6.5 Lean on Your Lender

CHAPTER 6

fee” of 3 percent of the cost of each reservation or an annual subscription fee. These fees are deductible.

9. Travel and transportation expenses. You can deduct expenses such as airfare, accommodations, mileage, meals, and other travel expenses when you travel overnight for business related to your VRP. This could include activities such as traveling to your rental property to do repairs or maintenance, education opportunities related to your rental, such as classes, seminars, conventions, or trade shows. You can also deduct mileage for travel to visit your property.

10. Home o ce. If you manage your rental business from a home offi ce, you may be able to deduct expenses related to the offi ce, including equipment, supplies, and a percentage of many of the costs of running your home.52

Many tax deductions for your rental business could seem small. But they can really add up. Make sure to record your expenses as you go along. Keeping detailed records of any expenses related to your rental makes things much easier when it comes time to fi le your taxes. This is also important in case the IRS has questions in the future.

Knowing what you can deduct and keeping good track of those expenses can help you take maximum advantage of tax savings on your rental property. Again, work with an accountant who is experienced in VRP, and many of these headaches will be handled for you.

6.5 Lean on Your Lender

Your lender is your leverage into the VRP business. Very rarely will an investor be able to purchase the asset of their business with all cash. So, there are a couple ways to proceed. First of all, you can deal

52. https://www.avalara.com/mylodgetax/en/blog/2018/03/10-easily-overlooked-taxdeductions-airbnb-hosts-can-claim.html Accessed June 10, 2019.

WEALTH AS A VACATION

directly with your bank. If you have a longstanding relationship, and your bank has a policy that is friendly toward investment property, (and specifi cally to VRP), that is defi nitely the way to go.

If not, you will want to look into the many mortgage brokers in your area, interview them, get references, and select a couple with whom to work. A mortgage broker fi nds loans on behalf of individuals or businesses. Mortgage brokers fi nd a bank or a direct lender willing to make the specifi c loan an individual is seeking. Many mortgage brokers are regulated to assure compliance with banking and fi nance laws in the jurisdiction of the consumer.

Duties of a Mortgage Broker The nature and scope of a mortgage broker’s activities varies. Typically, their duties include:

• Assessment of the borrower’s circumstances: this may include assessment of credit history and income documentation • Finding a mortgage product that fi ts the client’s needs • Gathering all needed documents including pay stubs, tax returns, bank statements, etc. • Completing a lender application form • Explaining the legal disclosures to the client • Submitting all material to the lender • Off ering best advice for the clients’ circumstances

A mortgage broker is normally registered with the state, and is personally liable for fraud for the life of a loan. A loan offi cer works under the umbrella license of an institution, typically a bank or direct lender. Both positions have legal, moral, and professional responsibilities and obligations to prevent fraud and to fully disclose loan terms to both consumer and lender.

Mortgage brokers must also be licensed through the Nationwide Multi-State Licensing System and Registry (NMLS). The purpose of the NMLS is to improve and enhance mortgage industry supervision,

CHAPTER 6

create better communication from state to state, and to create consistency in licensing requirements and automate the licensing process to the greatest degree possible.

Remember: Even though your Realtor-Attorney-AccountantLender team may seem to have all the answers and the necessary expertise, YOU are ultimately responsible as the President and CEO of your VRP business. Thus, YOU need to understand the ins and outs of fi nancing a property, specifi cally mortgages. A mortgage is a weapon in your arsenal, perhaps the biggest one, which will allow you to go forward into battle in your pursuit of building your VRP business.

The Lending Landscape for VRP by Financing Expert Oscar Mendez Oscar Mendez has been in the fi nancial services industry for 25+ years, specializing in banking, underwriting, lending, mortgage and management services. He served as a mortgage professor for Florida’s premier state accredited mortgage school, Compliance Consulting Corporation, where he taught mortgage regulation, compliance, and practices to attorneys, bankers, investors, real estate and mortgage professionals. Oscar now serves as the Director of Corporate Development for Columbus Capital Lending, LLC, where he is responsible for strategic alliances, recruiting, lender portfolio assembly, and public relations.

Each property—each asset—is underwritten diff erently. One of the biggest challenges for property developers looking to accelerate sales of their off erings is fi nding the right lending program(s). What I do for big developers all around the state of Florida is set up a lending portfolio that off ers options to walks of buyers (i.e. US citizens, Foreign Nationals, Construction to Perm, etc.) In Florida, we have about three to fi ve hundred banks, and you have to know the appetite for each of the banks. By providing a developer a lender portfolio for all types of folks—people whether it be full doc loans, bank statements or light doc programs, A borrowers, foreign national income, private equity fi nancing—we are able to place every prospect.

WEALTH AS A VACATION

In South Florida, you have cap rates to consider when acquiring investment properties. Cap rates used to be really higher than today’s highly competitive market; anything over 10 percent was great. Now, in South Florida, people are grateful for six or eight percent. It’s a thin margin to work with for real estate, especially with real estate cycles going up and down, mistakes in real estate can prove costly if you don’t consult with top professionals that have proven records and quality research.

Opportunities are diff erent with vacation rental properties, particularly in Central Florida right now. For example, in Reunion, Florida specifi cally, a strong cap scenario would be leveraging the minimum investment possible into a deal, 20 percent down, then your mortgage payment with a respectable current market interest rate is going to be about $9,500-$10,000 per month, and that includes everything (Principal, interest, taxes, insurance). If we round it off , we could plan on a payment of $10k, and these properties are bringing in up to $40k per month. With a 60 percent occupancy, the return would be $25k per month. So, you’re more than doubling your money based on a conservative income model.

They don’t even believe me, in South Florida, when I tell them these numbers. I show them the numbers and say, “You need to present your investors the opportunities in Central Florida, specifi cally Orlando where the park attractions, transportation, infrastructure, tourism is among the best in the world.”

Trends in Florida Real Estate Investment I’ve been primarily in South Florida for the entirety of my career, but I recognize the value of Orlando. Even if you go lower with your rental projections, at 50 percent occupancy, you’re doubling your money. That’s a cap rate that doesn’t exist elsewhere. They are impressed at these numbers in South Florida, and South Florida is a blooming real estate market.

The other important consideration regarding Florida real estate investment is the sea level. In Miami, it has been controversial but

CHAPTER 6

more and more evident as time passes. After the last hurricane, some areas were eight to nine feet under water. That didn’t happen ten-twenty years ago; there is defi nitely a problem. With all of the coastlines now being targeted by the credit agencies if they don’t remedy and mitigate, they are being downgraded. This has all kinds of implications on real estate valuations and fi nances.

So, Central Florida, because it has the infrastructure, the energy, the conference centers, the airport, the employment, the transportation, is becoming a most interesting market of opportunities.

Central Florida will also benefi t from the Bright Line/Virgin Train, which will connect Central and South Florida, and the fact that we are now the third most populated state in the country. We have 900–1,002 new residents registering in Florida—daily. That’s up to 365,000 people a year, and they’re coming to South Florida and Central Florida. The prices in Central Florida are, in many instances, signifi cantly less of what they are in South Florida, for very attractive and strategic land. The people who are coming have a lot of money; they’re from California and New York. Miami is the second-largest banking capital in the country behind New York, so many highly recognized hedge funds and fi nancial institutions are moving here as well.

When you read all these articles in the newspapers that are doom and gloom and negative, I don’t know where they’re getting their data. Because there is more money—and more people—here than there is inventory. Everybody is doing well.

Requirements for Obtaining a Loan on VRP First of all, as it relates to investment property, acquisitions banks want to know that you own a primary home before they’ll off er you a loan on a vacation home. A lot of people will take an investment property and call it their primary home because they want a lower interest . . . that’s rampant in the industry. It’s called mortgage fraud. Again, if you’re going to buy a vacation home, the bank wants to know that you own a primary. That’s one of the major guidelines.

WEALTH AS A VACATION

The second thing is they want to make sure you have reserves in case of a down market—at least six months of reserves for all of your housing expenses. So, if you have $20,000 in mortgage payments due each month between three properties, they want to see at least $120,000 in the bank. Evidencing stable income, assets, credit, and employment all play a major role as well.

For your A borrower, based on current rates, you’ll be in the midfours to the mid-fi ves . . . and that’s where almost everyone is going to fall. Then you have the investor class that doesn’t want to get a thorough underwrite on their fi nancials, so they’ll get “stated income aka light doc loans.” Those loans range from the six to the seven percent range.

Finally, for the people who want no questions asked whatsoever— they just want to close—they’ll need to put 30–35 percent down, and they’re going to get a rate between eight and 10 percent. With the returns we are seeing on a lot of VRP, the property still pays for itself. So, those are the three classifi cations of vacation property loans: A+ borrowers, stated income borrowers, and the no-questions-asked borrowers. These three loan types are for fi nished products, homes that are already built as well as construction.

I also have loans for land, for people who either just want to sit on the land and eventually fl ip it, or for people who want to take their time with designers and architects. Then, we have lenders for land and construction. Most people pay for the land then get a construction loan, but we can facilitate both. Typically, we give those folks, depending on their credit, between 70 and 75 percent of the loan-tocost. What I mean by that is if a property is going to cost $1 M to build, we’ll give you 70–75 percent of that money.

The problem in these types of transactions is that there are lenders for land, and there are lenders for construction, then perm loans. Very few can handle all three in one to make the process easier for the investors.

Fortunately, I have a bank that will underwrite one fi le—your land, your construction, and your perm—with just a single underwrite, one

CHAPTER 6

closing. When you’re talking a million dollars, that saves you a lot of money in the acquisition of the property. So, we have a pretty diverse portfolio for every type of scenario. We can even provide private equity fi nancing for overseas buyers during the construction phase. Then I can get them into a really good perm loan. Almost everybody who walks in can get a loan.

Tips for Finding a Good Mortgage Broker I served as an accredited mortgage instructor for the state of Florida, and taught all types of people. In Florida, it takes one year of school to become a hairdresser, and three days of school to become a mortgage broker. It’s shocking given the history of our housing crisis events in the recent past.

To become a stock broker or an insurance agent, you have to go through a lot of schooling to write a simple insurance policy, or to transact a thousand-dollar investment. Yet you have people purchasing a million dollars’ worth of property and putting big money at stake, and there might be someone involved with only 24 hours of education. It’s disappointing and risky. Housing professionals of all forms should have extensive credentials that require thorough schooling and education.

If a couple comes in, loves a property, and puts down, say, $200,000 and someone inexperienced takes their loan application, important matters must be considered. For example: That inexperienced broker begins shopping the loan yet doesn’t consider the contractual milestones and deadlines such as a mortgage commitment deadline. That money, that down payment or deposit, could become non-refundable because the buyer took that property off the market and the seller could’ve sold to someone else with a loan already in order during that time.

Under the law, the seller can legally claim that deposit. As a result, you now have a couple whose life savings is at risk. That’s how quickly you can endanger the public in this business. You need to have your lending in place immediately when you put in an off er, within 10 to 20

WEALTH AS A VACATION

days at most. As a mortgage broker, you need to understand the type of property, the client, the bank, and perform on a consistent basis. A mortgage broker needs to know the business inside and out, and contracts, and make sure people are protected. It is our job to keep the expectations real and provide education. People may think they deserve a four percent rate, for example, when they’re actually going to get a 5.5. Proper due diligence, research and disclosures are crucial in this business.

So, to determine if you’ve met a good mortgage broker, you really need to do a credentials search. Is there a publication that lists the best broker in the industry? No. You need to vet the experience of the person. Make sure they have long-term experience in this fi eld, that they have recognizable clients for the long-term. Once you see that they’ve worked with big builders and have good references, you probably have somebody good. They are few and far between.

Valuing VRP For all investment properties of any classifi cation, they’re going to look at the rental ROI track record; they never want to hear about how blue the skies are going to be tomorrow. Under the Dodd Frank regulation, there is a federal model for how appraisals are done. It’s the HVCC.

For new construction, they’ll use comparable properties that have already been built in the area and see what the average return is going to be. They’re going to use something called a 1005 Rental Analysis, which is a Fannie Mae standard for determining rental value. They’re going to take data from comparable properties that have been built in the area, and they’re going to see what the average rental rate has been for the last two or three years. They’ll look at 60 percent occupancy. They’ll also get data from management companies that manage all the other properties nearby. It’s very mathematical, there’s not much guessing or speculation. So, the HVCC and the appraisals and the local market will really give you a good indication of where everything stands.

CHAPTER 6

Look at the macro picture, the market in your area. Then, fi ne tune it to a particular home, to specifi c numbers. Once you do that, it makes the decision to buy easy.

Advice for Someone Who Wants to Get Into VRP First, you have to own your home and do extensive due diligence. Second, you have to consider whether you will be comfortable through both the good times and variable market cycles. To qualify for a home, there’s four legs to the table: income/credit, employment, assets, and your housing history. Those are things that someone needs to qualify. Of course, everyone is a fi rst-time investor at some point. But having some history helps.

Understand the market. Look at the economy, the good the bad, and be prepared for every type of market. Look at your mortgage broker’s experience, look at their clientele. You need to dig deep. Do your research, read everything. Have a real estate attorney and make sure they have strong credentials. Get an attorney to review all of your mortgage documentation. Study all the players that are going to go in to a transaction including the attorney. Vet them.

Once you have the legal piece and the fi nancing piece in order, make sure you get good insurance. If something happens in the future, the fi ne print in an insurance policy could ruin your life. Insurance should be very well explained and reviewed. Finally, the management

WEALTH AS A VACATION

company that’s going to run your rentals is very important. In Florida, it’s a very competitive market and only the strong survive. But you’ve got to vet them, too.

Extensive vetting of every individual and entity in your process is really, really important.