5 Expert Tips on Securing Investment for Your Next Vacation Home or Rental Property

Whether it’s a vacation rental property that you’ll only book half the year or a cabin in the mountains for weekend getaways, financing seasonal investments can be challenging. 

Lenders know you’re heavily invested — financially and psychologically — in your primary residence, so they typically don’t have a problem giving you a mortgage for a home. When it comes to an investment property or vacation home, they tend to focus on the risks, which means higher rates, tougher loan terms or a rejection of your application.

Many investors say this is unfair.

Returns on season rental investments often exceed those on year-round rentals, and the vast majority of people looking to purchase investment properties are financially stable and fully committed.

Still, it can be challenging to get a loan for a second property. Here’s how you can finance seasonal properties.

READ: Understanding the Complexities of Investment Property Financing — 4 Key Pitfalls to Avoid

Get your finances and paperwork in order

It’s not easy to qualify for a loan on a vacation home or investment property, so make sure you understand the process before you jump in.

If you purchased your primary home with a VA, FHA or USDA loan, you can’t use those government-backed loans to purchase second homes. 

You should also stay up to date with changes in the real estate market. Although sellers have traditionally paid the buyer’s agent’s commission, a federal lawsuit has ended that arrangement, which means you could have to pay your agent out of pocket. 

Apply for a conventional loan

It’s possible to get a conventional loan for a seasonal property, but your lender will likely insist on stricter terms than they would for a primary residence.

If it’s an investment property you won’t live in for more than 14 days a year, you’ll pay much higher rates. You’ll also have to come up with a down payment of 20% or more, and you might need a credit score of 620 or more.

If you’re using it as a secondary residence, your loan requirements won’t be quite that high, but they’ll still be fairly restrictive. Shop around for the best lender, and take measures to make the purchase less expensive. That can include using a low-commission real estate agent if you’re selling a property to finance your investment or using a buyer’s agent who offers a rebate so you can get cash back at closing.

READ: Debt-Free Real Estate Investing: Is it Possible, and Should You Strive for It?

Consider a home equity loan or home equity line of credit

If you have a lot of equity in your primary residence, you may be able to cash that out to buy your second property. A home equity line of credit applies the same idea but offers a line of credit for the amount of your equity. You can use some, part or all of your equity, as opposed to a lump sum.

A home equity loan will allow you to convert the difference between your home’s value and your remaining mortgage balance into cash, but it’ll be at today’s interest rates. This can be jarring to home buyers who locked in 2% to 3% mortgage rates in previous years. 

A cash-out refinancing, which originates a new loan and results in a big “cash out” of your equity, operates on the same principle.

Pursue asset-based loans

An asset-based loan looks at the potential revenue of a property rather than your income as the primary financing criteria. 

This has some fairly obvious advantages, especially for smaller or novice investors. If you’ve found a dynamite rental investment, but your personal income or debt-to-income ratio isn’t ideal, you can use the property’s financial potential to apply for a loan. 

To evaluate this kind of loan, the lender will divide the property’s projected income by the principal plus interest, taxes and insurance. ABL loans can close pretty quickly because they don’t require as much documentation as conventional loans, but there are some downsides. 

Rates are generally higher than conventional loans, and down payment requirements can range as high as 25%. For a $500,000 mortgage, you’d have to come up with $125,000 upfront. 

READ: Real Estate Crowdfunding Projects — 9 Reasons it’s a Great Option for Investors

Use a seasonal or camp loan

Many lenders offer specialized loans for truly seasonal properties, such as ski lodges, mountain cabins or lake houses. These loans can be issued on a wide variety of vacation properties that aren’t usually eligible for a conventional loan, such as properties that don’t have year-round road access, a permanent heat system or unconventional water supplies. 

Like most vacation home loans, these loans generally come with a higher down payment requirement of 20% or more, but terms can be favorable. Talk to your lender about specifics, and comparison shop to get the best terms. 

Luke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times and more.