helpful :slight_smile:

Newbie needs advice - Posted by Christie

Posted by Christie on May 15, 2006 at 19:29:23:

We have $50K equity in our home, $60K in investments, $20K in cash. Husband has 700 FICO, I have 600. He’s employed FT for more than 2 yrs, I am self-employed more than 3.

We’re interested in purchasing a lakefront property to rent as a vacation destination in Austin, TX. Home is $650K, $100K under app. value. I have written a biz plan that shows positive cash flow within 6-12mos of purchase based on mortgage of $650K @ 7.0% over 30yrs. Rents for $1900wk in the off-season, $2200wk in spring/summer, $450 night with 3day minumum. Similar rentals here are solidly booked through the summer, 1/2 full during the winter. Little to no competition–there are only two others we’ve found so far, so both do well.

What is the best way to finance this? Should we use our cash or home equity for a down payment, or would we be better off doing an 80/10/10? We plan to put profit back into the payments and pay off within 10yrs. Only other concern is that we should just keep looking for something less expensive, but prop. values here just keep skyrocketing. Already passed up a good deal at $450K thinking we’d find something better, and then it disappeared and prices soared :-/

Thanks for any input!

Re: Newbie needs advice - Posted by John Corey

Posted by John Corey on May 16, 2006 at 04:46:47:

Christie,

  1. You are looking at a rising market and thinking you have to act even if you have to stretch. Be careful about such logic. It matters less about the rising prices then it does about your true ability to manage the debt. If jet planes are rising in value but you can not afford one you just move on.

  2. There is a mailing list on Yahoo that is very active and very focused on short term vacation rentals. Go to http://groups.yahoo.com/group/vacation_rentals/ to sign up or otherwise read the posts.

The list is very much about where to advertise, how to deal with screening tenants, finding quality supplies, and other issues related to running such a business. There is almost no knowledge about financing and some of the other legal aspects of investment property. Hence you should stay where on CREOnline for things other than day to day operation of a vacation rental.

  1. Your financing question. I would speak with a TX mortgage broker to see what they can obtain for you. You might be able to secure financing as a second home or as a NOO rental. You need to be careful about what the loan terms say as there can be restrictions if you are trying to operate a short term rental. You also have to be sensitive to the income you are projecting when applying for a loan. They might discount the short term rental income and only all income from a long term rental if they allow any such income to be a factor in the decision process.

If you are able to purchase be very careful about getting the right insurance so that you have coverage. If you pick a 2nd home policy and there are any restrictions on how long you can rent the property future claims could be (likely will be) denied.

Assume for the 1st year you will earn next to nothing from the rental after you deal with the costs of running such a rental. Can you afford the payments? If so then you will be fine if the income is higher than I am suggesting.

The equity in your home is likely a tiny amount compared to the value if your home is worth more than $100K. Having access to the equity with a HELOC could be a good buffer. As far as helping finance a rental it is not much. Using the cash and the investments would provide around 10% of the price but there are closing costs and other costs associated with outfitting the business. Hence you will be at a high LTV. As you did the math using 100% LTV then you know how tight things might be.

Forget the idea of paying down the mortgage quickly until you have built up a buffer. This can be cash in a savings account or it could be paying down equity where you have a HELOC in place so you still have access. Stuff happens and you will need money to do repairs, deal with vacancies, hire staff, buy materials, advertise, etc.

John Corey