Lending on Short Term Rentals. What I discovered and confirmed.

Collin HaysBusiness Member

Property Manager · Gatlinburg, TN · Member since 2020 · 3k+ posts · 4k+ votes

3y

very good and insightful info! I’ll take a few nuggets of fact over a novel of hearsay and embellishment any day.

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1 Reply

Ken Boone

Investor · Greenville, SC · Member since 2015 · 1k+ posts · 1k+ votes

3y

So I would totally agree from a lenders perspective you are right on 100%, however, from a buyer's perspective or even a seller's perspective, I think an STR can be valued higher based on it's performance. For instance a 2 bed cabin in the Smokies that did 140k gross last year, is going to be worth more than a 2 bed cabin that only did 70k last year.

I agree the lender may not see it that way, but I think a buyer would be willing to pay more for the one that did 140k vs the one that did 70k.

Again, past performance does not dictate what it will do in the future, but it does show what it is capable of.

And of course you would have to have a buyer that values it higher for a sell to work.

But I totally agree just because it is an STR does not make it worth more per se.

5 Reply

Michael BaumPro Member

OP

Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes

3y

It does seem that way, but all the lenders were pretty adamant that they lend on the value of the property not the revenue.

Some did mention that they would lend on anything with more down. If you are willing to pay more for a property than what the comps say, all you need to do is cover the excess.

3 Reply

Zach Edelman

Lender · New York, NY · Member since 2022 · 1k+ posts · 1k+ votes

3y

Michael, thanks for posting this.

So often as STRs become more and more popular and more and more of a "asset class," investors fail to realize that when it comes to financing, if they're buying assets of four units or less, the lender will order a residential appraisal, and the property will be valued based off sales comps, and the sales comparison approach (rather than the income approach).

13 Reply

January Johnson

Real Estate Agent · Emerald Coast, FL · Member since 2016 · 820 posts · 486 votes

3y

Quote from @Ken Boone:

So I would totally agree from a lenders perspective you are right on 100%, however, from a buyer's perspective or even a seller's perspective, I think an STR can be valued higher based on it's performance. For instance a 2 bed cabin in the Smokies that did 140k gross last year, is going to be worth more than a 2 bed cabin that only did 70k last year.

I agree the lender may not see it that way, but I think a buyer would be willing to pay more for the one that did 140k vs the one that did 70k.

Again, past performance does not dictate what it will do in the future, but it does show what it is capable of.

And of course you would have to have a buyer that values it higher for a sell to work.

But I totally agree just because it is an STR does not make it worth more per se.

Interesting opinion, but you are not selling the management team with the property in many cases, so a seller could never guarantee that the buyer would be able to do the same GRI. As you know, it's not the PROPERTY that "performs" - it's the people. By the same token, I tell MANY of my buyers they can do BETTER than the rental history (and most can - we teach that at my company). So still, no more "value" for the high-performing property -- at least not if one is financing it.

4 Reply

January Johnson

Real Estate Agent · Emerald Coast, FL · Member since 2016 · 820 posts · 486 votes

3y

Also, thanks for the research @Michael Baum! Love this discussion.

1 Reply

Michael BaumPro Member

OP

Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes

3y

Thanks @Zach Edelman. I was thinking of giving you a call, but I thought that would be a conflict in the forum. :)

Thanks @Collin Hays and @January Johnson for the thanks! :)

1 Reply

Mike Holloway

Member since 2023 · 1 post · 0 votes

3y

Quote from @Michael Baum:

It does seem that way, but all the lenders were pretty adamant that they lend on the value of the property not the revenue.

Some did mention that they would lend on anything with more down. If you are willing to pay more for a property than what the comps say, all you need to do is cover the excess.

Hey Michael, I am looking to do a partnership with my dad on a Lakehouse in Florida. We both own a few properties separately. Is it possible to get two separate mortgages for a house upon purchase? He plans to pay his half off sooner. Do you know of any partnership loan products or have any advice?

0 Reply

Beth JohnsonPro Member

Lender · Renton, WA · Member since 2018 · 227 posts · 216 votes

3y

Great post! The difference in opinion between a lender POV and an investor POV is the amount of down payment required because it's underwritten by the lender using an appraisal and potentially DSCR for a long-term rental = a higher down payment. So, yeah, you can value a STR higher as an investor, as mentioned by commenters, and it'll cashflow great as an short-term IF AND ONLY IF you have enough down payment to cover what's required by the lender. Can't really separate the two points, in my opinion.

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2 Reply

John UnderwoodPro Member

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

3y

Since you have "spare time " maybe you could be a VA?

0 Reply

Arda Bircan

Investor · Miami · Member since 2021 · 23 posts · 13 votes

3y

Quote from @Michael Baum:

Hey everyone. There has been a few posts about lending on STRs. Some have said that a working Short Term Rental is worth more than a similar comp in the same area based on that revenue.

I have said for years, along with many others, that a STR is worth what every other similar house in the same area is worth. It isn't worth more because it did 50k in revenue.

A few folks were pretty adamant that I was wrong so I said in the threads that I would call a bunch of lenders and find out. Here is the results of 4 hours of work.

National Bank #1 - They were difficult to get a firm confirmation but they told me their posted processes. LTV is based on comps and appraisals only. 43% DTI on conventional, 50% FHA.

National Bank #2 - Much more information with an enthusiastic loan officer about the info. Essentially it is the lesser of 3 things. Purchase Price, Appraisal Value, Finished Value (new construction). They do not take into account revenue when it comes to value. They do when it comes to DTI/Debt service. They want 2+ years of Schedule E revenue shown.

Local Credit Union #1 - Comps and appraisal's only. They don't take into account revenue. They do use it for DTI based on at least 2 years revenue.

Local Credit Union #2 - Comps and appraisals only. Same as LCU 1

National Mortgage Lender #1 - Comps and appraisals only. Great info from them as they mentioned DSCR loans. They still only use comps and appraisal values for DSCR loans and they us the revenue for improved DTI.

National Mortgage Lender #2 - Comps and appraisals only. Same as mortgage lender 1

National Investor Mortgage Lender - This was a lender who only does investment loans. No home mortgages for primary etc. They only use comps and appraisals just like everyone else. They have more flexible terms when it comes to DTI. That revenue stream can make it easier to qualify like others but they use other criteria. Only needing a year of revenue on LTR. They do not use AirDNA for estimates.

Local Portfolio Lender #1 - This is a local lender but they lend in most of the western states. They use comps and appraisals only. They do use revenue to help with DTI but that is about it.

Local Portfolio Lender #2 - This is also a local lender who lends in all western states and some mid west including Texas. They use comps and appraisals only. Same DTI benefits to working rentals.

National Mortgage Brokerage - Finally I called one of the largest mortgage brokerages in the US. They have many offices in every state. They have no offerings that take into account the revenue of an existing rental when it comes to value.

So the bottom line is what many of us have been saying. No STR is worth more because it is a STR. It is worth what other comps in the area are worth. Every lender I contacted said they exact same thing. No exceptions. They lend on the value not the possible revenue.

I was upfront about why I was looking for answers to these questions. I told them I was posting this on a large real estate investor forum. I am not listing the names of the various lenders, nor will I tell anyone who I called. I told each person that I would use the preceding terms and they were fine with that.

This is not a comprehensive list of lenders or their practices. There might very well be a lender out there who does take that revenue into account. There might be a hard money lender who would. You never know.

I did ask about commercial lending, but none of them were able to comment as that was not their department. I wasn't going to spend another 4 hours running down practices regarding a hypothetical 12 unit apartment complex, but I am betting that when it comes to value, comps and appraisals rule the roost.

So hopefully this will help dispel any ideas that a STR is worth because it is a STR.

this is golden. thanks for sharing

1 Reply

Collin HaysBusiness Member

Property Manager · Gatlinburg, TN · Member since 2020 · 3k+ posts · 4k+ votes

3y

Quote from @Michael Baum:

Thanks @Zach Edelman. I was thinking of giving you a call, but I thought that would be a conflict in the forum. :)

Thanks @Collin Hays and @January Johnson for the thanks! :)

Well thank YOU for thanking me!

[email protected]806-672-7102

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1 Reply

Martin D.

Realtor · Sedona, AZ · Member since 2020 · 70 posts · 42 votes

3y

Yes @Michael Baum, you are right. That is how lenders work; they love their appraisals! :D

Although an STR property is worth more to buyers and sellers. And when many buyers and sellers sell many STR properties in an area, then prices go up, more so than properties which cannot operate as STR.

Over here in Sedona, it is commonly accepted that homes without an HOA go for about 20% more than the exact some home in an HOA. Only difference is, one can do STR, and the other cannot.

If the lender has enough comps in that neighborhood to support the price at appraisal, than the STR property is, in fact, worth more!

4 Reply

Jon Martin

Member since 2022 · 1k+ posts · 1k+ votes

3y

Quote from @Michael Baum:

It does seem that way, but all the lenders were pretty adamant that they lend on the value of the property not the revenue.

On a related note, with conversations I've had recently, I know that there are Fannie Mae backed investor loans that can take LTR rates into account without dinging your DTI. If your all in PITI is at or below the monthly loan amount you are good and don't need to show the income to cover it. Therefore you are basically getting the benefits of a DSCR but with a reduced interest rate.

That said, they do not care what your expected STR revenue is going to be, which seems to be the basic jist of this post.

Great stuff @Michael Baum and thanks for the post and legwork

0 Reply

James Hamling

Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes

3y

@Michael Baum of course that was what you got for an answer, because you did it all wrong.

Look, I will explain.

Instead of a STR business, let's say it's a Taco Truck. And I tell you I can get a million dollars for my Taco Truck business, because my revenues are steadily $700k per year, and after expenses it comes out to $250k net profit annually on the business. So 4yrs profit, heck yeah I can get a million bucks for that taco Truck.

And than you call lenders asking how much they would finance a Taco Truck for. And they ask the year of it, millage, weight etc. and generally say if it's decent condition they'd go as high as $30k to finance that Taco Truck.

So you say I'm nut's, no way a million, only $30k. I tell you, I was selling the BUSINESS, and not just one of the business's tools. Sure, the TRUCK is only $30k, I was talking about selling THE BUSINESS who happens to own a TRUCK, that it sells taco's out of.

See the difference.

The property is not the STR business, it's just a house, on it's own it's only value is that of just a house, a house doing nothing. If you want to get paid for the revenues of a STR business, you need to sell, a STR business and it's assets, not just a house that once was used for a STR business. That's like someone trying to sell just a truck for a million bucks saying "hey, they last guy who had this, sold tacos out of it, made a killing, so hey, how about you pay me what his business was worth, for this truck" LOL, no way, it's just a truck, the business is gone.

If it's not a business being sold, as an operational whole unit, it does not get the valuation of the business, it get's the valuation of what's being sold, the tool alone.

Do people in STR not get this very basic fundamental? I would hope so. I mean, for 1, what about the customer list? What about the audience that's been built? Sever that "POW" it instantly lost value big time, you gotta start from 0 all over again.

If you want to sell a STR business based upon revenues the STR business generates, you need (a) track record to support and (b) to sell the BUSINESS as a whole.

And yes, it's commercial finance, not mortgage financing, just like any business purchase. Storage units are the same, the sale price they get is not just the value of the buildings and lot, it's the revenue they built, and they sell it turn-key not vacant. If vacant, wow-zers, gonna take a hell of a beating on price.

0 Reply

James Hamling

Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes

3y

Quote from @Michael Baum:

I did ask about commercial lending, but none of them were able to comment as that was not their department. I wasn't going to spend another 4 hours running down practices regarding a hypothetical 12 unit apartment complex....

As a person who transacts apartment buildings I can answer this one.

First, if not familiar a person should google "MAI Appraiser".
Commercial real estate is appraised very differently than residential real estate.
In appraisal their is 3 weighted standards for appraisal, one of which is comparable solds which in residential is heavily selected and often the singular weight. Their is times, I have seen, where replacement or recreation value is utilized.

In commercial, the coin flips, and things heavily weight from the financial side of things. This is why you'd be hard pressed to find an MAI Appraisal anything less than 50 if not 80 pages. I have seen them 200+ before, all depends on subject property complexity and size.
They get deep into analysis, deep-deep. Will get into cap-x, rent's per sqft, market demand, on and on. It's a very thorough analysis.

My data source, my wife and her associates, as she was an MAI Appraiser. Not all commercial appraisals are done by an MAI, but MAI is the "gold standard" for such and many lenders and developers seek them to complete their commercial residential appraisal for that exact reason.
Comp's are just a data point and not weighted anything like they are in standard residential.
This is exactly why many syndicators focus on value-add, because you can rather readily do exactly that, buy a property for $2m, sink $700k into it, lease up, and sell for $3.7m based on the new revenues. Happens all the time.

0 Reply

Michael BaumPro Member

OP

Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes

3y

Quote from @Martin D.:

Yes @Michael Baum, you are right. That is how lenders work; they love their appraisals! :D

Although an STR property is worth more to buyers and sellers. And when many buyers and sellers sell many STR properties in an area, then prices go up, more so than properties which cannot operate as STR.

Over here in Sedona, it is commonly accepted that homes without an HOA go for about 20% more than the exact some home in an HOA. Only difference is, one can do STR, and the other cannot.

If the lender has enough comps in that neighborhood to support the price at appraisal, than the STR property is, in fact, worth more!

Ok so that could be considered a tangible difference. Like having a permit that is no longer available nor will ever be available. Different areas bring different values.

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Michael BaumPro Member

OP

Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes

3y

Quote from @James Hamling:

@Michael Baum of course that was what you got for an answer, because you did it all wrong.

Look, I will explain.

Instead of a STR business, let's say it's a Taco Truck. And I tell you I can get a million dollars for my Taco Truck business, because my revenues are steadily $700k per year, and after expenses it comes out to $250k net profit annually on the business. So 4yrs profit, heck yeah I can get a million bucks for that taco Truck.

And than you call lenders asking how much they would finance a Taco Truck for. And they ask the year of it, millage, weight etc. and generally say if it's decent condition they'd go as high as $30k to finance that Taco Truck.

So you say I'm nut's, no way a million, only $30k. I tell you, I was selling the BUSINESS, and not just one of the business's tools. Sure, the TRUCK is only $30k, I was talking about selling THE BUSINESS who happens to own a TRUCK, that it sells taco's out of.

See the difference.

The property is not the STR business, it's just a house, on it's own it's only value is that of just a house, a house doing nothing. If you want to get paid for the revenues of a STR business, you need to sell, a STR business and it's assets, not just a house that once was used for a STR business. That's like someone trying to sell just a truck for a million bucks saying "hey, they last guy who had this, sold tacos out of it, made a killing, so hey, how about you pay me what his business was worth, for this truck" LOL, no way, it's just a truck, the business is gone.

If it's not a business being sold, as an operational whole unit, it does not get the valuation of the business, it get's the valuation of what's being sold, the tool alone.

Do people in STR not get this very basic fundamental? I would hope so. I mean, for 1, what about the customer list? What about the audience that's been built? Sever that "POW" it instantly lost value big time, you gotta start from 0 all over again.

If you want to sell a STR business based upon revenues the STR business generates, you need (a) track record to support and (b) to sell the BUSINESS as a whole.

And yes, it's commercial finance, not mortgage financing, just like any business purchase. Storage units are the same, the sale price they get is not just the value of the buildings and lot, it's the revenue they built, and they sell it turn-key not vacant. If vacant, wow-zers, gonna take a hell of a beating on price.

Ok, you are talking about something entirely different. I am not talking about buying existing businesses with track records with commercial loans. I am talking about buying a single STR.

Buying an operating manufacturing business or even a hotel is not the same as a single family property to be used as a short term rental.

I shouldn't be surprised that you would think it was done all wrong. Most of your posts are contrarian no matter the topic. I often agree with your assessments, but not this time.

2 Reply

Michael BaumPro Member

OP

Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes

3y

Quote from @James Hamling:

Quote from @Michael Baum:

I did ask about commercial lending, but none of them were able to comment as that was not their department. I wasn't going to spend another 4 hours running down practices regarding a hypothetical 12 unit apartment complex....

As a person who transacts apartment buildings I can answer this one.

First, if not familiar a person should google "MAI Appraiser".
Commercial real estate is appraised very differently than residential real estate.
In appraisal their is 3 weighted standards for appraisal, one of which is comparable solds which in residential is heavily selected and often the singular weight. Their is times, I have seen, where replacement or recreation value is utilized.

In commercial, the coin flips, and things heavily weight from the financial side of things. This is why you'd be hard pressed to find an MAI Appraisal anything less than 50 if not 80 pages. I have seen them 200+ before, all depends on subject property complexity and size.
They get deep into analysis, deep-deep. Will get into cap-x, rent's per sqft, market demand, on and on. It's a very thorough analysis.

My data source, my wife and her associates, as she was an MAI Appraiser. Not all commercial appraisals are done by an MAI, but MAI is the "gold standard" for such and many lenders and developers seek them to complete their commercial residential appraisal for that exact reason.
Comp's are just a data point and not weighted anything like they are in standard residential.
This is exactly why many syndicators focus on value-add, because you can rather readily do exactly that, buy a property for $2m, sink $700k into it, lease up, and sell for $3.7m based on the new revenues. Happens all the time.

I guess I will have to spend a few hours figuring it out. I have heard of what you are talking about but didn't really look into it as it doesn't really focus on folks at the level I am speaking to.

0 Reply

Robin SimonBusiness Member

Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes

3y

Quote from @Michael Baum:

Quote from @James Hamling:

Quote from @Michael Baum:

I did ask about commercial lending, but none of them were able to comment as that was not their department. I wasn't going to spend another 4 hours running down practices regarding a hypothetical 12 unit apartment complex....

As a person who transacts apartment buildings I can answer this one.

First, if not familiar a person should google "MAI Appraiser".
Commercial real estate is appraised very differently than residential real estate.
In appraisal their is 3 weighted standards for appraisal, one of which is comparable solds which in residential is heavily selected and often the singular weight. Their is times, I have seen, where replacement or recreation value is utilized.

In commercial, the coin flips, and things heavily weight from the financial side of things. This is why you'd be hard pressed to find an MAI Appraisal anything less than 50 if not 80 pages. I have seen them 200+ before, all depends on subject property complexity and size.
They get deep into analysis, deep-deep. Will get into cap-x, rent's per sqft, market demand, on and on. It's a very thorough analysis.

My data source, my wife and her associates, as she was an MAI Appraiser. Not all commercial appraisals are done by an MAI, but MAI is the "gold standard" for such and many lenders and developers seek them to complete their commercial residential appraisal for that exact reason.
Comp's are just a data point and not weighted anything like they are in standard residential.
This is exactly why many syndicators focus on value-add, because you can rather readily do exactly that, buy a property for $2m, sink $700k into it, lease up, and sell for $3.7m based on the new revenues. Happens all the time.

I guess I will have to spend a few hours figuring it out. I have heard of what you are talking about but didn't really look into it as it doesn't really focus on folks at the level I am speaking to.

The difference can be boiled down to who the buyer pool is and what they value (i.e. "the market"). SFR (single family) will be predominantly by far owner-occupants, even in pretty vacation-based areas, therefore the value is going to be based on comps and what the market will pay for.

Anything multi-unit - especially once you get past 5 or so, the market will be strictly investors, who are focused on the income/value potential above all else (do not care about living there or personal taste), so value will be primarily derived from income/cap rates.

Almost all STRs fall into #1 - SFR - so they will be valued on comps to other SFRs (OO, LTR or STR), while anything multi-unit will more be based on commercial valuation practices

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James Hamling

Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes

3y

Quote from @Michael Baum:

Quote from @James Hamling:

@Michael Baum of course that was what you got for an answer, because you did it all wrong.

Look, I will explain.

Instead of a STR business, let's say it's a Taco Truck. And I tell you I can get a million dollars for my Taco Truck business, because my revenues are steadily $700k per year, and after expenses it comes out to $250k net profit annually on the business. So 4yrs profit, heck yeah I can get a million bucks for that taco Truck.

And than you call lenders asking how much they would finance a Taco Truck for. And they ask the year of it, millage, weight etc. and generally say if it's decent condition they'd go as high as $30k to finance that Taco Truck.

So you say I'm nut's, no way a million, only $30k. I tell you, I was selling the BUSINESS, and not just one of the business's tools. Sure, the TRUCK is only $30k, I was talking about selling THE BUSINESS who happens to own a TRUCK, that it sells taco's out of.

See the difference.

The property is not the STR business, it's just a house, on it's own it's only value is that of just a house, a house doing nothing. If you want to get paid for the revenues of a STR business, you need to sell, a STR business and it's assets, not just a house that once was used for a STR business. That's like someone trying to sell just a truck for a million bucks saying "hey, they last guy who had this, sold tacos out of it, made a killing, so hey, how about you pay me what his business was worth, for this truck" LOL, no way, it's just a truck, the business is gone.

If it's not a business being sold, as an operational whole unit, it does not get the valuation of the business, it get's the valuation of what's being sold, the tool alone.

Do people in STR not get this very basic fundamental? I would hope so. I mean, for 1, what about the customer list? What about the audience that's been built? Sever that "POW" it instantly lost value big time, you gotta start from 0 all over again.

If you want to sell a STR business based upon revenues the STR business generates, you need (a) track record to support and (b) to sell the BUSINESS as a whole.

And yes, it's commercial finance, not mortgage financing, just like any business purchase. Storage units are the same, the sale price they get is not just the value of the buildings and lot, it's the revenue they built, and they sell it turn-key not vacant. If vacant, wow-zers, gonna take a hell of a beating on price.

Ok, you are talking about something entirely different. I am not talking about buying existing businesses with track records with commercial loans. I am talking about buying a single STR.

Buying an operating manufacturing business or even a hotel is not the same as a single family property to be used as a short term rental.

I shouldn't be surprised that you would think it was done all wrong. Most of your posts are contrarian no matter the topic. I often agree with your assessments, but not this time.

As my reply says, I am talking about single family STR. I am saying buying an existing, proven, PERFORMING STR business, with asset's (the property, furniture, the whole-9) vs just buying a house.

You asked mortgage lenders about buying a house, and they gave you an answer to buying a house. Which is different to buying a STR business. And vice-versa.

Selling a STR Business is just like selling a hotel or motel, because all3 are a Hospitality Business. If look up buying a Hospitality Business one will find various guides to such, lenders of such, and so on. But, as said, it has to be a sale of the business, not just an asset of the business, 2 very different things.

1 Reply

Michael BaumPro Member

OP

Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes

3y

Ok, so what constitutes a STR business? Everyone should treat their STR as a business, but that doesn't make the business itself have value.

If you buy an existing STR, you don't get the reviews etc if it is listed on the OTA's. You have to start from scratch so there really is no business.

If the property has a direct booking site, that adds value. It will depend on how many bookings come from that.

I guess a better comparison would be buying a business where you got the physical assets, but not the intellectual property.

If I buy Master Widget. All their manufacturing etc, but I couldn't call it Master Widget. I had to come up with a new name. I lose any good will built up over the years, market share maybe, name recognition etc. The value of the business is not just the assets, but the name etc.

After talking with all these lenders, I feel pretty confident that a single STR as a business wouldn't be valued at a 25% increase over comps.

I can see where your point makes the most sense would be for someone selling something like Mountain Stream Rentals. It has a great booking site that brings in over 50% of the bookings, there are 15 cabins all over the place (not on one parcel) that has been operating for 10 years. It is more than a mom and pop STR.

0 Reply

AJ WongBusiness Member

Real Estate Broker · Oregon & California Coast · Member since 2022 · 834 posts · 696 votes