Using short term rental income to qualify for mortgage

23 Replies

Hi everyone,

I am looking to purchase 2 or 3 investment properties to rent them out on airbnb. This is my short time plan while my long term plan may involved further purchases or the purchase of a primary residence (I only own long term rentals right now and do not own where I live)

My question is in 2 or 3 years time when I go to apply for a loan for my primary residence will I be able to use the income I get from STR to qualify as long as I have it documented on tax returns?

If I achieve my goal of purchasing 3 units by the end of next year and they do not count the short term income but still count my debt I will be unable to qualify for a mortgage.

I want to make sure I have all my ducks in a row before I go into full flight with the investments.

Thanks everyone.

David

Originally posted by @David Rutledge :

Hi everyone,

I am looking to purchase 2 or 3 investment properties to rent them out on airbnb. This is my short time plan while my long term plan may involved further purchases or the purchase of a primary residence (I only own long term rentals right now and do not own where I live)

My question is in 2 or 3 years time when I go to apply for a loan for my primary residence will I be able to use the income I get from STR to qualify as long as I have it documented on tax returns?

If I achieve my goal of purchasing 3 units by the end of next year and they do not count the short term income but still count my debt I will be unable to qualify for a mortgage.

I want to make sure I have all my ducks in a row before I go into full flight with the investments.

Thanks everyone.

David

Yes they will count as income with most lenders who regularly lend to professional real estate investors. 

However buying 2 properties for Airbnb sounds a bit risky, Have you thought about student housing which can be just as profitable as Airbnb or just a regular tenant. My question is how do you know your properties will perform on Airbnb? and do you see how that could be a problem if you "buy" the properties? 

Thanks Jason,

I actually already have a few regular rentals. I switched one to Airbnb and I have seen a significant increase in my overall cash flow. I plan to buy in markets that I feel will work well for Airbnb while still considering the affordability, regulations and seasonality of the area. I am

In the process of researching different markets that I think are a good fit. I think Tampa, Davenport/Kissimmee in Florida, Memphis, Indianapolis or smaller college towns like Ann Arbor, Columbus, Waco or Tucson. I’m trying to find a few areas that will fit my model and see what is available.

I am going to give it a shot and if it doesn’t work for whatever reason I will convert to long term rentals. 

Thanks again for the response

David 

Originally posted by @David Rutledge :

Hi everyone,

I am looking to purchase 2 or 3 investment properties to rent them out on airbnb. This is my short time plan while my long term plan may involved further purchases or the purchase of a primary residence (I only own long term rentals right now and do not own where I live)

My question is in 2 or 3 years time when I go to apply for a loan for my primary residence will I be able to use the income I get from STR to qualify as long as I have it documented on tax returns?

If I achieve my goal of purchasing 3 units by the end of next year and they do not count the short term income but still count my debt I will be unable to qualify for a mortgage.

I want to make sure I have all my ducks in a row before I go into full flight with the investments.

Thanks everyone.

David

 Yes, they will count the income that you report to your schedule E.  Whether it's positive income or negative income.

Originally posted by @David Rutledge :

Thanks Jason,

Gotcha, well that changes everything since you're already experienced. I'd say that you're bang on with Tampa, but also look into Nashville, Atlanta (a Ton of business travel) and North Carolina. 

Good luck.

 AirB&B Also has fairly new arrangements with Quicken loans and another lender that will count the short term income on your primary residence to help you qualify for a refinance. And I almost took advantage of that last year.

Hi @David Rutledge , yes you absolutely can use your rental income as reported on Schedule E.  I own four short-term rentals and am about to close on a fifth.  The cash flow far outpaces any similarly-priced long-term rental I could find.

I invest mainly in the Smoky Mountain region of Tennessee, in Sevierville/Pigeon Forge/Gatlinburg.  They're decades-proven vacation rental markets with friendly regulation that is very unlikely to change.  There's high demand virtually year-round, no severe weather threats, and the local economy is so entwined with vacation rentals that there's plenty of service people to help you run your property.  I lived in Los Angeles when I bought mine and they've been super easy to self-manage.  

Whichever market you focus on, definitely research the local regulations before you do anything else. Nashville can be a great market IF you can navigate through their regulations and buy a property that's correctly zoned (and the zoning is getting more restricted lately).  

Good luck as you move forward with this endeavor - in the right market, you won't be disappointed!

Thanks Jason, 

i actually own a home in charlotte and at and at least in that area it doesn’t seem that Airbnb is the best fit. The regulations in Nashville scare me a little so I am avoiding that market too.

Originally posted by @Account Closed :
Originally posted by @David Rutledge:

Thanks Jason,

Gotcha, well that changes everything since you're already experienced. I'd say that you're bang on with Tampa, but also look into Nashville, Atlanta (a Ton of business travel) and North Carolina. 

Good luck.

Thanks Julie,

i have actually looked a little little into that area and do have some interest there too.

thanks so much for the input 

Originally posted by @Julie McCoy :

Hi @David Rutledge, yes you absolutely can use your rental income as reported on Schedule E.  I own four short-term rentals and am about to close on a fifth.  The cash flow far outpaces any similarly-priced long-term rental I could find.

I invest mainly in the Smoky Mountain region of Tennessee, in Sevierville/Pigeon Forge/Gatlinburg.  They're decades-proven vacation rental markets with friendly regulation that is very unlikely to change.  There's high demand virtually year-round, no severe weather threats, and the local economy is so entwined with vacation rentals that there's plenty of service people to help you run your property.  I lived in Los Angeles when I bought mine and they've been super easy to self-manage.  

Whichever market you focus on, definitely research the local regulations before you do anything else. Nashville can be a great market IF you can navigate through their regulations and buy a property that's correctly zoned (and the zoning is getting more restricted lately).  

Good luck as you move forward with this endeavor - in the right market, you won't be disappointed!

I've been told they consider it but after 2 years?? It's not anything I've validated so be sure to look into it by contacting a mortgage broker. As property managers, we've partnered with a company that guarantees rent to the owner. Basically you sign a lease with us and then you get a guaranteed consistent monthly rental rate all year round. You get a little less than you would if you were to manage it a STR but it's more than a LTR and it gives the banks a lease to show. We haven't tried applying for a mortgage with it but I think it would help a lot! We're in the same boat wanting to buy a new primary residence. Some banks don't know how to handle STRs so the guaranteed rent model is what we had planned to use to apply if there was an issue.

@Joe Crupi I do not believe so, no.  However, talk to @Parker Borofsky about this - she's the expert on it, but my understanding is that if you're buying with a conventional investment loan, you can use projected rent as a means to help qualify.  The projected rent amount is determined by the appraiser, many of whom are well aware that short-term rental is the highest and best use of these cabins in the Gatlinburg area, and will take that into consideration.  They'll still project conservatively, but it's a big help.

@David Rutledge I would definitely call up an experienced loan officer or mortgage broker who has experience with Fannie Mae/Freddie Mac loan programs like FHA and VA and ask them. Even still, a lot can change in two years. If a bank is going to keep the loan in house then they can pretty much do whatever they want and some of that will depend on your relationship with them.

@Joe Crupi they do not use the current owners rental income but Lenders can ask the the appraiser to include a rental income appraisal. They then can use this to offset the forecasted debt. We have done this with my 5 properties. Feel free to reach out if you have any questions or need my lenders contact.

Mack

Thanks Mack that would be really helpful actually I will pm you.

i think I will be getting out first mortgage as a second home finance so I will not be able to use the projected income right? 

We we plan to buy 2 or 3 in the next 18 months so we can hopefully use the projected income on the next purchases which will be investment loans.

 Originally posted by @Malgrum Holley :

@Joe Crupi they do not use the current owners rental income but Lenders can ask the the appraiser to include a rental income appraisal. They then can use this to offset the forecasted debt. We have done this with my 5 properties. Feel free to reach out if you have any questions or need my lenders contact.

Mack

@David Rutledge As with most contributors here, good lenders will consider Schedule E. The challenge with wanting to using Schedule E as your primary source of income will be balancing whether to take write-offs or not. On one hand, you'll want to write-off as much as possible to push that Schedule E income as low as possible so that you pay Uncle Sam as little as possible. On the other hand, you'll want to not take write-offs so that your primary source of income, Schedule E, is as high as possible to look better in the eyes of a lender. 

I'd just say consider that lenders look for a 1.3 DSCR (debt service coverage ratio or total monthly income/total monthly debt service expenses) or better to lend. Make sure your monthly Schedule E amount, is at least 130% of the total monthly Debt Service expenses you're looking to incur. As long as you're at 1.3 DSCR or better, write-off everything else you can.

Hope that's somewhat helpful for you!

Best of luck!

Conner

@David Rutledge

Hi David

I have done exactly what your asking about.

We just closed on a property using only my cabin income and RE earnings. It was nerve wrecking but so exciting. We used a program where they even used the potiential earnings of the cabin we were purchasing.

BP is a great place for lots of answers but do not be discouraged by what you hear.

Ask your lender and if they dont give you the answer you want ask another lender.