Operating two STRs for

Question

Hi BP members. As the title states, I've been operating two STRs for about 8 months now. I am interested in buying another property, but I want to make sure I am understanding any limitations I may run into as a result of my current DTI situation. My understanding is that I will not be able to use the STR income for those units until they've been on my tax returns for 2 years? If that's the case, would I be able to substitute their market long-term rents as part of my income when the lender checks my DTI?

My appraisal report lists the appraiser's opinion of each unit's market rent -- would a lender use those without issue? Or, since I believe the rents were significantly undervalued 9 months ago, and may be even more so in today's market, would they consider an in-house/updated estimate of market rents. Thank you.

Alex Bekeza · Answer

@Brenden M. I think you'd be surprised to see how close pricing in some STR Friendly Commercial Programs is to Fannie/Freddie Investment Programs.  There are some products out there right now that will do 30 year fixed up to 80% LTV with zero DTI requirements and instead base the loan on DSCR calculated using the information from Air DNA.  These also allow LLC vesting, don't report to credit, among many other perks.

Lucas Martinez · Answer

You should be able to use long term rental estimates in your DTI. I believe most lenders would require those estimates to come from an appraiser, however. Another option you should look into is DSCR loans. Many lenders will work with 6 months of seasoning, so you should be fine with 8 months of financials. May pay a higher rate, but you can probably get more equity out faster going this route.

Lucas Martinez · Answer

For 80% LTV DSCR loans? What lenders are still offering those rates?

Lucas Martinez · Answer

Be very careful with this approach. I've spoken to my attorney about this and he said this could cross the line into mortgage fraud. If you go this route, make sure you express in writing to your lender exactly what you're intending. Make sure the broker conveys this information to the actual lender. This has the potential to get very dicey if the bank isn't on board.

Ryan Howell · Answer

@Brenden M. - I've not done this personally, but have clients who have and I've ran this by some of my lender friends who have also agreed that it is plausible so something you can consider:  You need to create a long term lease from you or your business as the "owner" to your STR management business.  Essentially, you can create a long term lease for the average STR rent to your STR business who sublets as a vacation rental and then that long term lease income can be counted same as it would be if you had an actual LT tenant.  Key is to be upfront with your lender and honest, but I have seen underwriters allow this to get around the DTI issue.

Brenden M. · Answer

Thanks for the reply, Alex. I have been considering DSCR loans as well. However, I assume I'll be able to get a lower interest rate with a conventional loan assuming I can get past the DTI hurdle? I received some quotes in the last 10-14 days from DSCR lenders in the 6.925%-7.25% with 80% LTV. But the DSCR lenders I've been speaking with have 5-year pre-payment penalties, which I am not entirely thrilled about. I just want the flexibility of prepayment - not that I intend at this point to prepay the loan. I'd be happier with a 3-year PPP, but maybe I need to find some different lenders to speak with.

Brenden M. · Answer

Thank you, Lucas. I do have estimates from my appraisal report when I purchased the property 9 months ago, so it sounds like I have what I need. I have been weighing the pros and cons of the DSCR approach as well.

Operating two STRs for <2 years - using their LTR rents for DTI?

Most Popular Reply