DSCR loan with renovation for STR

Shreveport, Louisiana
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DSCR loan with renovation for STR

Mistidawn Lee
Member since 2023 · 1 post · 2 votes

I have a property that is lake front that I want to buy. The selling price is below value.  I want to turn this property into a short term rental. The property needs renovation. This renovation will further increase the value. What would be my best option to have the property and renovation financed? 

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  • Devin PetersonBusiness Member
    Lender · Sarasota, FL · Member since 2022 · 2k+ posts · 667 votes
    3y

    Short term bridge loan to purchase and borrow 100% of the renovation costs then DSCR refi into long term debt

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  • Jonathan Taylor
    Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes
    3y

    @Mistidawn Lee A renovation loan is not based on the rental income the stabilized property will receive. It is based on purchase price, renovation amount, ARV, FICO, experience and liquidity. These loans are perfect for what you are doing.

    The refinance is where you would need to have your numbers in line. Some lenders can do a DSCR loan based on appraised STR income but this is market dependent. Make sure you can pull some or all of your cash out at 75% LTV with rates in 7-8s. If the ratios work for you then this is the best course of action.

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  • Brett Deas
    CO · Member since 2022 · 588 posts · 426 votes
    3y

    I buy a lot of my vacation rentals in situations like this. I would recommend a hard money loan/bridge financing. Then refinancing into traditional long term debt. 

    However one obstacle I see with your plan is the DSCR loan, How will you get it based on STR rent? Unless the property has a proven history it will be very difficult to find a lender willing to do a DSCR on an STR. You could hold the hard money loan long enough to develop a rental history (I have done this before) but then your debt service costs are extremely high during that period. What were you thinking for this part?

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  • Zach Edelman
    Lender · New York, NY · Member since 2022 · 1k+ posts · 1k+ votes
    3y

    Best open would be a fix and flip/hold loan for the front end of the project, and then for the takeout, a DSCR refinance with a lender that can use Air DNA projections. This set up/plan should do you well.

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  • Erik EstradaBusiness Member
    Lender · Member since 2022 · 6k+ posts · 1k+ votes
    6d

    Sounds like a fix and flip loan and a DSCR refi exit makes sense in this scenario

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