Rental Property - First time

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RMO87
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Rental Property - First time

Post by RMO87 »

Hello, wife and I are looking to relocate to Florida after our youngest graduates high school in four years. I'm the meantime, we are thinking about purchasing a rental property (i.e., VRBO) in Orlando, Tampa, or Ft. Myers.

We would then have a Florida address when it comes time to explore job opportunities prior to making the move. Does anyone have a good resource/book/advise on researching available properties, how much to put down, etc?

Thanks in advance!
humblecoder
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Re: Rental Property - First time

Post by humblecoder »

RMO87 wrote: Fri Sep 17, 2021 8:57 am Hello, wife and I are looking to relocate to Florida after our youngest graduates high school in four years. I'm the meantime, we are thinking about purchasing a rental property (i.e., VRBO) in Orlando, Tampa, or Ft. Myers.

We would then have a Florida address when it comes time to explore job opportunities prior to making the move. Does anyone have a good resource/book/advise on researching available properties, how much to put down, etc?

Thanks in advance!
My wife and I are in the process of closing on a property in Kissimmee. Our intent is to use it as a vacation home maybe 2-4 weeks a year and then rent it as a vacation home the rest of the time. In the next 10-15 years we are considering retiring to Florida so it could provide a more permanent residence (or not). Here is some of my observations, in no particular order.

1. If you are planning to short term rent, make sure the home is zoned for short term rental. From what I understand Orlando itself is not zoned for short term rental, but many areas west which are closer to the theme parks are.

2. You need to balance what is attractive to you versus what would be attractive to a renter. In the Orlando market, having things like a game room, a pool, themed bedrooms, theater room, a community with amenities like a water park can help drive rentals. However, you personally might not care for such things. This is especially important if you are thinking of using the property as a full time home at some point. I know the house that we purchased may be a good vacation home for us, but it might not be a good "forever home".

3. Find a good realtor who specializes in short term rentals. They can guide you on communities, what aspects of the property will give you a good ROI in the market, vendors to use. They can also help with projecting the financials, advice on vendors, etc.

4. Run the numbers. Get some estimate of what your monthly expenses will be (mortgage, taxes, insurance, utilities, HOA fees, resort fees, property management fees, contingency fund). On the revenue side, research what similar properties will rent for and what their occupancy rate is. You can do this through a variety of different booking sites, consulting with your realtor or a property management company (although their estimates may be optimistic in order to entice you). That will help give you an idea of how profitable your property is going to be, what sort of occupancy rates are you going to need to hit, etc.

5. Consider how you are going to manage the property and consider if you want to go with a property management company. And if you go with a property management company, what level of services do you require? Do you just need somebody to handle cleanings, and coordinate repairs? Do you need somebody to help you with marketing and bookings too? Obviously, the more you have your property management company do, the less you will make. However, some people like just getting a check every month.

I also found that Biggerpockets.com is a good resource. However, the focus seems to be maximizing ROI so if your goals are partially non-financial, you may need to take what is said there and "salt to taste" so to speak.
humblecoder
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Re: Rental Property - First time

Post by humblecoder »

I saw you also asked "how much to put down"...

Normally, lenders will ask you to put down a bigger down payment than you would for a primary residence - the thought being that you would be more willing to default on a vacation home since it's not like you'd be homeless if you lost the home. We had to put 25% down.

Also, we went with a conventional lender who underwrote the home as if we were not going to get ANY income from the property. In other words, they wanted to make sure our income would cover the mortgage for both our current home and second home together. That allowed us to get a more conventional interest rate. I think there are other lenders who specialize in underwriting investment properties, but my understanding is that the interest rate would have been higher. However, not an expert in this area by any means.
IMO
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Re: Rental Property - First time

Post by IMO »

humblecoder wrote: Fri Sep 17, 2021 10:42 am I saw you also asked "how much to put down"...

Normally, lenders will ask you to put down a bigger down payment than you would for a primary residence - the thought being that you would be more willing to default on a vacation home since it's not like you'd be homeless if you lost the home. We had to put 25% down.

Also, we went with a conventional lender who underwrote the home as if we were not going to get ANY income from the property. In other words, they wanted to make sure our income would cover the mortgage for both our current home and second home together. That allowed us to get a more conventional interest rate. I think there are other lenders who specialize in underwriting investment properties, but my understanding is that the interest rate would have been higher. However, not an expert in this area by any means.
If one is purchasing a property for a 2nd home vs. a rental/investment home there will definitely be a higher interest rate and as you've mentioned, often a higher down payment. I'm not going to get into mortgage fraud issues, but one must disclose the purpose of the property on a mortgage application. We've purchased a property that we were going to move into a few years later (and renting long term), but we had to purchase the home as an investment property with the higher mortgage rate/down payment and then later refinance as a primary home when we moved into it a few years later.

There is also a significant difference when it comes to insuring a 2nd home that is a personal property vs. a property that is being rented for short periods. Last time I checked with my insurer (USAA) any rental period shorter than 6 months was considered "commercial" type of rental and any shorter than 6 month rental of the property was not covered under their typical type of landlord rental insurance coverage.
humblecoder
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Re: Rental Property - First time

Post by humblecoder »

IMO wrote: Fri Sep 17, 2021 11:28 am
humblecoder wrote: Fri Sep 17, 2021 10:42 am I saw you also asked "how much to put down"...

Normally, lenders will ask you to put down a bigger down payment than you would for a primary residence - the thought being that you would be more willing to default on a vacation home since it's not like you'd be homeless if you lost the home. We had to put 25% down.

Also, we went with a conventional lender who underwrote the home as if we were not going to get ANY income from the property. In other words, they wanted to make sure our income would cover the mortgage for both our current home and second home together. That allowed us to get a more conventional interest rate. I think there are other lenders who specialize in underwriting investment properties, but my understanding is that the interest rate would have been higher. However, not an expert in this area by any means.
If one is purchasing a property for a 2nd home vs. a rental/investment home there will definitely be a higher interest rate and as you've mentioned, often a higher down payment. I'm not going to get into mortgage fraud issues, but one must disclose the purpose of the property on a mortgage application. We've purchased a property that we were going to move into a few years later (and renting long term), but we had to purchase the home as an investment property with the higher mortgage rate/down payment and then later refinance as a primary home when we moved into it a few years later.

There is also a significant difference when it comes to insuring a 2nd home that is a personal property vs. a property that is being rented for short periods. Last time I checked with my insurer (USAA) any rental period shorter than 6 months was considered "commercial" type of rental and any shorter than 6 month rental of the property was not covered under their typical type of landlord rental insurance coverage.
Good points. Just to be clear, I was 100% up front with the bank regarding our usage of the property. . Not sure if you were calling my integrity in question with that statement. :beer
Jimsad
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Re: Rental Property - First time

Post by Jimsad »

Do your research to be sure .
I have enough headache with my 2 rentals and sold one and thinking of selling the other when rental lease is up
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Sandtrap
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Re: Rental Property - First time

Post by Sandtrap »

Other points to consider: (not a complete list)

1. Do you want to be a business person running a rental business?
2. Do you want to grow your rental business with more properties over time?
3. Is this venture advantageous to you for "taxes", for "personal investment portfolio diversification and income stream"?
4. Do you plan on living in the rental property again in the future or having it your estate (beneficiaries) or for children, etc, later?
5. Are you planning to invest this way as passive (hands off) investing with the expectation of an income stream without work or tending to it?
6. Have you considered taking the funds from the sale of this potential rental property, and not renting, and adding those funds to your personal investment portfolio (index funds, etc)?
7. Have you calculated and compared the total investment and comparitive ROI (return on investment: gross and net) between this path and #6 above?
8. Are you planning to purchase a home for your own use (SFH) (retirement dream home?) and renting it out for 4 years, then living in it after your child graduates? (so this is a temporary rental)?
If so, why not purchase the home at that time instead of now?

topic: personal investment portfolio, diversification, alternatives, etc.

PM me as you wish.
j :D

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IMO
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Re: Rental Property - First time

Post by IMO »

humblecoder wrote: Fri Sep 17, 2021 1:19 pm
IMO wrote: Fri Sep 17, 2021 11:28 am
humblecoder wrote: Fri Sep 17, 2021 10:42 am I saw you also asked "how much to put down"...

Normally, lenders will ask you to put down a bigger down payment than you would for a primary residence - the thought being that you would be more willing to default on a vacation home since it's not like you'd be homeless if you lost the home. We had to put 25% down.

Also, we went with a conventional lender who underwrote the home as if we were not going to get ANY income from the property. In other words, they wanted to make sure our income would cover the mortgage for both our current home and second home together. That allowed us to get a more conventional interest rate. I think there are other lenders who specialize in underwriting investment properties, but my understanding is that the interest rate would have been higher. However, not an expert in this area by any means.
If one is purchasing a property for a 2nd home vs. a rental/investment home there will definitely be a higher interest rate and as you've mentioned, often a higher down payment. I'm not going to get into mortgage fraud issues, but one must disclose the purpose of the property on a mortgage application. We've purchased a property that we were going to move into a few years later (and renting long term), but we had to purchase the home as an investment property with the higher mortgage rate/down payment and then later refinance as a primary home when we moved into it a few years later.

There is also a significant difference when it comes to insuring a 2nd home that is a personal property vs. a property that is being rented for short periods. Last time I checked with my insurer (USAA) any rental period shorter than 6 months was considered "commercial" type of rental and any shorter than 6 month rental of the property was not covered under their typical type of landlord rental insurance coverage.
Good points. Just to be clear, I was 100% up front with the bank regarding our usage of the property. . Not sure if you were calling my integrity in question with that statement. :beer
No, wasn't calling your integrity in question. :beer

Actually was just letting OP know that it will be of concern if they lie on the mortgage application and claim it's a 2nd property. The normal homeowners insurance is collected by the mortgage servicer (as typical), but then the owner then cancels the normal homeowners because they purchase/require a commercial insurance policy as required to cover them (liability and otherwise) for VRBO/AirBnB type rentals. Seems like that would put the mortgage loan at possible risk for audit?
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