Short-Term & Vacation Rental Discussions

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Sean Starkey
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  • Huntington Beach
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Looking to get my second property!

Sean Starkey
  • Rental Property Investor
  • Huntington Beach
Posted Aug 1 2022, 06:29

Here is my situation and if anyone can help that would be awesome. 
we bought our primary residence in Huntington Beach then got a HELOC on that property to buy a short term rental in yucca valley near Joshua tree national park. It is doing good and getting all positive reviews but we aren't cash flowing yet. I have 30k left in reserves and I just spoke to a lender to try and get my next STR but my DTI is too high and he said I will need a partner to get it done. He also said I could wait until my taxes come back to show that my yucca STR makes money but I don't want to wait. I want to get my next house now. He also said I could do a DSCR loan but rate is 8% and 2.85 points. If anyone could help that would be great I really want to get that next property and the next and the next and the next….

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Robin Simon#2 Private Lending & Conventional Mortgage Advice Contributor
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Robin Simon#2 Private Lending & Conventional Mortgage Advice Contributor
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Replied Aug 1 2022, 06:44

Yes - DSCR is going to be your best bet to scale (and not have to wait around for taxes / history for the current property). 8% and 2.85 points does seem a little steep however, market came back down a bit last week

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Sean Starkey
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Sean Starkey
  • Rental Property Investor
  • Huntington Beach
Replied Aug 1 2022, 06:59
great thanks for your response! So with a DSCR loan I have to really make sure my analysis works and I will cash flow to make the deal a yes right? 



Quote from @Robin Simon:

Yes - DSCR is going to be your best bet to scale (and not have to wait around for taxes / history for the current property). 8% and 2.85 points does seem a little steep however, market came back down a bit last week


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Nick Velez
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Nick Velez
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Replied Aug 1 2022, 07:08

@Sean Starkey

There are definitely DSCR brokers out there who can beat that. 2% origination is pretty common with DSCR loans but you should be able to find rates in the high 7's with no points assuming you have good credit. If your property does not have a DSCR ratio above 1 then expect to be in the 8's for sure. There are a lot of properties out there that will struggle to ratio with long term rents but would absolutely kill it as a STR. It is up to you if you are fine not having a cash flowing back up option but you know what they say, date the rate and marry the house!

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Kenneth Garrett
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Kenneth Garrett
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Replied Aug 1 2022, 07:12

@Sean Starkey

That is how I scaled by using commercial loans (DSCR). I generally paid 1% higher than other loans. I used small local banks to get my loans. If your working with a big bank, I would try a small local lender or credit union.

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Sean Starkey
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Sean Starkey
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Replied Aug 1 2022, 07:15

Great info thank you all! So tell me more about this DSCR loan…when I can refinance out of it to a conventional loan ?

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Sean Starkey
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Sean Starkey
  • Rental Property Investor
  • Huntington Beach
Replied Aug 1 2022, 07:16
yes my wife and I have excellent credit! 


Quote from @Nick Velez:

@Sean Starkey

There are definitely DSCR brokers out there who can beat that. 2% origination is pretty common with DSCR loans but you should be able to find rates in the high 7's with no points assuming you have good credit. If your property does not have a DSCR ratio above 1 then expect to be in the 8's for sure. There are a lot of properties out there that will struggle to ratio with long term rents but would absolutely kill it as a STR. It is up to you if you are fine not having a cash flowing back up option but you know what they say, date the rate and marry the house!


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Sean Starkey
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Sean Starkey
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  • Huntington Beach
Replied Aug 1 2022, 07:18
hi Nick! What do you mean by a DSCR ratio above 1?
thanks!


Quote from @Nick Velez:

@Sean Starkey

There are definitely DSCR brokers out there who can beat that. 2% origination is pretty common with DSCR loans but you should be able to find rates in the high 7's with no points assuming you have good credit. If your property does not have a DSCR ratio above 1 then expect to be in the 8's for sure. There are a lot of properties out there that will struggle to ratio with long term rents but would absolutely kill it as a STR. It is up to you if you are fine not having a cash flowing back up option but you know what they say, date the rate and marry the house!


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Nick Velez
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Nick Velez
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Replied Aug 1 2022, 07:21

@Sean Starkey

DSCR lenders want the long term rents on the appraisal to be equal or higher than your PITI on the subject property, which is a DSCR of 1 or higher. If you have at least 1 year of experience, some DSCR lenders will let you use Airdna data instead of the long term rents.

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Kenneth Garrett
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Kenneth Garrett
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Replied Aug 1 2022, 07:22

@Sean Starkey

A few things: ownership must be in entity; LLC or other entity. Typically it's an LLC, you'll also need an operating agreement. Some loans have a prepayment penalty; I've had some where there is a 3/2/1 penalty if you refinance or sell the loan/property. 3 points the first year, 2 the second year and so on. This is lender specific. Make sure you read your docs. Other loans did not have a prepayment penalty.

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Sean Starkey
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Sean Starkey
  • Rental Property Investor
  • Huntington Beach
Replied Aug 1 2022, 07:27
got it so I will be using the DSCR for an STR. They will just look at rental history right or airdna?
thanks!




Quote from @Nick Velez:

@Sean Starkey

DSCR lenders want the long term rents on the appraisal to be equal or higher than your PITI on the subject property, which is a DSCR of 1 or higher. If you have at least 1 year of experience, some DSCR lenders will let you use Airdna data instead of the long term rents.


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Sean Starkey
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Sean Starkey
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  • Huntington Beach
Replied Aug 1 2022, 07:28
great I already made an LLC and I will be sure to see the prepayment penalty’s if there are any. What is the length and term of a DSCR loan typically?



Quote from @Kenneth Garrett:

@Sean Starkey

A few things: ownership must be in entity; LLC or other entity. Typically it's an LLC, you'll also need an operating agreement. Some loans have a prepayment penalty; I've had some where there is a 3/2/1 penalty if you refinance or sell the loan/property. 3 points the first year, 2 the second year and so on. This is lender specific. Make sure you read your docs. Other loans did not have a prepayment penalty.


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Kenneth Garrett
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Kenneth Garrett
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Replied Aug 1 2022, 07:34

DSCR loans very. Typically mine were 5 years. I was able to get a 30 year. Typically 25/75 loan to value. When things tighten they will go 30/70 and or 35/65.

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Robin Simon#2 Private Lending & Conventional Mortgage Advice Contributor
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Robin Simon#2 Private Lending & Conventional Mortgage Advice Contributor
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Replied Aug 1 2022, 07:35
Quote from @Sean Starkey:
great thanks for your response! So with a DSCR loan I have to really make sure my analysis works and I will cash flow to make the deal a yes right? 



Quote from @Robin Simon:

Yes - DSCR is going to be your best bet to scale (and not have to wait around for taxes / history for the current property). 8% and 2.85 points does seem a little steep however, market came back down a bit last week



Yes but not necessarily - sub-1.00x DSCR loans are still available and workable with a good, flexible lender. For example, the property might not have 12 months of operating history proving cash flows and might not cash flow if used as a long-term rental, but would still be a workable deal for a DSCR loan. The DSCR underwrite also only takes into account property tax and insurance expense for expenses (no repairs, capex, utilities, etc.), so its a light underwrite

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John Underwood#5 All Forums Contributor
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John Underwood#5 All Forums Contributor
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Replied Aug 1 2022, 07:58

Why is your first STR not cash flowing? Did you not run the numbers and pick a good property? or just having to fix up this property?

I'd get that fixed before trying to buy another one.

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Steven Wilson#1 New Member Introductions Contributor
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Steven Wilson#1 New Member Introductions Contributor
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Replied Aug 1 2022, 08:11
Quote from @Sean Starkey:

Here is my situation and if anyone can help that would be awesome. 
we bought our primary residence in Huntington Beach then got a HELOC on that property to buy a short term rental in yucca valley near Joshua tree national park. It is doing good and getting all positive reviews but we aren't cash flowing yet. I have 30k left in reserves and I just spoke to a lender to try and get my next STR but my DTI is too high and he said I will need a partner to get it done. He also said I could wait until my taxes come back to show that my yucca STR makes money but I don't want to wait. I want to get my next house now. He also said I could do a DSCR loan but rate is 8% and 2.85 points. If anyone could help that would be great I really want to get that next property and the next and the next and the next….


 The more you call around and ask different lenders what they can do then the more options will come your way. Keep asking and keep trying. 

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Kiera Underwood
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Kiera Underwood
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Replied Aug 1 2022, 08:29

@Sean Starkey curious if in the meantime you could qualify for a much a lower cost STR? I'm assuming the second that you wanted to buy was in the Yucca area as well? In Oklahoma City I'm aware of STRs in the 300k range that take around 20k to furnish and that cash flow at ~$400/month. This is factoring in the insane 6+ interest rates/mortgage payment. An investor I know just closed on a 500k duplex that will cash flow at over $1500/month. This is true net cash flow after vacancy, maintenance, PM, and like I mentioned before of course the mortgage payment. Is diversifying location up your alley at all?

Also I love Huntington! Just work remotely from there for two months and got back to Oklahoma this week. Can't wait to go back!

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Joshua Messinger
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Joshua Messinger
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Replied Aug 1 2022, 09:28

Hey @Sean Starkey

Don't just reach out to one lender! Keep your options open and keep looking! @Steven Wilson said this the best! The more lenders you call the more options will come your way! 

Hope this helps and if you ever need anything please don't hesitate to reach out! 

All the best, 

Josh Messinger

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Andrew Street
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Andrew Street
Replied Aug 1 2022, 09:37

I'd suggest looking into how you can make your first STR cashflow. Creating success through the one property will only help you down the road as you're building them out.

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John D.
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John D.
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Replied Aug 6 2022, 21:48

If your existing short-term rental is not cashflowing, DO NOT buy another one, unless you have a drastically different strategy. With home prices and more importantly interest rates way up, I'd only double-down if your existing STR was throwing off a large amount of cash. Your market is experiencing a slowdown in demand, and a HUGE increase in supply. It's only going to get harder in the J-tree area.

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Sean Starkey
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Sean Starkey
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  • Huntington Beach
Replied Aug 6 2022, 21:54
Quote from @John D.:

If your existing short-term rental is not cashflowing, DO NOT buy another one, unless you have a drastically different strategy. With home prices and more importantly interest rates way up, I'd only double-down if your existing STR was throwing off a large amount of cash. Your market is experiencing a slowdown in demand, and a HUGE increase in supply. It's only going to get harder in the J-tree area.


 I honestly think my pricing is too low which I did because I am so new I wanted to get the review count up first and then gradually ask for more per night but good points nonetheless

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John D.
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John D.
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Replied Aug 6 2022, 22:47

I typically raise rates after 3 reviews or 6 or so bookings (given you'll have 3+ reviews soon) on a new property.  I've found that's all it takes to build enough confidence to raise rates to at or near market rate.  If you are doing well this last month or two thats awesome, most owners int he Joshua Tree area are way down vs. time last year.  FYI this is my property that's closest to you area --  I have a few others down valley as well.

https://www.airbnb.com/rooms/5...

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Replied Aug 6 2022, 22:47

can you drop a link to your Yucca Valley rental? Been looking out there for 2 years now and thinking to switch towards Crestline/Cedarpines area instead possibly due to saturation.

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Sean Starkey
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Sean Starkey
  • Rental Property Investor
  • Huntington Beach
Replied Aug 7 2022, 06:43
Quote from @John D.:

I typically raise rates after 3 reviews or 6 or so bookings (given you'll have 3+ reviews soon) on a new property.  I've found that's all it takes to build enough confidence to raise rates to at or near market rate.  If you are doing well this last month or two thats awesome, most owners int he Joshua Tree area are way down vs. time last year.  FYI this is my property that's closest to you area --  I have a few others down valley as well.

https://www.airbnb.com/rooms/5...

Ok cool that is good to know! We currently have 6 reviews and most likely 8 by the end of this week! And yes we are very fortunate! Here’s my link https://www.airbnb.com/h/casac...

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Sean Starkey
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Sean Starkey
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  • Huntington Beach
Replied Aug 7 2022, 06:43
Quote from @Eddie Sati:

can you drop a link to your Yucca Valley rental? Been looking out there for 2 years now and thinking to switch towards Crestline/Cedarpines area instead possibly due to saturation.

https://www.airbnb.com/h/casac...

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Sean Starkey
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Sean Starkey
  • Rental Property Investor
  • Huntington Beach
Replied Aug 7 2022, 06:44
Quote from @John D.:

I typically raise rates after 3 reviews or 6 or so bookings (given you'll have 3+ reviews soon) on a new property.  I've found that's all it takes to build enough confidence to raise rates to at or near market rate.  If you are doing well this last month or two thats awesome, most owners int he Joshua Tree area are way down vs. time last year.  FYI this is my property that's closest to you area --  I have a few others down valley as well.

https://www.airbnb.com/rooms/5...


 Also your house is awesome thanks for sharing!