Short Term Rental Tips and Tricks

Caeli Ridge recorded this episode on 7/18/2023

Short Term Rental Tips and Tricks 

Curveball! This week Caeli does a brief overview of what an amortized loan is vs. an interest only loan, with a short pro & con list of each.  She will come back next week with a deeper dive and some great visual aids. 

Caeli discusses the topic for our July Newsletter which is what you can do to set your short term rental vacation home apart from others this summer season. 
Check out the newsletter on our website. 

https://ridgelendinggroup.com/july-2023-summer-cash-flow-tips-tricks-monthly-newsletter/

Check out the video with the screen share and the documentation in the Community.

You can join these live each week by following this link to join the call:
https://community.ridgelendinggroup.com/events/live-with-caeli-each-tuesday-beginning-at-430-pm-et/list

As always, give Ridge Lending Group a call if you have any questions at 
855-747-4343 or email us at info@RidgeLendingGroup.com

Copyright ©2023 Geneva Financial, LLC, DBA Ridge Lending Group

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Transcript

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Karlie Libby: Hello, everyone, and welcome to calling all real estate investors with Caeli Ridge. we are here live every Tuesday at 1 30 Pm. Pacific time 4 30 pm. Eastern time

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Karlie Libby: for this live event with Caeli from Ridge lending group. So during today's call, please utilize our chat feature. If you have any questions throughout the call, we will answer them. as we are able to. we love your participation so really, just throw anything in there. If it comes up we will answer that as soon as possible.

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Karlie Libby: And

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Karlie Libby: today's topic with Caeli is gonna be talking about amortized versus open-ended loans. Just gonna talk a little bit about the differences of each loan. shed some light for you on their individual characteristics. And, what implications that has for the borrowers, so that when you're making your next loan you will have more information on the subject. So thank you all so much, and I'll hand it on over to you. Jaylee.

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CAELI RIDGE: Thank you. Ms Karlie.

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CAELI RIDGE: Hi, guys, happy Tuesday to everybody nice to see you.

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CAELI RIDGE: I am going to be pulling an audible today, Karlie, I'm sorry. I if I would have had time more time before

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CAELI RIDGE: our live start time, I would have given you a heads up. So everything that she just said was a lie. I'm kidding No, I'm I'm teasing today. Had been planned to to get into, as she said, the difference differences between closed and an amortized and open-ended interest only kind of revolving type mortgages and while we can spend a little bit of time touching on it. I fear that I was not as prepared as I would normally like to be. I had some visual aids that I had put together or started to put together. They're not finished.

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CAELI RIDGE: So I'm thinking, I'll give a quick overview. But I'd like to use today there's a few other things that I wanted to share with you guys that have kind of crossed my desk that I think are timely And then. Otherwise I thought maybe we could just do Q. A. Stuff for things that are important to you that have come up in your your day to day real estate investing journeys. So this may end up being a very short

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CAELI RIDGE: Tuesday. Live with Caeli. We'll see.

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CAELI RIDGE: Okay, so you know, just for anybody that's brand new that may not understand. Conceptually, I'm going to give you the quick definitions of of amortized and closed-ended and open ended revolving interest. Only

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CAELI RIDGE: happy to answer any questions. But just note that we're gonna really take next Tuesday. I will be more prepared to present with those visual aids, and even some Take home stuff. There'll be some amortization tables that we'll post on the community that you guys can have access to. I'll be sharing and showing those during next week. so you'll see them. But you'll also have access to them on the community if you want to use them for your own

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uses or reasons.

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CAELI RIDGE:  I'll do that first, and then we can get into some of the the Q. A. And and other topics that I mentioned.

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CAELI RIDGE: So amortization is when you are going to take a mortgage. In this case use mortgage as the example, and you're going to utilize over a period of time, the amount of interest that you're going to pay

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CAELI RIDGE: in order to make that payment more manageable or more palatable for an example, a 30 year. Fixed mortgage is the most common in in our industry, where you're taking a hundred $1,000 that you borrowed at a rate of 6% or whatever it is, and they're going to stretch that payment out over 360 months, which is the equivalent to 30 years. 30 times 12 is 3, 60

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CAELI RIDGE: and come up with a principal and interest payment that is much much lower than if the amortization would say 60 months. So take a car loan, for example, car loans, or what they Max out at 72 months. Maybe it goes to 84, I think in some cases I don't know.

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CAELI RIDGE: But the short of the amortization, the higher

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CAELI RIDGE: the payment. Okay, it's it's actually quite unique in the United States that we have access to 30 year fixed money.

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CAELI RIDGE: it's very, very rare. There's only a handful of of countries on the planet that have mortgages that will last or or amortize over 30 years to keep that payment as low as possible. Most countries might offer 5 years, maybe 10 years. 10 years is kind of a high end of what the amortization is like, and if you think about it, if you've ever looked at an amortization table before, or you, you understand how that math works.

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CAELI RIDGE: that's a huge difference, huge difference in payment between 120 months, which is 10 years or 360 months. It's closed, ended, amortized and closed-ended, meaning that for every payment that you make, it's cutting down a little bit of principle on the front end. Usually you don't start plunking down the principal to the back end of that loan. It's mostly interest, as most of you know.

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CAELI RIDGE: But when you make that payment, let's say you make a little bit extra. Let's say your payments a thousand dollars a month, and you wanted to try to accelerate the payoff of this mortgage. And so you're going to send in every single month 1,100 or 1,200, whatever it is.

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CAELI RIDGE: what happens to that extra amount that you're sending in

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CAELI RIDGE: right. If your mortgage is a thousand dollars, and you send in $1,200, that $200? Yes, goes directly to principal. But do you have access to those funds. Can you get them back at any point in time? The answer is well, the answer is yes, but only by a full cash out refinance. Right? So really, it's no

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CAELI RIDGE: the only way you're going to be able to access any of that capital back.

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CAELI RIDGE: for whatever your use would be is a full cash out refinance, which in and of itself is is everybody's favorite thing. To go through a refinance transaction and and put in all of your files of blood for qualifications and the closing cost of associated, of doing so.

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CAELI RIDGE: so it's it's quite restrictive in terms of how to use arbitrage as a way of maximizing

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CAELI RIDGE: paying less interest, and the flexibility of having access to your cash so close ended, amortized a lot less flexible, more secure right? Your rate is usually going to be fixed for whatever period of time. but it it doesn't give you some of the added benefits that say an open ended, and I'm going to do a quick pros and cons between each

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CAELI RIDGE: pivoting to open ended revolving interest only very, very different animal. This is where none of the payment goes to principle, only

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CAELI RIDGE: interest, and that might be okay. It depends on the deal and the property, and and how long you're going to have it, etc. But every deposit or every payment that you make over and above that interest only payment also goes straight towards the principal, but you have access to get it back at your discretion.

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CAELI RIDGE: so just the basics between those 2, I

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CAELI RIDGE: based on a variety of variables that we would have to identify, based on your goals will ultimately drive the point on whether this option for funding is better than this option a lot of times, especially for real estate investors under normal market conditions. And we haven't had normal market conditions for probably

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CAELI RIDGE: well, truly, over 10 years. Right normal to me is post 809, but certainly the pandemic, I would say 2,018 would have probably been the last time, maybe parts of 2,019 where an open-ended interest only loan product would have been my preference.

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CAELI RIDGE: so keep that in mind when I'm talking about this. But under normal market conditions I love an open, ended, revolving interest, only product. Or even if it's not revolving, even if it's a 5 year fixed interest. Only I love that product because it it gives you more control.

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CAELI RIDGE: and because investors, typically the shelf life of any traditional mortgage is about 5 years, anyway. 3 to 5 years for most rental properties.

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CAELI RIDGE: And you don't start really even paying principal on a 30 year fixed mortgage until you're 1112. The interest only is usually a nice option. Now I think that in the coming year maybe 2 years, interest only products are going to be more viable. Remember, I said, that we're not in a normal market condition environment. So interest only probably doesn't make sense unless we're talking about the all in one which isn't necessarily what this context for this conversation was supposed to be about, although I suspect next week, when we really dive into it, we'll spend some time looking at it and talking about it.

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CAELI RIDGE:  But I've always been a fan of either an open-ended, revolving interest only, or a a 3 or 5 year arm interest only.

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CAELI RIDGE: we'll come back to that. Anybody have any specific questions about amortized versus

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CAELI RIDGE: principal and interest amortized, close-ended versus interest, only open-ended revolving accounts for mortgage related stuff. Anybody have anything about that before I pivot

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Karlie Libby: for everyone who just joined you can go ahead and put your questions in the chat. And then we can answer them from there. We did get one from Gloria here. I think you touched on it briefly. Chile She asked, is this the all in one the the interest? Only? So you did briefly touch on that, and maybe we'll get more into that

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CAELI RIDGE: next week. Yeah, we will, for sure. Thank you. Glory, for the question to answer your question specifically. This isn't just the all in one, while the all in one is an interest only product. It's really more about defining the differences between an amortized mortgage and one that you're paying principal and interest regular payments

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CAELI RIDGE: versus interest only is really more the context of what the discussion will be. so more more to come on, that when I'm more prepared for those of you that are joining late.

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CAELI RIDGE: Today's discussion was interest only versus amortized the differences. What's better when and why, etc., I have called an audible, and we will really be diving into that next week because I am not prepared. I had some visual aids that are not ready yet. So that's on me. But today I'm going to go ahead and switch gears. Now then, I had sent. I don't know if you guys have all seen it, but we have sent out July's newsletter.

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CAELI RIDGE: I'm talking about short term and and or midterm rentals. There was some bullet points of some things in which we can do to better.

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CAELI RIDGE: separate us from the pack. Our short term rental properties for those of you. How many, if you guys anybody want to just kind of raise your hand if you know how to do that, how many people today with us have short term, or have had short term rental properties.

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Karlie Libby: you know, while they're answering that chile, we did get one other question, basically. Glenn asks, basically, an open-ended is similar to a he lock, then is that

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CAELI RIDGE: is that true? Yes, open ended will be a he lock. You can have close-ended interest only to plan. They're not mutually exclusive.

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CAELI RIDGE: but open ended. Yes, would be a revolving. A a credit card could be open-ended.

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CAELI RIDGE: He locks. Certainly it's open-ended. Yeah.

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Karlie Libby: perfect. Well, I did see a couple of hands come up, so I think we had about.

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CAELI RIDGE: I don't know 3 or 4 for your question. You, whether you have them, have had them, are going to have them. at this time of year is is timely, because for many markets across the Us. This is this is high season for short term rentals. again a newsletter this month for July. Kind of touched on some of that.

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CAELI RIDGE: I have been seeing reports, and and obviously I I I get the publications. And I'm always reading things that come across my email and and things related to, or the Google feed that that comes up on my phone related to real estate and the short term rentals, Airbnb and vrbo stuff.

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CAELI RIDGE: is timely. But I've been seeing headlines and articles that are written that certain markets, every market is going to be unique.

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CAELI RIDGE: Anybody that starts to blanket statement stuff like short term rentals, or on the way out, or or whatever, and they they just make it a, you know, an over reaching

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CAELI RIDGE: blanket statement. I I just shut off immediately because they don't know what they're talking about. But there are certain markets that are feeling some pinch, some pressure on the short term rental space. And today's article

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CAELI RIDGE: was talking about this in that. They're finding that they're normal, like from just comparing year over year. the number of days in this high market are down by 30% in some cases, and then the amount of rents that they're collecting are down, another, maybe 1112. So the numbers are substantial, significant to kept to capture people's attention anyway?

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CAELI RIDGE:  And looking at that, I had an idea or just a thought that struck me. Well, okay, if that's happening, where are they? Because I I believe in most cases we still have the activity. I think that a lot of times, if the individual home, the single family residence, or condo or 2 to 4 unit, whatever it is, isn't being rented. I think hotels are starting to find that their returns are increasing.

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CAELI RIDGE: This year. I read another article unrelated. But that hotels are profitability. Levels are up.

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CAELI RIDGE: So, looking at that side by side, are those 2 headlines side by side, it got me to thinking.

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CAELI RIDGE: why, what? What is it that consumers are are getting are not getting with an Airbnb single family residence versus

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CAELI RIDGE: a hotel.

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CAELI RIDGE: okay, what would those things be? The first thing that struck me? If it's me thinking about it? If I'm going to take and go on vacation, the nice thing about a hotel is is all of the other extra creature comforts that you're going to get there. 24, 7 room service, perhaps concierge all of those little nuances that you're not necessarily going to get with your

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CAELI RIDGE: your single family residence. Right? So how do we prepare ourselves, or what can? What are some of the creative ways in which we can think about our own Airbnb single family residents that can can attract those that may be otherwise. Looking at a hotel to spend their their week or 2 week vacation of the the summer time. Months. what about? And and this is an open form discussion guys. So if anybody has been doing this or or thinking of this, or seen it or read it, it doesn't matter.

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CAELI RIDGE: Please feel free to interject. One of the things I thought about was, what about a a voucher like a a door dash voucher, or something good for a hundred bucks for any restaurants that's nearby. You could even go to the individual nearby restaurants or pubs, or whatever, or or start calling if you're not in that area and

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CAELI RIDGE: talking to the owners. If you can get a hold of them. If they're small enough places, you may be able to attract a a, a certain concession, or if that's the one place that you have the voucher for, perhaps they'll give you some kind of discount on their fair. What else would be another good one.

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CAELI RIDGE: What else would you get at? A this is just this just

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CAELI RIDGE: struck me this morning. I read the article this morning. What else would you get from a like a concierge?

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CAELI RIDGE: So you could pick up the phone and call down the concierge and say, Hey, what is there to do in

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CAELI RIDGE: Palm Beach, Florida? Right, whatever it may be, and start calling some of the the local area attractions, or or what? What have you, and find ways to ingratiate yourself so that you can get extra advantages or discounts for your tenants, your potential tenants, things like that? Does anybody have any stories, or any

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CAELI RIDGE: offerings or feedback that you've seen or read or done yourself that might help with

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CAELI RIDGE: short-term Airbnb or Vrbo properties?

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CAELI RIDGE: Come on. There's somebody on here that's that's got some anecdote or something they can share with the team. I'm sure I actually have a go ahead. Oh, sorry. I was just gonna say, well, similar to what you just said. I just went on a trip with my friends, and the owner of the Airbnb sent us automatically after

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Karlie Libby: you know, getting the property a list of local things to do, places to go So it was really fantastic. We went to one of the best restaurants I've ever been to a great local spot, so it was just nice to feel like they knew

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Karlie Libby: the places around them, and I'm sure they probably do have some sort of personal connection to the owners, or just they like going there themselves. So that was really nice.

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CAELI RIDGE: But you gotta take it a step further, especially if you're starting to see for those of you that may be starting to see some decline in activity. And how many days of the month of the property is rented, or the amount which you would normally be renting it for you have to plan ahead. Those are going to be important things to

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CAELI RIDGE: mitigate any. You know, downturn, because, you know, investments are cyclical. You guys have heard me talk about this. Maybe I don't know 4 or 5,000 times. Nothing's more true than that of of real estate it is going to. It's a a cyclical nature investment, so you've got to be ahead of the game as much as possible.

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CAELI RIDGE: And I'm I'm starting to see this more and more in the writings and and click bait fine, whatever. But

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CAELI RIDGE: I would be prepared for anything that you're looking at, where you currently have short term rental wise start

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CAELI RIDGE: doing some of your own due diligence to keep your your property ahead of the rest, and the one that is rented the most and for the most money.

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CAELI RIDGE: okay, that was what I had on that.

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CAELI RIDGE: What else does anybody have any questions about anything related to investing finance?

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Karlie Libby: We do have a question here from Ts from a little bit earlier, and they asked, it's interest only best with higher down for protection.

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CAELI RIDGE: Hmm! Tell me what you mean by that. Ts, can you expand on that that question? I'm not sure I I'm I'm I understand the question.

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T S: I was just making a comment that I think the best combination is to have a higher down payment, and in

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T S: just only loan for cash, flow and safety for for the product, whatever you're buying.

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CAELI RIDGE: Okay, that might be true, depending on on the variables of the transaction. I think that. So I mean, let's just take interest only, and and and take a few minutes and dig into that one a little bit deeper.

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CAELI RIDGE: So in comparison, I think I mentioned this in comparison to a 30 year fixed mortgage on a 30, or fix the first 10 years of that loan, how much of it's going to principle? Very, very little right.

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CAELI RIDGE: And if we know that on average the the shelf life of a non-owner-occupied or investment property mortgage is about 5 years in duration.

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CAELI RIDGE: right? A lot, I mean the vast majority of what you are paying every month is going straight towards the interest, anyway, on a 30 year fixed right? Very, very little is going to the principal and looking at an amortization table. You can see this every single month.

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CAELI RIDGE: if you had an interest only in the right

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CAELI RIDGE: market. And what I mean, let me be specific about what I mean when I say that

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CAELI RIDGE: interest only loans right now, especially for investment properties are priced. The interest rate is price, such that a principle and interest 30 year fix more often than not is going to generate a lower monthly payment

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CAELI RIDGE: than an interest only payment. So there's no incentive, right? It's defeated in this particular marketplace when that flips back. and there is a substantial amount of savings. Let's just say it's the difference in payment between an interest only in a normal market and a 30 year fixed is 100 bucks a month. Okay, whatever? if you were to apply that 400 in my example, with the interest only payment. You will actually crack down that principle faster on an interest only than you would on the principal interest.

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CAELI RIDGE: with the same payment that you would have had before, without having to to add anything extra. Now, taking that a step further, and looking at it with an open-ended interest. Only product where you put in, and you can take back out now that Gloria is absolutely the all in one. But you could do it with a second lean Helock, or any kind of open-ended line of credit that you may have attached to that property or not. The concept works, no matter where it it lives, the the open-ended line of credit.

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CAELI RIDGE: But anyway, yeah, thanks to

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CAELI RIDGE: anybody else, anything, anybody. Thank you.

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CAELI RIDGE: You're welcome. Of course.

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Karlie Libby: let me think, if I've got anything else that would be noteworthy for you guys.

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CAELI RIDGE: Thank you for your question, Teresa. No, when we say multi-family. Can I assume that you're talking about a 2 to 4, keeping it residential? A duplex striplex fourplex. Let's assume that that's the case, we'll wait for your answer? If it is, then no, you would not have to live in the property, although there are some strategies where house hacking

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CAELI RIDGE: much higher leverage if you did live in it to get financing, if you're going to buy it as an investment property right out the gate, a 2 to 4 unit property as a rental. You're going to be looking at 25 down for the best terms you can find 20% down. But the rates will be a little bit higher than than they would at 25 But if the numbers work, who cares about the rate? Right?

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CAELI RIDGE: So the answer to your question is, no, you do not need to live in it. You're going to end up putting more money down if you didn't live in it. let's just use this and take it a step further for those that are in a position to take advantage of a house hack. I absolutely love this strategy, where, if you find something that you're okay with being your primary residence at a duplex, we'll use that for an example.

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CAELI RIDGE:  you can get up to 95% leverage on that, even even a little bit higher F, a. 96 and a half percent loan to value. You're putting very little down interest rates on an fha are going to be, for an owner occupied obviously better than a non owner occupied.

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CAELI RIDGE: so high high leverage. Better interest rates, and you've got a tenant on the other side, probably covering the majority, if not all, of the the mortgage payment and then, when you're ready to kind of move on or upgrade into your own single family, or whatever it may be, you still have this investment property. You get another tenant into the the unit that you were living in.

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CAELI RIDGE: I think it's brilliant. It's one of my favorite strategies for investors to to utilize, especially for the younger homeowners. Right. it's a great way.

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CAELI RIDGE: for I I've got a lot of my clients that teach their kids to do it this way, just to to get their first toe in the water for real estate investing. They go out and they buy their first primary residence. They've got 3 and a half percent down. It can be gifted because it's on our occupied and Fha rules. Allow for that. I think it's absolutely brilliant.

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CAELI RIDGE: Hopefully answer your question, Teresa. Thanks.

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CAELI RIDGE: What else, guys.

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CAELI RIDGE: we got 7 min to the top of the hour

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CAELI RIDGE: going back in.

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CAELI RIDGE: Okay, then what we are going to do is I will absolutely come prepared next Tuesday we will go into. There'll be some fun, but actually real quickly. I'll show you kind of one of the things that we're going to look at together.

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CAELI RIDGE: Since we have a few minutes left I'll share my screen amortization schedules.

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CAELI RIDGE: Can you guys, you can get these anywhere? I mean, this is the one that I like. It seems to me it's the most user friendly. where did we go here? Share screen

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CAELI RIDGE: simple amortization. Okay, this will show you every single month for the duration of the

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CAELI RIDGE: loan. So you put the years in here. So if you put 15 in here, it'll obviously update. But this will kind of show you guys. Well, if there were well, I guess I'll

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CAELI RIDGE: not get into this, but it'll show you how much interest you're going to pay, based on the loan amount and the interest rate that you've secured, etc. And then how much interest goes away? If you were to make extra payments. It just kind of gives you. I don't know about you guys, but I like to have that visual aid, and I like to be able to manipulate it and play around with it, just to see how the numbers

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CAELI RIDGE: add up and then, taking this, we'll be able to kind of compare how quickly the interest only

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CAELI RIDGE: scenario can be repaid versus a a fully amortized right? So if you guys will just draw your, you know, we'll do this again next week. So there's the payment. These are the terms, whatever. Okay.

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CAELI RIDGE: there's the principle. There's the interest. So the vast majority is going toward the interest. Obviously.

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CAELI RIDGE: if you were to take an interest only well, I'll show you guys this next week. But this will be one of the visual aids that I I show you guys and we'll make this available for you on the community site so that you can download it and mess around as much as you want to your scenario.

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CAELI RIDGE: okay, no other questions, Carly.

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CAELI RIDGE: No other questions.

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CAELI RIDGE: Bye, gang.