How to use DSCR on a mortgage for an STR?

Question

Hey BP!

I need some help from the pros with my question here:

How can one use DSCR to qualify for a mortgage on a short term rental property with no trailing 12 month income? (i.e. new builds)

I understand that in a typical situation, with rental history, the DSCR would have to be greater than 1.0 or 1.5, etc… but what about situations where there is no history to provide?

- Will lenders acknowledge market rent to calculate the DSCR?

- Is it only long term market rent they would acknowledge?

- What is the standard data provider for market rental rates?

I want to take the DSCR route to avoid maxing out my personal DTI ratio.

Thanks in advance!

Jayson Cain · Answer

@Tommy Cotter It depends mainly on the lender. If the property is vacant, lenders can look at the market rate and use that to calculate the DSCR when underwriting the loan. As for data providers, I know some lenders use services like RentRange or Rentometer for initial underwriting, and then the appraiser's market value during the actual underwriting. If you have a specific scenario, I'd be happy to help you run through the numbers with you.

Sean Thompson · Answer

Hey @Tommy Cotter,Something to note with asset based lenders is often times the formula they use can vary to calculate their DSCR, I would always ask what equation they use before working with one.  On a purchase they will use market rents, often this come from the appraisal but depends on the lender. Typically yes unless it is a refinance some can use a percentage of your short term rental income. One option you may consider is taking down the property with private money or short term financing then when the property has been operating successfully for a period of time refinance into a 30 year fixed product to get the best interest rate and terms you can find. The better performing the property typically the better rate you will get with DSCR loans. Good luck!

Marc Rice · Answer

Most lenders will underwrite at long term rental income, they won't even look at STR income.

Nick Velez · Answer

@Tommy Cotter

Hey Tommy,

The lender will likely base the DSCR on the appraisers market rent valuation.  New builds are tricky but if there are rentals near by, they should be able to come up with a number.  Our main DSCR lender just requires a ratio of 1. If you are looking for what potential rents would be, you can go on Zillow and see what is for rent near the subject property.  I hope that helps!

Riaz Gillani · Answer

@Tommy Cotter An awesome resource that my company uses is Air DNA. It gathers information from Airbnb, HomeAway & VRBO public website using proprietary data crawling methods. It essentially crawls the properties available on the Airbnb website (in the same market area) and tracks the performance of listings around the globe each day.

When vetting an STR deal, we use this, the borrower's liquidity, and experience. When all things align, we get the approval to use the numbers provided by Air DNA. Market Rent no longer a consideration.

Hope that helps!

Joseph Bafia · Answer

I worked with a great individual (Tyler) with Viso Lending when I was dipping my toe in the Asset Based lending space.  My advice would be just call one of these types of lenders and let them walk you through what they need.  Their super helpful as it's in their best interest to try and lend funds, so they should walk you through it.  Happy to share his contact if you'd like.

Tommy C. · Answer

@Riaz Gillani good to know! I’m going to sign up for an account now. Thanks for the tip Riaz! Happy Hollidays / New Year!

Tommy C. · Answer

@Sean Thompson thanks for the insight Sean. This is very helpful!

Tommy C. · Answer

@Jayson Cain interesting. Thank you for the info Jayson. Good to know about those two data solutions for running tentative numbers.

I’m still searching but I really appreciate the offer!

Tommy C. · Answer

@Joseph Bafia thanks Joseph! That would be great, could you DM me his info?

How to use DSCR on a mortgage for an STR?

How to use DSCR on a mortgage for an STR?

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