Vetting a Short Term Rental Lender

[Tyler Solomon]

Full Disclosure - I am a lender myself, however I am curious -

What do you all look for in a lender when going to finance an STR?
What attributes are most important to you?
What have been your biggest pain points while trying to finance STR's? 

[Luke Carl]

Shouldn't be any different than a long term rental. Unless you have no DTI in which case dscr is super hot the past couple years.

The biggest disconnect is when a client says “I’m going to put it on airbnb” and the MLO has no idea what that means because they do primaries all day. 

[Patricia Steiner]

We've found that vacation rental financing has really dried up in the past few months. The lenders who are still doing it are charging some pretty high rates (my clients have 800+ FICOs, liquidity, low DTI) and don't really understand STR ('there is no rent roll or leases'). Two years of financials on the property has also been problematic for some properties that have a shorter history than that but have significant NOI.

So, a long way of saying: I want a STR lender who I don't need to train on STR, who is in the business today and will be in it tomorrow. Business awaits that lender...

[Reid Chauvin]

As mentioned above, it generally doesn't matter if you are trying to finance short term rental or a long term rental. The loan products are the same. The only caveat being that for a short term rental, some borrowers area able to use a 2nd home loan and put 10% down instead of an investment property loan (min. down payment of 15%). 

The no income doc / DSCR loans are treated the same regardless of whether it is LTR or STR.

[Tyler Solomon]

Quote from @Reid Chauvin:

As mentioned above, it generally doesn't matter if you are trying to finance short term rental or a long term rental. The loan products are the same. The only caveat being that for a short term rental, some borrowers area able to use a 2nd home loan and put 10% down instead of an investment property loan (min. down payment of 15%). 

The no income doc / DSCR loans are treated the same regardless of whether it is LTR or STR.

I would not necessarily say that DSCR loans are treated the same whether it is LTR or STR. The main difference with STR DSCR lenders comes in their ability to qualify the properties income via AirDNA (not all can do this), rather than the 1007 market rent schedule.

[Tyler Solomon]

Quote from @Patricia Steiner:

We've found that vacation rental financing has really dried up in the past few months. The lenders who are still doing it are charging some pretty high rates (my clients have 800+ FICOs, liquidity, low DTI) and don't really understand STR ('there is no rent roll or leases'). Two years of financials on the property has also been problematic for some properties that have a shorter history than that but have significant NOI.

So, a long way of saying: I want a STR lender who I don't need to train on STR, who is in the business today and will be in it tomorrow. Business awaits that lender...

 Patricia - just shot you a message.

[Reid Chauvin]

@Tyler Solomon - that hasn't been my experience with the DSCR Lender we use, but it also hasn't mattered as the long-term rent rates have been sufficient to cover the debt and qualify the borrower. Good to hear that some lenders are allowing the STR rent rates - hopefully a growing trend!

[Jeff Langley]

Transparency.

[Leslie Anne Morris]

What do you all look for in a lender when going to finance an STR?  That they can actually close the deal and have a track record of doing so.

What attributes are most important to you?  Competence and easy to work with.

What have been your biggest pain points while trying to finance STR's? Closing on time.

[Kyle Gilliam]

It definitely helps if the lender has worked with STRs before or best case scenario they also invest in STRs. I'm trying to put together an offer right now on my first STR. I have talked to 5 different lenders and only two out of the five were familiar with a DSCR loan and only one of them was able discuss alternative investment home loans that they have used for STRs.

[Raymond J. Rodrigues]

I just closed a few deals where we used short term rental comps pulled off the MLS to be used on the comparable rent schedule in lieu of using traditional long term rents. I've also done this with loan products that have more palatable rates that are not DSCR loan products. I've also done this for properties that do not have past short term rental history. @Patricia Steiner

[Mark S.]

@Tyler Solomon Look for a smaller local/regional bank that writes portfolio loans and has worked in the STR arena. I have found they are easiest to work with and offer the best terms.

[Jonathan Dempsey]

@Tyler Solomon

I 100% agree. Lenders that aim to do loans using market rent as an LTR in the STR market are behind the 8 ball.

[Jonathan Dempsey]

@Tyler Solomon

I just had 2 houses over appraise for a client (I'm an STR focused agent), only to find out the DSCR lender they were using is having trouble 1 week before closing because they are using market LTR rents vs. an Airdna projection (which I poor assumed the DSCR lender would use from past experience with these loans).

Nightmare! Hoping we can salvage these deals because they are 13 cap rates

[Jewel B.]

Quote from @Jonathan Dempsey:

@Tyler Solomon

I 100% agree. Lenders that aim to do loans using market rent as an LTR in the STR market are behind the 8 ball.

Hi Jonathan. Could you elaborate on the issue with using LTR market rent vs AirDNA projections with lenders?

[Kevin Woodard]

Quote from @Jonathan Dempsey:

@Tyler Solomon

I just had 2 houses over appraise for a client (I'm an STR focused agent), only to find out the DSCR lender they were using is having trouble 1 week before closing because they are using market LTR rents vs. an Airdna projection (which I poor assumed the DSCR lender would use from past experience with these loans).

Nightmare! Hoping we can salvage these deals because they are 13 cap rates

This was definitely the case earlier in the year. There are lenders that can still underwrite a property specifically as a short term rental. 

I have seen both projections and STR as comps on the 1007 to qualify income. 

[Sara Levy-Lambert]

Google Awning Airbnb Estimator - it allows you to see competing properties and their performance by month. It's like the Enemy Method on steroids. That's a good way to underwrite.

[Carlos Ptriawan]

Quote from @Tyler Solomon:

Full Disclosure - I am a lender myself, however I am curious -

What do you all look for in a lender when going to finance an STR?
What attributes are most important to you?
What have been your biggest pain points while trying to finance STR's? 

Lets say I want to finance the STR condo in Kentuckyville,KY.
Then I want STR lender that had experience lending STR condos in Kentuckyville,KY.
The Kentuckyville has its own set of regulation that the lender has to understand

Even not all non-QM lender can do this. As they are not approved to work in KY, for example.
I had the issue before, even when they experience financing in KY, but there's always a knowledge gap. In that sense, having a local specialized real estate agent in KY that's specializing in STR is super important.

[Tyler Solomon]

Quote from @Carlos Ptriawan:

Quote from @Tyler Solomon:

Full Disclosure - I am a lender myself, however I am curious -

What do you all look for in a lender when going to finance an STR?
What attributes are most important to you?
What have been your biggest pain points while trying to finance STR's? 

Lets say I want to finance the STR condo in Kentuckyville,KY.
Then I want STR lender that had experience lending STR condos in Kentuckyville,KY.
The Kentuckyville has its own set of regulation that the lender has to understand

Even not all non-QM lender can do this. As they are not approved to work in KY, for example.
I had the issue before, even when they experience financing in KY, but there's always a knowledge gap. In that sense, having a local specialized real estate agent in KY that's specializing in STR is super important.

 I agree - that's why having a lender that is in communication with all relevant parties, including the RE agent, is extremely important!

[Carlos Ptriawan]

Quote from @Tyler Solomon:

Quote from @Carlos Ptriawan:

Quote from @Tyler Solomon:

Full Disclosure - I am a lender myself, however I am curious -

What do you all look for in a lender when going to finance an STR?
What attributes are most important to you?
What have been your biggest pain points while trying to finance STR's? 

Lets say I want to finance the STR condo in Kentuckyville,KY.
Then I want STR lender that had experience lending STR condos in Kentuckyville,KY.
The Kentuckyville has its own set of regulation that the lender has to understand

Even not all non-QM lender can do this. As they are not approved to work in KY, for example.
I had the issue before, even when they experience financing in KY, but there's always a knowledge gap. In that sense, having a local specialized real estate agent in KY that's specializing in STR is super important.

 I agree - that's why having a lender that is in communication with all relevant parties, including the RE agent, is extremely important!

 Oh, one more point, having an agent and lender that has experience in the particular area and type of investment is important when it comes
to property insurance as everyone is having a different idea how to insure in specific zoning. Note in my case I invest STR in resort zone only.

[Nick Belsky]

@Tyler Solomon

Based on the comments, it appears that many in this forum are also not very familiar with STR loans.

I deal with a lot of STRs all over the country.  When looking for a lender, there is an easy way and a hard way to find financing.

The hard way is where these lender who mostly do conventional or other non-Qm lender want to get into the STR market all of a sudden and the investors who back them have no real idea of what they are assessing or buying. Their default is requiring a certain amount of existing STR rental history to use as qualifying income for the DSCR calculation. Their alternative, which is even more ridiculous, is to base it from long term rental rates from the 1007, which almost never cash flows enough to qualify for a reasonable leveraged loan. Most these types of lenders will reduce your LTV by 5% or so simply because you said, "STR". Lol. Technically, you can get conventional financing for an STR, but you'd have to occupy it as a second, or vacation, home and "live" in it for at least a few weeks a year to qualify for 10% down and meet Fannie/Freddie DTI requirements. In this case, you cannot use any previous or projected rental income to help ease your DTI though.

Lenders who actually know what they are doing use AirDNA projections. If you are purchasing or refinancing and have a 12 month history, that's great too. However, the percentage of AirDNA projections is usually based on experience or FICO. For example, someone who has owned at least 2 STRs for at least 1 year of two may get 100% of the AirDNA projections used in their DSCR calculation, if not more. Some lenders go to 125% of what AirDNA projects. If you don't have a certain experience seasoning or a lower FICO, they may only allow 75% of the projection. For refis, expect to have 6 month seasoning before you can pull cash out though.

The AirDNA lenders aren't usually required for lower value properties. For example, a recent STR I did in Florida had no rental history. An experience STR owner purchased the property for $1.3MM. The fair market rent came back on the 1007 at $3,400/month. No way any DSCR would be high enough to qualify. Using AirDNA projections at 100%, we were able to use $11,250/month in STR income. We qualified to 75LTV purchase on this property. The remaining loan was done no differently than any other DSCR loan. In reality, the buyer is trending far above $11,250/month. But had we not used a proper lender that truly knows STR, we would have really had a hard time getting a loan with leverage that made sense for this borrower.

There is another alternative, using no ration DSCR loans. These do function well for STRs but the nature of No DSCR is usually an interest rate that is 2% or so higher than typically DSCR loans. Leverages still go up to 70-75 right now, but they used to go to 80LTV. I am seeing no ratio 30yr FRM around 10-11% right now. The lenders who use AirDNA are around 8.75-9.25% for a 30yr FRM. Standard DSCR is between 7.5-8.0% at this point in time. So, yes, there is a small premium in rate to finance STR, but rates will always change.

Love the property, date the rate.

Cheers!  

[Andrew Steffens]

- turnaround time, changing terms, and bad appraisals!!

[Levi Bennett]

Quote from @Nick Belsky:

@Tyler Solomon

Based on the comments, it appears that many in this forum are also not very familiar with STR loans.

I deal with a lot of STRs all over the country.  When looking for a lender, there is an easy way and a hard way to find financing.

The hard way is where these lender who mostly do conventional or other non-Qm lender want to get into the STR market all of a sudden and the investors who back them have no real idea of what they are assessing or buying. Their default is requiring a certain amount of existing STR rental history to use as qualifying income for the DSCR calculation. Their alternative, which is even more ridiculous, is to base it from long term rental rates from the 1007, which almost never cash flows enough to qualify for a reasonable leveraged loan. Most these types of lenders will reduce your LTV by 5% or so simply because you said, "STR". Lol. Technically, you can get conventional financing for an STR, but you'd have to occupy it as a second, or vacation, home and "live" in it for at least a few weeks a year to qualify for 10% down and meet Fannie/Freddie DTI requirements. In this case, you cannot use any previous or projected rental income to help ease your DTI though.

Lenders who actually know what they are doing use AirDNA projections. If you are purchasing or refinancing and have a 12 month history, that's great too. However, the percentage of AirDNA projections is usually based on experience or FICO. For example, someone who has owned at least 2 STRs for at least 1 year of two may get 100% of the AirDNA projections used in their DSCR calculation, if not more. Some lenders go to 125% of what AirDNA projects. If you don't have a certain experience seasoning or a lower FICO, they may only allow 75% of the projection. For refis, expect to have 6 month seasoning before you can pull cash out though.

The AirDNA lenders aren't usually required for lower value properties. For example, a recent STR I did in Florida had no rental history. An experience STR owner purchased the property for $1.3MM. The fair market rent came back on the 1007 at $3,400/month. No way any DSCR would be high enough to qualify. Using AirDNA projections at 100%, we were able to use $11,250/month in STR income. We qualified to 75LTV purchase on this property. The remaining loan was done no differently than any other DSCR loan. In reality, the buyer is trending far above $11,250/month. But had we not used a proper lender that truly knows STR, we would have really had a hard time getting a loan with leverage that made sense for this borrower.

There is another alternative, using no ration DSCR loans. These do function well for STRs but the nature of No DSCR is usually an interest rate that is 2% or so higher than typically DSCR loans. Leverages still go up to 70-75 right now, but they used to go to 80LTV. I am seeing no ratio 30yr FRM around 10-11% right now. The lenders who use AirDNA are around 8.75-9.25% for a 30yr FRM. Standard DSCR is between 7.5-8.0% at this point in time. So, yes, there is a small premium in rate to finance STR, but rates will always change.

Love the property, date the rate.

Cheers!  

 I would bet that most people have no idea how incredibly valuable this information is! Amazing response, thank you!

[Sandra McEwan]

Quote from @Levi Bennett:

Quote from @Nick Belsky:

@Tyler Solomon

Based on the comments, it appears that many in this forum are also not very familiar with STR loans.

I deal with a lot of STRs all over the country.  When looking for a lender, there is an easy way and a hard way to find financing.

The hard way is where these lender who mostly do conventional or other non-Qm lender want to get into the STR market all of a sudden and the investors who back them have no real idea of what they are assessing or buying. Their default is requiring a certain amount of existing STR rental history to use as qualifying income for the DSCR calculation. Their alternative, which is even more ridiculous, is to base it from long term rental rates from the 1007, which almost never cash flows enough to qualify for a reasonable leveraged loan. Most these types of lenders will reduce your LTV by 5% or so simply because you said, "STR". Lol. Technically, you can get conventional financing for an STR, but you'd have to occupy it as a second, or vacation, home and "live" in it for at least a few weeks a year to qualify for 10% down and meet Fannie/Freddie DTI requirements. In this case, you cannot use any previous or projected rental income to help ease your DTI though.

Lenders who actually know what they are doing use AirDNA projections. If you are purchasing or refinancing and have a 12 month history, that's great too. However, the percentage of AirDNA projections is usually based on experience or FICO. For example, someone who has owned at least 2 STRs for at least 1 year of two may get 100% of the AirDNA projections used in their DSCR calculation, if not more. Some lenders go to 125% of what AirDNA projects. If you don't have a certain experience seasoning or a lower FICO, they may only allow 75% of the projection. For refis, expect to have 6 month seasoning before you can pull cash out though.

The AirDNA lenders aren't usually required for lower value properties. For example, a recent STR I did in Florida had no rental history. An experience STR owner purchased the property for $1.3MM. The fair market rent came back on the 1007 at $3,400/month. No way any DSCR would be high enough to qualify. Using AirDNA projections at 100%, we were able to use $11,250/month in STR income. We qualified to 75LTV purchase on this property. The remaining loan was done no differently than any other DSCR loan. In reality, the buyer is trending far above $11,250/month. But had we not used a proper lender that truly knows STR, we would have really had a hard time getting a loan with leverage that made sense for this borrower.

There is another alternative, using no ration DSCR loans. These do function well for STRs but the nature of No DSCR is usually an interest rate that is 2% or so higher than typically DSCR loans. Leverages still go up to 70-75 right now, but they used to go to 80LTV. I am seeing no ratio 30yr FRM around 10-11% right now. The lenders who use AirDNA are around 8.75-9.25% for a 30yr FRM. Standard DSCR is between 7.5-8.0% at this point in time. So, yes, there is a small premium in rate to finance STR, but rates will always change.

Love the property, date the rate.

Cheers!  

 I would bet that most people have no idea how incredibly valuable this information is! Amazing response, thank you!

Hi Levi, What if you want to purchase a quadplex that vacant b/c it was newly renovated and you need to get a DSCR loan? You want to use it possibly as mid-term rentals/short term down the road or start with one unit as MTR/STR and the others LTR. What do you tell the lender and how do estimate rental income? Would they want to change leverage b/c one might be STR? Would AirDNA information be available for a MF property like this that has not been a MTR/STR. Thank you.

[Zach Edelman]

Quote from @Sandra McEwan:

Quote from @Levi Bennett:

Quote from @Nick Belsky:

@Tyler Solomon

Based on the comments, it appears that many in this forum are also not very familiar with STR loans.

I deal with a lot of STRs all over the country.  When looking for a lender, there is an easy way and a hard way to find financing.

The hard way is where these lender who mostly do conventional or other non-Qm lender want to get into the STR market all of a sudden and the investors who back them have no real idea of what they are assessing or buying. Their default is requiring a certain amount of existing STR rental history to use as qualifying income for the DSCR calculation. Their alternative, which is even more ridiculous, is to base it from long term rental rates from the 1007, which almost never cash flows enough to qualify for a reasonable leveraged loan. Most these types of lenders will reduce your LTV by 5% or so simply because you said, "STR". Lol. Technically, you can get conventional financing for an STR, but you'd have to occupy it as a second, or vacation, home and "live" in it for at least a few weeks a year to qualify for 10% down and meet Fannie/Freddie DTI requirements. In this case, you cannot use any previous or projected rental income to help ease your DTI though.

Lenders who actually know what they are doing use AirDNA projections. If you are purchasing or refinancing and have a 12 month history, that's great too. However, the percentage of AirDNA projections is usually based on experience or FICO. For example, someone who has owned at least 2 STRs for at least 1 year of two may get 100% of the AirDNA projections used in their DSCR calculation, if not more. Some lenders go to 125% of what AirDNA projects. If you don't have a certain experience seasoning or a lower FICO, they may only allow 75% of the projection. For refis, expect to have 6 month seasoning before you can pull cash out though.

The AirDNA lenders aren't usually required for lower value properties. For example, a recent STR I did in Florida had no rental history. An experience STR owner purchased the property for $1.3MM. The fair market rent came back on the 1007 at $3,400/month. No way any DSCR would be high enough to qualify. Using AirDNA projections at 100%, we were able to use $11,250/month in STR income. We qualified to 75LTV purchase on this property. The remaining loan was done no differently than any other DSCR loan. In reality, the buyer is trending far above $11,250/month. But had we not used a proper lender that truly knows STR, we would have really had a hard time getting a loan with leverage that made sense for this borrower.

There is another alternative, using no ration DSCR loans. These do function well for STRs but the nature of No DSCR is usually an interest rate that is 2% or so higher than typically DSCR loans. Leverages still go up to 70-75 right now, but they used to go to 80LTV. I am seeing no ratio 30yr FRM around 10-11% right now. The lenders who use AirDNA are around 8.75-9.25% for a 30yr FRM. Standard DSCR is between 7.5-8.0% at this point in time. So, yes, there is a small premium in rate to finance STR, but rates will always change.

Love the property, date the rate.

Cheers!  

 I would bet that most people have no idea how incredibly valuable this information is! Amazing response, thank you!

Hi Levi, What if you want to purchase a quadplex that vacant b/c it was newly renovated and you need to get a DSCR loan? You want to use it possibly as mid-term rentals/short term down the road or start with one unit as MTR/STR and the others LTR. What do you tell the lender and how do estimate rental income? Would they want to change leverage b/c one might be STR? Would AirDNA information be available for a MF property like this that has not been a MTR/STR. Thank you.

Theoretically, you could underwrite the units that you plan to underwrite as LTRs as LTRs, and the ones as STRs as STRs. What the Lender probably will do, is see first if the property qualifies on long-term rents, as typically quadplexes debt service very well, and then, if the deal does run into debt service problems, use Air DNA if needed. I know for my firm, we can go up to 80% LTV on an acquisition regardless of rental income qualification (i.e Air DNA vs. 1007 market rent), however, the pricing is a bit friendlier for a 1007/LTR qualification than for deals that use Air DNA, simply because of the difference in risk profile. Lastly, yes Air DNA information would be available even if the property has not been used as an MTR/STR, as it's data, and property revenue estimate, is completely reliant on rental comps of other properties, specifically STRs.

[Sandra McEwan]

Quote from @Zach Edelman:

Quote from @Sandra McEwan:

Quote from @Levi Bennett:

Quote from @Nick Belsky:

@Tyler Solomon

Based on the comments, it appears that many in this forum are also not very familiar with STR loans.

I deal with a lot of STRs all over the country.  When looking for a lender, there is an easy way and a hard way to find financing.

The hard way is where these lender who mostly do conventional or other non-Qm lender want to get into the STR market all of a sudden and the investors who back them have no real idea of what they are assessing or buying. Their default is requiring a certain amount of existing STR rental history to use as qualifying income for the DSCR calculation. Their alternative, which is even more ridiculous, is to base it from long term rental rates from the 1007, which almost never cash flows enough to qualify for a reasonable leveraged loan. Most these types of lenders will reduce your LTV by 5% or so simply because you said, "STR". Lol. Technically, you can get conventional financing for an STR, but you'd have to occupy it as a second, or vacation, home and "live" in it for at least a few weeks a year to qualify for 10% down and meet Fannie/Freddie DTI requirements. In this case, you cannot use any previous or projected rental income to help ease your DTI though.

Lenders who actually know what they are doing use AirDNA projections. If you are purchasing or refinancing and have a 12 month history, that's great too. However, the percentage of AirDNA projections is usually based on experience or FICO. For example, someone who has owned at least 2 STRs for at least 1 year of two may get 100% of the AirDNA projections used in their DSCR calculation, if not more. Some lenders go to 125% of what AirDNA projects. If you don't have a certain experience seasoning or a lower FICO, they may only allow 75% of the projection. For refis, expect to have 6 month seasoning before you can pull cash out though.

The AirDNA lenders aren't usually required for lower value properties. For example, a recent STR I did in Florida had no rental history. An experience STR owner purchased the property for $1.3MM. The fair market rent came back on the 1007 at $3,400/month. No way any DSCR would be high enough to qualify. Using AirDNA projections at 100%, we were able to use $11,250/month in STR income. We qualified to 75LTV purchase on this property. The remaining loan was done no differently than any other DSCR loan. In reality, the buyer is trending far above $11,250/month. But had we not used a proper lender that truly knows STR, we would have really had a hard time getting a loan with leverage that made sense for this borrower.

There is another alternative, using no ration DSCR loans. These do function well for STRs but the nature of No DSCR is usually an interest rate that is 2% or so higher than typically DSCR loans. Leverages still go up to 70-75 right now, but they used to go to 80LTV. I am seeing no ratio 30yr FRM around 10-11% right now. The lenders who use AirDNA are around 8.75-9.25% for a 30yr FRM. Standard DSCR is between 7.5-8.0% at this point in time. So, yes, there is a small premium in rate to finance STR, but rates will always change.

Love the property, date the rate.

Cheers!  

 I would bet that most people have no idea how incredibly valuable this information is! Amazing response, thank you!

Hi Levi, What if you want to purchase a quadplex that vacant b/c it was newly renovated and you need to get a DSCR loan? You want to use it possibly as mid-term rentals/short term down the road or start with one unit as MTR/STR and the others LTR. What do you tell the lender and how do estimate rental income? Would they want to change leverage b/c one might be STR? Would AirDNA information be available for a MF property like this that has not been a MTR/STR. Thank you.

Theoretically, you could underwrite the units that you plan to underwrite as LTRs as LTRs, and the ones as STRs as STRs. What the Lender probably will do, is see first if the property qualifies on long-term rents, as typically quadplexes debt service very well, and then, if the deal does run into debt service problems, use Air DNA if needed. I know for my firm, we can go up to 80% LTV on an acquisition regardless of rental income qualification (i.e Air DNA vs. 1007 market rent), however, the pricing is a bit friendlier for a 1007/LTR qualification than for deals that use Air DNA, simply because of the difference in risk profile. Lastly, yes Air DNA information would be available even if the property has not been used as an MTR/STR, as it's data, and property revenue estimate, is completely reliant on rental comps of other properties, specifically STRs.

Hi Zach, thank you for your response. I appreciate the input! I am understanding the AirDNA rent projections now. I have noticed that lenders want to decrease leverage usually by 5% and rates are higher when you mention STR as you said, higher risk. Hoping the property qualifies based on LTR's.