What is a transitional rental?

Posted by Jeff Ball on Mar 7, 2019 9:00:00 AM

a tan house with a garage and small lawn

Similar to our concept of a “permanent rental,” we’ve coined the term “transitional rental,” to describe the rental properties investors want flexibility on selling in the foreseeable future. These investors are interested in paying the lowest amount upfront, and are okay paying a higher interest rate, since they are more focused on the immediate cost rather than the long-term costs of the loan. Our transitional rental investors often are attracted to our 5/1 ARM rate product, our 3-2-1 prepayment penalty option, and typically choose to pay low fees upfront, if any. Here is an example of the benefits of the strategy.

Let’s say an investor with a 740 credit score is interested in purchasing a $350,000 rental home. The home generates a 1.3 DSCR at a loan-to-value, or LTV, of 80%. If this investor chooses to pay our standard 2% origination fees and selects our 5/1 ARM product with our 3-2-1 prepayment penalty, here is what their origination fees, interest rate, and monthly payment would be*:

  • Origination Fee: $5,600
  • Annual Interest Rate: 6.6%
  • Monthly Payment: $1,958

On the other hand, let’s say the same investor chooses to pay no upfront fees. Again, using our 5/1 ARM product with our 3-2-1 prepayment penalty, here is what their origination fees, interest rate, and monthly payment would be*:

  • Origination Fee: none
  • Annual Interest Rate: 7.2%
  • Monthly Payment: $2,070.61

Even though, this investor increases their monthly payment by a little over $100 a month, they save $5,600 upfront. If this investor chooses to sell the house within 2 years, they will have paid an extra $2,688 on interest, yet still come out $2,912 ahead by not paying any fees. Clearly, our 5/1 ARM and 3-2-1 prepayment penalty with no upfront fees is an ideal option for investors looking to buy properties at the right time.

On the other hand, for investors looking to purchase the legacy, hold forever rentals, that we have coined “permanent rentals,” our 30-yr fixed rate product with our 5-year prepayment penalty is an ideal option.

*Obviously, our fees, rates, and terms have changed over time and likely will change in the future, so contact your Visio Account Executive to obtain a current quote. 

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More posts by CEO Jeff Ball: Why Might Someone Rent in 2019 When They Could Afford to Buy?Financing Challenges for Vacation or Short-Term Rentals, 

Topics: Real Estate Investing

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