Looking for STR Advice!!

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Looking for STR Advice!!

Investor · Houston, TX · Member since 2021 · 14 posts · 15 votes

I’m about to put in an offer on a beach property in Galveston and I have a few questions for the group and would love some feedback based on your experience.

1) What loan product should I look into? Is a DSCR loan something that works for a STR?

2) What type of insurance should I look into? Are there multiple types I should have on the home?

3) Should I buy the home in my LLC or personal name…and why?

4) Other than making sure it pencils out, anything else you feel is important for me to know before offering and finalizing the deal?

Please feel free to answer all or just the ones you feel comfortable answering.

I appreciate your help and assistance.

3 Reply

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John UnderwoodPro Member

Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes

I agree with what everyone else has said.

Don't get a DSCR loan if you have the downpayment and good credit.

Don't worry about an LLC on a mortgaged property. Attorneys go after low hanging fruit. A house that the bank owns most of is not low hanging fruit.

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Andrew SteffensBusiness Member
Tampa, FL · Member since 2022 · 3k+ posts · 3k+ votes
3y
Hey Scott. There are some possible variables that would change my responses but here are my thoughts in a slightly brief manner:
1. DSCR works but they are typically more expensive and may be a lower LTV. They are usually for people who cannot qualify for or do not want to go through the hassle of a conforming loan.
2. Insurance will depend on your lender and where the property is. First you will need hazard, then probably wind based on its proximity to the shore and hurricane potential, and then possible flood if in a flood zone. Then you may want to consider additional personal liability protection or a separate umbrella policy for a $1M-2M is sort of standard depending on your net worth etc.
3. This will also depend on your loan somewhat. I own some on conforming loans and they must be in your personal name. I also own some in LLC's where the loan dictated (DSCR are usually business purpose loans and require an LLC). From a tax perspective it does not really matter with a good CPA and from a liability standpoint is negligible and mitigated with proper care and insurance.
4. At least here in FL, best practices matter. Make sure the property is well located, has amenities in abundance, at least meets if not beats your competition. Furnish it professionally and get pro photos. Get it listed on more than Airbnb/VRBO. Hire an ethical manager if you are not prepared to give it your all personally.
Best of luck!
[email protected]813-563-0877
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Trent Reeve
Atlanta · Member since 2022 · 708 posts · 639 votes
3y
1. DSCR loans are almost specifically for STR (and LTR) it is based on the revenue a property can make vs your DTR, but usually have a higher interest rate. but the loan product you should choose is the one that fits you the best, with the best options. maybe its a DSCR, maybe a 2nd home loan, maybe something else.

2. if you are going to STR rent it, you will need more than normal homeowners insurance. insurers know what STR's are now, so you can say how you are using the property and let them find the policy that works.

3. putting the title in the LLC will protect you for liability, but thats about it from a basic standpoint. if something happens at the property and you are sued, the cant go after your personal accounts and assets, only what is in the LLC.
1 Reply
Michael BaumPro Member
Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
3y
Hey @Scott Davis, I would shoot for the standard mortgage first. You will be paying a higher interest rate, more down and maybe more points for a DSCR loan. Check on all forms of financing.

You need a STR policy and additional riders for flooding and wind etc. Proper and Foremost are 2 top providers.

The LLC thing gets so much attention on these forums. It isn't really necessary. Just make sure you have plenty of insurance including the umbrella.

I disagree with @Trent Reeve on the LLC protection. It will protect you from contract issues. Tort lawsuits are a different thing. If they can prove to the court that whatever the injury is was caused due to negligence, the LLC will not protect you.
It isn't always easy to pierce the veil of the LLC here, but if you neglect to repair something, you will be hit personally as the member of the LLC. An LLC is a pass through entity for tax purposes.
2 Reply
Bruce WoodruffPro Member
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
3y
Quote from @Michael Baum:

The LLC thing gets so much attention on these forums. It isn't really necessary. Just make sure you have plenty of insurance including the umbrella.

I disagree with @Trent Reeve on the LLC protection. It will protect you from contract issues. Tort lawsuits are a different thing. If they can prove to the court that whatever the injury is was caused due to negligence, the LLC will not protect you.
It isn't always easy to pierce the veil of the LLC here, but if you neglect to repair something, you will be hit personally as the member of the LLC. An LLC is a pass through entity for tax purposes.
+1 on Mike's view of the LLC thing!
1 Reply
John UnderwoodPro Member
Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
3y
I agree with what everyone else has said.
Don't get a DSCR loan if you have the downpayment and good credit.
Don't worry about an LLC on a mortgaged property. Attorneys go after low hanging fruit. A house that the bank owns most of is not low hanging fruit.
3 Reply
Scott Davis
OP
Investor · Houston, TX · Member since 2021 · 14 posts · 15 votes
3y
Thanks for the great advice. I do have good credit (770) so I'll continue to look at all my options. And thanks for the advice on the insurance piece.
0 Reply
Tanner Lewis
Lender · Austin, TX · Member since 2021 · 447 posts · 441 votes
3y
Hi Scott,
1) I think a DSCR is a great option. Many lenders have pretty strict underwriting guidelines when it comes to short-term rentals that drastically inhibit short-term rental acquisitions, but some can allow you to use AirDNA Projections to underwrite your deal. I suggest looking on the BiggerPockets "Find a lender" page to find a good DSCR lender who can finance with AirDNA.
2) Typically I look for something with dwelling coverage equal to the replacement cost of the property and 6-month loss of rent coverage, but honestly the best coverage is whatever makes you sleep the best at night knowing your asset is safe. Insurance is always the first line of defense when it comes to asset protection.
3) I would suggest purchasing the property in an entity. I suggest getting a Texas LLC and nesting it under a Wyoming or Delaware LLC. An entity in the state of the property is always the first line of defense when it comes to lawsuits, etc., but having it nested in a state with good anonymity provision is a great way to keep you from getting a lawsuit to begin with (because they don't know who to file against). I know DSCR lenders can lend to entities whereas conventional lenders cannot.
4) I would make sure to have something with that "wow" factor on your property. Anyone can toss up their house on Airbnb, but the pros manage to charge above-market rent because their rental has that extra "wow" factor that makes the property feel more like a resort than just someone's house.
1 Reply
Sarah KensingerPro Member
Real Estate Consultant · OH · Member since 2023 · 2k+ posts · 1k+ votes
3y
You have some good answers here, but I would highly suggest you check into Proper Insurance and see if they would cover your property. They are the most comprehensive STR insurance and just adding a rider to normal homeowner policy does not always cover a STR. Plus Proper offers all the liability you'll ever need, so you won't need any extra umbrella policies.

If you plan on trying to use a 2nd home loan you won't be able to close a property in an LLC, but with a DSCR you can. The latter is a great option and can be find at many different bank choices. As if you can't already tell, LLC opinions are all over the board on this forum, so I would highly suggest doing some research on that. A great place to start is Clint Coons YouTube channel! @Tanner Lewis Pretty much hit it right on and it's the only way we'll purchase a STR property! He also gave you an excellent answer to number 4. If you offer a wow factor and amazing service with a touch of personalization, you'll have a booked 5-star property in no time!
[email protected]330-557-3021
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Travis TimmonsPro Member
Rental Property Investor · Ellsworth, ME · Member since 2021 · 1k+ posts · 2k+ votes
3y
You need to figure out your insurance costs and loan interest rate (full PITI) prior to making an offer. I'm sure that you know that, but I'm just making sure. It's impossible to underwrite without that info. Insurance in Galveston can be tough. You'll want to know those costs before making an offer. Don't rely on what the seller is telling you that they pay.
A DSCR loan rate is going to be higher. You'll likely have higher up front costs (points) at closing too. The LLC vs in your name is a preference or judgment call. I've done both. You get better terms when it is in your name. You'll have more lending options too. I'd try to get a conventional loan for the first one. I've never met anyone that said the LLC saved them from liability. It's not a bad idea, but it gets more attention than it should.
I'm local to Houston and have set up a couple of short term rentals (and working on the 3rd right now). I'd be happy to help if you think I can be a resource. I have nothing to sell.
1 Reply
Scott Davis
OP
Investor · Houston, TX · Member since 2021 · 14 posts · 15 votes
3y
@Sarah Kensinger You have a great looking website. I may be in touch. Thanks for your response.
1 Reply
Myrtle Mike ThompsonBusiness Member
Realtor · Myrtle Beach, SC · Member since 2016 · 350 posts · 204 votes
3y
@Scott Davis One of my lending partners offers a commercial loan product for STR properties with 20% down. She has three ARMs to choose from, amortized over 25 years: 5-year at 6.375%, 7-year at 6.5%, and 10-year at 6.625%. Those rates are as of last week. She's based out of Myrtle Beach but licensed in Texas and several other states, and she can do single-family, multifamily up to 20 units, condos, and even condotels. Feel free to message me and I'd be happy to share her contact info.
[email protected]843-999-2301
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1 Reply
Dave Skow
Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes
3y
@Scott Davis- thanks 1) regarding the loan - if you are able to qualify for a regular ( non dscr ) loan - the terms will likely be better than a DSCR loan ...there will be more detailed paperwork involved 2) if you buy in your name you will have many more options for loans as compared to LLC loan options AND the terms will be significantly better 3) if buying a condo - watch the rental provisions that HOA have and check reslae cert 4) make sure the local laws allow STR
1 Reply
Richard Elvin
Investor · Cleveland, TN · Member since 2016 · 279 posts · 187 votes
3y
@Scott Davis When to use an LLC is definitely a polarizing question.
I would point out that several responses were from current property owners and investors, their responses were either ambivalent or negative to the idea of buying with a LLC. It's a lot different in practice than it is in opinion. Personally, the advice I take is heavily weighted towards those that have the experience to say what they've done vs someone's opinion of what they plan to do.
You're free to do what suits you, and you should, but I would thoughtfully consider why those that are "doing" don't feel the need to have a LLC.

As to my "...and why".
I've had rental properties in the past and, now that life circumstances are favorable to that, plan to invest in the "near" future. I've never had a LLC and don't see the hype for one. If you have any active part in managing the property you will very likely be a named party in any lawsuit regardless of whether the LLC is named also. That said, DSCR loans usually require an LLC, if that's the route I end up going, I'll get the LLC as required.

Best to you in your endeavors!
1 Reply
Jonathan Taylor
Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes
3y
@Scott Davis I can only speak on the lending portion of your deal but STR specific loans for purchases can be done as long as the location has plenty of AirDNA for STR comps similar to this property. We can close a STR loan up to 80% LTV (assuming the market ST rents debt cover) and my lenders prefer LLC vesting. I have been getting a lot of traction with these loans because you can garner higher monthly rents than Long term which allow higher leverages.
1 Reply
Matthew Masoud
Investor · Orange County, CA · Member since 2014 · 363 posts · 408 votes
3y
1. If you have the income use a 2nd home mortgage. Watch out for restrictions on occupancy. If not, DSCR or conventional will be your best option.
2. You'll need STR insurance. I use proper insurance but shop around. Also, consider adding an umbrella insurance.
3. Depends on financing. DSCR you can close in an LLC. Conventional you'll likely have to use your own name.
4. Start talking to loan officers, CPA, and attorneys. Loan products and closing entities are highly individualized questions.
Tough to give you detailed answers with limited information and be cautious of anyone who does.
1 Reply
Matthew Tregoning
Real Estate Consultant · Melbourne, FL · Member since 2019 · 245 posts · 119 votes
3y
1. Loan Selection: DSCR loans tailored to short-term rentals have proven effective for me, especially when certain lenders can use AirDNA comps for evaluation.
2. Insurance Consideration: Prioritize short-term rental insurance with substantial liability coverage to safeguard your investment.
3. Ownership Structure: Opting for an LLC provides advantages in terms of tax and legal matters, enhancing your property's protection.
4. Competitive Market: Given the growing competition in this space, ensure your budget includes distinct features and amenities from the outset. This proactive approach ensures your property stands out immediately and maintains strong occupancy rates without issues.
1 Reply
Zach Edelman
Lender · New York, NY · Member since 2022 · 1k+ posts · 1k+ votes
3y
A DSCR loan is definitely something that works for STRs. You should ensure the DSCR lender that you're speaking to can underwrite STR income.
0 Reply
Michael BaumPro Member
Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
3y
Quote from @Matthew Tregoning:
Ownership Structure: Opting for an LLC provides advantages in terms of tax and legal matters, enhancing your property's protection.
So what tax advantages does an LLC provide? It is a pass through entity...
1 Reply
Matthew Tregoning
Real Estate Consultant · Melbourne, FL · Member since 2019 · 245 posts · 119 votes
3y
Quote from @Michael Baum:
Quote from @Matthew Tregoning:

Ownership Structure: Opting for an LLC provides advantages in terms of tax and legal matters, enhancing your property's protection.
So what tax advantages does an LLC provide? It is a pass through entity...
Certainly, an LLC's tax advantage lies in its flexibility. It allows you to restructure your business to potentially save on taxes depending on the situation. However, keep in mind that tax laws vary, and I'm not a CPA. It's crucial to consult with a certified accountant or tax professional for personalized advice.
0 Reply
David M Trapani
Rental Property Investor · Franklin, TN · Member since 2019 · 160 posts · 125 votes
3y
Lots of good advice & ideas here. Forgive me if already mentioned, suggest adding “business interruption” insurance on your str policy. When Covid closed str’s or water heater or other leak shuts down the business, etc., the insurance company may well compensate you for your losses based on past revenues. Can be a big boost.
2 Reply
Michael BaumPro Member
Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
3y
Quote from @David M Trapani:

Lots of good advice & ideas here. Forgive me if already mentioned, suggest adding “business interruption” insurance on your str policy. When Covid closed str’s or water heater or other leak shuts down the business, etc., the insurance company may well compensate you for your losses based on past revenues. Can be a big boost.
That is built in to our Proper policy.
1 Reply
January Johnson
Real Estate Agent · Emerald Coast, FL · Member since 2016 · 820 posts · 486 votes
3y
Quote from @Scott Davis:

I’m about to put in an offer on a beach property in Galveston and I have a few questions for the group and would love some feedback based on your experience.

1) What loan product should I look into? Is a DSCR loan something that works for a STR?

2) What type of insurance should I look into? Are there multiple types I should have on the home?

3) Should I buy the home in my LLC or personal name…and why?

4) Other than making sure it pencils out, anything else you feel is important for me to know before offering and finalizing the deal?

Please feel free to answer all or just the ones you feel comfortable answering.

I appreciate your help and assistance.

All of these questions make me think you don't have a Realtor who specializes in STRs, which is unfortunate (if true) as they would be able to guide you to tried and true recommendations. Even if they are NOT an STR specialist, I would reach out to them to see what and who they recommend.
1 Reply
Richard Elvin
Investor · Cleveland, TN · Member since 2016 · 279 posts · 187 votes
3y
Quote from @Matthew Tregoning:
Quote from @Michael Baum:

Quote from @Matthew Tregoning:

Ownership Structure: Opting for an LLC provides advantages in terms of tax and legal matters, enhancing your property's protection.
So what tax advantages does an LLC provide? It is a pass through entity...
Certainly, an LLC's tax advantage lies in its flexibility. It allows you to restructure your business to potentially save on taxes depending on the situation. However, keep in mind that tax laws vary, and I'm not a CPA. It's crucial to consult with a certified accountant or tax professional for personalized advice.
I'm not sure I understand how it's more flexible? I can change a sole proprietorship into a partnership, LLC, S-Corp, C-Corp. I can do JV's, whatever. I don't see how an LLC magically gives me flexibility. Maybe I'm missing something. *shrug*
1 Reply
Michael BaumPro Member
Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
3y
You're not @Richard Elvin.
2 Reply
Scott Davis
OP
Investor · Houston, TX · Member since 2021 · 14 posts · 15 votes
3y
Quote from @January Johnson:

Quote from @Scott Davis:

I’m about to put in an offer on a beach property in Galveston and I have a few questions for the group and would love some feedback based on your experience.

1) What loan product should I look into? Is a DSCR loan something that works for a STR?

2) What type of insurance should I look into? Are there multiple types I should have on the home?

3) Should I buy the home in my LLC or personal name…and why?

4) Other than making sure it pencils out, anything else you feel is important for me to know before offering and finalizing the deal?

Please feel free to answer all or just the ones you feel comfortable answering.

I appreciate your help and assistance.

All of these questions make me think you don't have a Realtor who specializes in STRs, which is unfortunate (if true) as they would be able to guide you to tried and true recommendations. Even if they are NOT an STR specialist, I would reach out to them to see what and who they recommend.
Thanks, January.
I do have a realtor that has a couple STRs herself and works with several investors. I asked her the same questions. My point in asking the questions are to see how peoples experiences or responses vary to ensure I understand multiple opinions.
Do you have any thoughts to the questions? I'm looking to see different points of view.
Thanks,

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