By: Shmuel Shayowitz
Can we all please agree!? A family trip is not exactly a vacation! I’m sure the thought crossed the mind of anyone able to get away for winter break. At the same time, there is often a moment, while on vacation, where one might say to themselves, “this is the life; we should do this more often.” And then, sometimes it happens…
What New Years is to weigh-loss resolutions, yeshiva break is to thoughts of buying a vacation home. With the advent of Airbnb, the notion of purchasing a secondary home has become increasingly popular over the past few years. With a bit of math and analysis, many are able to quickly evaluate if they could have “the best of both worlds” by owning a home for their leisure which could also generate revenue to offset their costs. What was once only attainable to the affluent has now become a regular conversation for “the average Joe.”
Technology, coupled with COVID, catapulted the home rental space to where it seemed like anyone with a home could profit with minimal downside. But things have changed and continue to evolve to where conventional wisdom might have you reconsider some things. Buying a vacation home is much more than crunching some numbers and checking out rental comps.
For starters, financing has become more cost-prohibitive. Aside from mortgage rates skyrocketing in 2022, changes in loan parameters require a new evaluation altogether. Many bought “Second-Homes” for as little as 5% down, with rates that were the same as those buying a home as their primary residence. This is no longer the case. The FHFA, the regulatory agency that governs Fannie Mae and Freddie Mac, has imposed excessive fees and additional restrictions for second homes and investment properties.
The premise was, rightfully so, that people were buying a “secondary residence” for their personal enjoyment and pleasure. Banks assumed the buyers would occupy the homes for themselves rather than seeking rental income to substantiate the purchase. Post-Closing quality control findings have revealed that most of these second homes are being rented out, which is riskier and completely misrepresentative. Furthermore, the downpayment requirements for second homes have increased to offset the greater risk to banks. In addition to a higher rate, a more significant downpayment is necessary to get the financing.
For those still considering second-home subletting, I encourage you to approach it entirely as you would an investment property. Run the numbers rigorously and remove the personal or emotional benefits you may derive. Do not assume that just because you own a home in Miami, Orlando, or the like, that you will visit there more often. Assume you won’t because most people don’t. Here’s a little “hack” as well – some banks have been so burned by fraudulent “second home” applicants that they actually give better rates to those applicants who flat-out apply as investment properties from the get-go.
There is more to becoming an Airbnb Mega-Millionaire than getting the numbers to work on paper. The markets are changing, as are demand and financial considerations. One of the most common conversations that I have been having over the past six months is with those looking to get into the rental and investment property space – there are still a lot of opportunities, but you need to arm yourself with the necessary information to succeed in this changing landscape. I can help!
As a reminder, if you want to learn more about how inflation, rate hikes, and an impending recession impact residential housing & real estate, join my webinar by visiting www.approvedfunding.com/webinar2023.
Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Approved Funding is a mortgage company offering competitive interest rates as well as specialty niche programs on all types of Residential and Commercial properties. Shmuel has over 20 years of industry experience, including licenses and certifications as a certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. He can be reached via email at Shmuel@approvedfunding.com.
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