Second Home Financing For A Vacation Rental – Podcast
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by Rob Delavan
- April 14, 2021
- Podcasts, Real Estate
- 0
Second Home Financing For A Vacation Rental Podcast
Transcript Highlights!
Adrian
All right, welcome back. Future millionaires today’s podcast is a little unique… Today’s topic of interest is second homes and how you can leverage this unique property type to buy a home that can net you some rental income.
Rob
Yes, and what we were thinking of doing today is building out an avatar of an actual client that Adrian and I working with together and give a rundown of the differences between what happens if you’re trying to buy from a traditional lending standpoint – a 25% down normal investment property vs. this second home product, which is quite unique. So, let’s just unpack this. So Adrian, we have the client, let’s call him Jeff. He’s done loans with you in the past and he’s done real real estate work with me. He has his current home and he recently refinanced. What does that loan look like?
Adrian
Well, first off, he bought about 10 years ago, actually back in 2009. So, 12 years ago, he bought the house for a hair under 260. It’s worth half a million today. So we could do the math real quickly, he’s gained $240,000 of equity minimum. We were talking about this before Rob, I think we could probably sell for more honestly, but it’s worth at least half a million in today’s market. So he’s doubled his initial investment and the remaining balance is only about 180k, which was refinanced just a year ago to an awesome 2.75 rate. So he’s in this kind of difficult spot where he wants to gain access to the equity in his home but he doesn’t want to refinance out of that sweet rate. So what do you do? You’re stuck between a rock and a hard place? Right? And the answer to this question depends on who you ask. If you ask an unscrupulous lender, they’ll say you got to just take the hit up front, go ahead and eat the 3.5% and get access to the equity in your home.
Rob
Oh, and in doing so that the unscrupulous lender is also going to get a commission on that new loan at the higher rate.
Adrian
Yes, and the new purchase, a good lender will tell you don’t do that. Get a home equity loan, or a home equity line of credit. These are excellent products that let you tap into the equity of your primary residence. There’s almost no banks out there that do lending with seconds on non primary residences, but as long as this is still your primary home, you can use these as a separate second loan that pulls equity out of the house, a home equity loan is going to be a one and done, you’re going to get access to all that money right away. And then, they’re going to dump it into whatever account you tell them to. And then you can go off and use it for whatever your intended purposes, I love the home equity line of credit because you only pull out what you need. So, if you need to pull a little bit of money for the down for the second home, you can do that upfront. And then if you need to do some repairs paid for them in a couple months, you might be able to pull that extra 1020 $50,000 that you needed in order to do that, or for the next next home.
Rob
And the nice thing is, most of these equity loans and local credit unions are generally the source for this and the cost is usually like $500; sometimes they’ll do it even free.
Adrian
And you can convert that to an equity loan, which is a fixed rate, and it’s usually amortized over like 20 years. So, a few of the products also have a lock period where you can secure a home equity line of credit at a certain rate.
Rob
Right, and it’s usually a higher rate. Obviously, they’re not going to get 2.75%. But this particular client with $250,000 in equity, keeping below 80% loan to value, will be able to withdraw easily $200,000. Now, I don’t think this particular client would need that much for a down payment on a second home, but they could. So, usually you’ll get that equity line or loan up to 80% loan to value which in this case, he has 200,000 available to him as a down payment. So technically, he wouldn’t have to come up with any extra down payment on his new purchase.
Adrian
Right now, if he goes up to 80% of the home’s value, that’s the total loan balance can be 400,000. So if they’ve got a balance of $180,000 that means he could have a home equity line of about $200,000. The cool thing is he can pull that money, he can repay it, and then he can pull it again. These usually have withdrawal periods that are 10 years and the ability to refinance them. To reset that period.
Rob
Right, so backing up and building out the avatar of Jeff – When he bought his house way back in 2009, he was making $70,000, a year between him and his wife. And now they’re in that $150,000 range. 10 or 12 years later, he’s in a situation where he’s saving a significant portion than general numbers (we’ll get into this on another episode with a financial planner are 19,500 that you can save in your 401k or individual retirement accounts and so on). He’s doing all of those savings. And now he wants to build a some wealth in real estate, because that is also tax advantage. He’s now in a spot where $400,000 to $500,000 would get him a home, that’s VERY nice. That could be a great rental in the $3,000 or so monthly rent rate, which is where he would want to be, the other option would be to use it as an Airbnb. So, this becomes an investment property and a second home for him if he wants to. Understand that Jeff currently lives in a suburb of Portland, and he’s interested in having the 2nd home in Oregon wine country 30 minutes away. It would be a great Airbnb or long-term rental….
Listen and learn more – https://podcasts.apple.com/us/podcast/second-home-financing-for-a-vacation-rental/id1558292234?i=1000516133952
