Our vacation rental loan program is underwritten based on property level cash flow and borrower credit, rather than the borrower’s income. As a result, our vacation investment property loans are the market leader for self-employed investors and investors building a portfolio of vacation rental properties.
Visio Lending is The Nation's Leading Vacation Rental Lender
Visio’s vacation rental program is meant to be scalable, and there is no hard limit to how many properties an investor can finance with us. We provide purchase and refinance financing up to 80% LTV. Commonly, a customer obtains a cash-out refinance from Visio to purchase or improve another vacation rental property. Since late 2015, Visio has financed more than $2.8 billion in Rental360 loans, including $821 million in vacation rental properties.
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Traditional Financing vs. Loans for Vacation Rental Property
When you finance vacation rental properties, you'll find a few options available to you, including conventional loans, which are mortgages through a traditional financial institution like a bank or credit union.
While these types of loans work well for a primary residence, they have very strict requirements for short-term rentals that can disqualify many borrowers, such as a low debt-to-income ratio and extensive financial documentation. This is because they have a low risk tolerance and stringent federal and local regulations.
In contrast, a mortgage lender that specializes in vacation rental home loans is more interested in how well the property performs. They'll perform due diligence on certain key metrics, such as how well the rental income covers the monthly mortgage payments and the cost of the property, without looking extensively into your personal finances.
This streamlines the approval process and allows a greater range of borrowers to access financing, including self-employed borrowers.
Vacation Rental Loan Options
Financing is a key element of affording a vacation home, so it's vital to understand the different loan options and choose the one that's right for you. These are some of the most beneficial options for a vacation home mortgage.
A DSCR loan is based on the Debt-Service Coverage Ratio, which divides the monthly rental income by the debt service (principal, interest, taxes, insurance, and association dues). This creates a ratio that shows whether the rental property is making a profit after covering its debts.
While the interest rate and down payment are typically higher than for a conventional loan, you can roll more properties into the home loan than you could with other loan options. They are also easier to access for self-employed borrowers and seasoned investors whose primary sources of income are other real estate investments. You can also borrow through a business entity, which reduces risk.
Buy-and-hold investing is when you purchase a vacation home and hold on to it for years, or perhaps even decades. This makes the most sense if you invest when home prices are undervalued, build home equity, and then leverage cash-out refinancing to enter the rental market again.
All throughout, you'll develop a healthy cash flow through your vacation rentals that allow you to expand your portfolio. Our vacation rental loans are a great option for this, as they have 30-year loan terms, perfect for those who intend to hold on to their vacation rental for an extended period.
Hard Money Loans
A hard money loan is a short-term loan that provides upfront funds for purchase and construction. The approval requirements are low, and they can be funded very quickly. Hard money loans are typically used by house flippers rather than those buying vacation rentals, as they have very short terms, typically no longer than 24 months.
Because the risk of default is so high, the interest rate on a hard money loan is also very high. There is usually a balloon payment at the end of the term, which can put you at risk of default because the loan is secured with your investment property as collateral.
For those investing in vacation rentals, we have a variety of alternatives to hard money loans that will better suit your needs.
What to Consider When Financing a Vacation Rental Property
Choosing income-generating second homes requires significant market research, as well as a solid understanding of the costs associated with maintaining a vacation property. Here are some of the most salient factors you must include when deciding to invest in vacation rentals.
• Scout potential vacation rental properties – Look at a variety of different markets before narrowing it down. Start at the state level, break it down by regions, and then begin investigating cities to find the most profitable market and property.
• Rental income – Look at property values, occupancy rates, and average nightly rates, then use this data to assess cash flow, ROI, and cash-over-cash return. Visio Lending has a variety of helpful rental property calculators that can assist in your assessment.
• Investment property location – Get down to the street level and assess why a particular vacation home may be a good investment. This involves proximity to attractions, local transport options, and the general neighborhood.
• Tax benefits – Each state has different tax requirements, as well as different tax breaks. Working with a financial advisor can be helpful at this step.
• Property management – Property management includes guest communication, marketing, cleaning, management and upkeep, and furniture replacement.
• Operating expenses – Some other operating expenses include mortgage payments, insurance, pest control, repairs, and payroll.