Like many Southern Californians this time of year, I was ready to book my annual trip to the mountains after repeatedly hearing radio ads for Big Bear Mountain and Snow Summit. In the past, my options in Big Bear Lake were limited to a few lodges and hotels that had websites or ran ads. Now, vacation rental websites like VRBO.com and AirBnB.com have forever changed the hospitality industry. Travelers can easily locate their ideal vacation rental property by going online and sorting through hundreds of privately owned and operated vacation rental properties. At Trust Deed Capital we are seeing more borrowers that want to purchase real estate in vacation destinations to take advantage of the new investment opportunities these new technologies create. Before you start making offers on that beautiful cabin in Big Bear or that beach bungalow on the Mission Beach peninsula in San Diego, here is what you should know about financing these types of properties:
1. Put more money down in order to get the best interest rate possible
You would be surprised by the low interest rates some hard money lenders are offering. I have seen rates as low as 6% on non-owner occupied, investment real estate.
2. Have a track record
Especially for your first vacation rental, collect rents for the first 12 months and then look to do a cash out refinance. Sites like VRBO.com and AirBnB.com can provide property owners with an annual schedule of rents collected. Your lender will want to see this.
3. Buy a fixer and build equity
You can maximize the amount of money you borrow by treating the property like your average purchase, fix, and flip loan. Once the property is completed, talk to your lender about having the property re-appraised (now at the higher after-repair-value) and see if you qualify for a cash-out, refinance, buy and hold loan.
4. Customize your terms to fit your strategy
If you plan to quickly payoff your hard money lender because you know you can qualify for a lower interest rate with your conventional lender down the road, ask for a shorter (or no) pre-payment penalty. If appreciation is what you are aiming for, ask for a longer term. Most lenders will only offer a maximum 5 year term, but I have seen some offering 7 years to 10 years.
5. Do your research before you start buying
Knowing the details of the city you are looking to invest in (like the busy tourist months, when to raise and lower rental rates, major festivals and events that draw large crowds, city planning and development, etc.) is critical to protecting your investment and keeping your lender safe. You will want to provide your lender with a letter of explanation as to why these details are important and letting them know that you have thoroughly thought your business plan through. This will impress your lender and greatly improve your chances of getting your loan approved with an investor.
I personally think that this is an excellent investment strategy if executed properly. There is certainly a large learning curve to this potential business model. Most lenders are leery of borrowers that want to execute this business plan without a prior successful track record. Therefore, it is important to have thought everything through and to present a professional package to your lender. If you would like more information about financing your vacation rental property, please contact us. With years of experience in the field of real estate finance, we are committed to finding solutions to all your real estate investment property needs.