Underwriting MTR for DSCR Loan
Investor · Ocean City, NJ · Member since 2021 · 1 post · 0 votes
Underwriting MTR for DSCR Loan
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Robin SimonBusiness Member
Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votesQuote from @Alexander Scher:
I'm interested in getting into the MTR space, and I want to use a DSCR loan to finance the rental. What're some tips for underwriting a MTR (or even STR) if you've never owned one? It's easy to estimate rental income for a long term rental based on comps, but MTR seems more difficult to estimate. How would I go about underwriting a MTR so I could acquire a DSCR loan?
DSCR Lenders are going to underwrite the loan/property themselves regardless of how you look at it as an investor - most DSCR Lenders on an acquisition will use Long-Term Market Rents to underwrite, potentially STR (airdna, etc.) if it makes sense as trending more towards as a STR (shorter "medium term stays").
Should aim for a DSCR Lender thats heavy in the STR space and more flexible/forward-thinking on MTRs rather than more of the traditional ones.
Heres an article I published recently on BiggerPockets that talks about potential next steps (evolution) for DSCR Lenders in the MTR space
https://www.biggerpockets.com/blog/what-is-coming-in-2024-fo...
Medium-Term Rentals
One of the biggest developments in real estate investing in 2023 has been the rise of medium-term rentals. The medium-term rental (sometimes referred to as mid-term rental) is an investing strategy that combines elements of short-term rentals and long-term rentals.
Investing in medium-term rentals, which are typically defined as tenants renting properties for more than 30 days but less than a year, has become a preferred strategy of many investors. The seminal book on the strategy, 30-Day Stay, published here on BiggerPockets and written by MTR pioneering investors Sarah Weaver and Zeona McIntyre, has helped popularize the method.
Real estate investors are attracted to medium-term rentals to gain the benefits of extra cash flow versus long-term rentals while avoiding regulatory risks, high turnover, and intensive management of short-term rentals.
While many investors are now turning to medium-term rentals to build their portfolios, the lending world has unfortunately been a little slow to keep up. Over the last couple of years, many DSCR lenders have embraced and adapted to financing short-term rentals, including using data-driven tools like AirDNA to qualify rents on short-term rental properties, but there is yet to be a similar tool for medium-term rentals.
Many investors use a general rule of thumb for midterm rentals that they should earn about 50% more in rents than an equivalent long-term rental (whereas short-term rentals should earn double or 100% more than if the property was utilized as a long-term rental).
However, for DSCR lenders, change can be slow and challenging, and many lenders prefer and require more precise qualification measures than rules of thumb. Thus, the next challenge and frontier for many DSCR lenders seeking to serve the growing number of real estate investors pursuing this strategy is to cement a qualification and underwriting methodology to properly qualify MTRs and accurately project their revenues.
Potential next steps would be for a data provider to emerge similar to AirDNA for medium-term rentals to take on this growing opportunity. Until then, DSCR lenders will have to be creative and flexible to tap this growing market.
Harpoon Capital514 Reviews
4 Replies
- 2yErik EstradaBusiness MemberLender · Member since 2022 · 6k+ posts · 1k+ votes
Hey Alex,
Many lenders factor STR and LTR rents to qualify for a DSCR loan. There is an alternative DSCR loan that does not factor STR and LTR rents, however the interest rate is higher. Also many lenders may require the property to be leased out prior to purchase. A handful will not.
If you are qualifying based on long term rents, lenders will require the property to debt cover with market rents (if vacant) or the lease agreement (if occupied). You do not need to be experienced to qualify.
If you are qualifying based on short term rents, many lenders will require that you have 12 months of prior experience operating a short term rental. A handful will not. Most lenders will require the property to debt cover with 75% of short term market rents. A handful will use 100% of the short term market rents.
LuxePrivate Investments LLC 572 Reviews - Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes2y
@Alexander Scher I would run your numbers on LTR only. STR lenders are asking for property STR history and have an experienced operator owning it. This isnt the case for ALL lenders but is becoming a more common stipulation as the STR markets have peaked according to many capital markets and analysis teams.
It is also advised to run your numbers on conservative UW so just in case any regulations limit your ability to operate STR/MTR you can still operate cash flow positive on LTR.
- 2yRobin SimonBusiness MemberLender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
Quote from @Alexander Scher:
I'm interested in getting into the MTR space, and I want to use a DSCR loan to finance the rental. What're some tips for underwriting a MTR (or even STR) if you've never owned one? It's easy to estimate rental income for a long term rental based on comps, but MTR seems more difficult to estimate. How would I go about underwriting a MTR so I could acquire a DSCR loan?
DSCR Lenders are going to underwrite the loan/property themselves regardless of how you look at it as an investor - most DSCR Lenders on an acquisition will use Long-Term Market Rents to underwrite, potentially STR (airdna, etc.) if it makes sense as trending more towards as a STR (shorter "medium term stays").
Should aim for a DSCR Lender thats heavy in the STR space and more flexible/forward-thinking on MTRs rather than more of the traditional ones.
Heres an article I published recently on BiggerPockets that talks about potential next steps (evolution) for DSCR Lenders in the MTR space
https://www.biggerpockets.com/blog/what-is-coming-in-2024-fo...
Medium-Term Rentals
One of the biggest developments in real estate investing in 2023 has been the rise of medium-term rentals. The medium-term rental (sometimes referred to as mid-term rental) is an investing strategy that combines elements of short-term rentals and long-term rentals.
Investing in medium-term rentals, which are typically defined as tenants renting properties for more than 30 days but less than a year, has become a preferred strategy of many investors. The seminal book on the strategy, 30-Day Stay, published here on BiggerPockets and written by MTR pioneering investors Sarah Weaver and Zeona McIntyre, has helped popularize the method.
Real estate investors are attracted to medium-term rentals to gain the benefits of extra cash flow versus long-term rentals while avoiding regulatory risks, high turnover, and intensive management of short-term rentals.
While many investors are now turning to medium-term rentals to build their portfolios, the lending world has unfortunately been a little slow to keep up. Over the last couple of years, many DSCR lenders have embraced and adapted to financing short-term rentals, including using data-driven tools like AirDNA to qualify rents on short-term rental properties, but there is yet to be a similar tool for medium-term rentals.
Many investors use a general rule of thumb for midterm rentals that they should earn about 50% more in rents than an equivalent long-term rental (whereas short-term rentals should earn double or 100% more than if the property was utilized as a long-term rental).
However, for DSCR lenders, change can be slow and challenging, and many lenders prefer and require more precise qualification measures than rules of thumb. Thus, the next challenge and frontier for many DSCR lenders seeking to serve the growing number of real estate investors pursuing this strategy is to cement a qualification and underwriting methodology to properly qualify MTRs and accurately project their revenues.
Potential next steps would be for a data provider to emerge similar to AirDNA for medium-term rentals to take on this growing opportunity. Until then, DSCR lenders will have to be creative and flexible to tap this growing market.
Harpoon Capital514 Reviews - 2yStephanie P.Pro MemberWashington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
Quote from @Alexander Scher:
I'm interested in getting into the MTR space, and I want to use a DSCR loan to finance the rental. What're some tips for underwriting a MTR (or even STR) if you've never owned one? It's easy to estimate rental income for a long term rental based on comps, but MTR seems more difficult to estimate. How would I go about underwriting a MTR so I could acquire a DSCR loan?
Welcome to BP.
Here are some guidelines for short term rentals. Get an Air DNA account to track the STR and longer rental income. Use the Rentalizer and the Overview reports.
General
o No first-time investors
o Declining market (value):
When a declining market is identified by the underwriter or listed on the appraisal, the max LTV is 65%
o Declining market (rent):
When declining market rent is identified by the underwriter or listed on the appraisal, one of the following must occur:
Reduce the LTV to 65%; OR Achieve a Minimum 1.25 DSCR Ratio
• Income:
o STR Income – Purchase and Refinance Transactions
Applies to all transactions using short-term rental income
A 5% LTV reduction applies to all loans qualified with short-term rental income
o DSCR Calculation
Monthly Gross Rents based on a 12-month average to account for seasonality required
Refinance Transaction: 12 months (or 6 months minimum, if owned less than 12 months) used and averaged accordingly
Extraordinary Costs:
Use actual extraordinary costs (i.e., management fees, advertising, furnishing, cleaning) listed on the 3rd party management/rental statement; OR
Use the gross rents reduced by 20% to reflect extraordinary costs (i.e., management fees, advertising, furnishing, cleaning) associated with operating short-term rental property compared to non-short-term property, if actual not provided
NOTE: (Gross Rents X 0.80) ÷ PITIA = DSCR
• Documentation:
Either of the following methods can be used to determine gross monthly rental income. Priority will be given to recent documented rental income when choosing a method.
o Form 1007 Single Family Comparable Rent Schedule/Form 1025 Small Residential Income Property Appraisal Report prepared by the appraiser reflecting long-term or short-term market rents
o Most recent 12-month rental history statement from the third-party rental/management service (may be provided by the seller if a purchase transaction)
Statement must identify the subject property/unit, rents collected for the previous 12 months and all vendor management fees
Any significant variance between the 1007/1025 prepared with short-term rental data and recently documented income may warrant a deeper dive by the underwriter
o AirDNA Rentalizer and Overview reports (must meet the following requirements):
Rentalizer
Purchase transactions only
Forecast period must cover 12 months from Note date
Occupancy rate must be > 65%
Must have six (6) comparison properties
Must be within two (2) miles of the subject property
Must be similar in size, room count, amenities, availability, and occupancy
Overview Report
Market grade by zip code
Must be B or greater
Income calculation (annual revenue ÷ 12)
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