Big success for first STR how to grow from here?

Question

Mid 2022 I listed my first short term rental. It is a detached garage that I converted into a guest house. I designed the floorplan, finishes, and even did almost all of the renovations. This place has been almost 100% booked since.

I'm well over 200 reviews with an average rating of 4.99 stars. I've even had a couple guests comment on how they will now start visiting Indianapolis because they found my place.

I've been very surprised with the amount of love my place has received, and now I'm looking at how I can apply the same ideas to more properties. I tried going it alone with hard money on one property, and for a variety of reasons that deal didn't work out as I had hoped.

What would be your advice on how to expand my portfolio from here? I'm self-employed so traditional financing is limiting factor.

Adam Windham · Answer

@Collyn Bennett second the above, the DSCR loan is probably the best financing option for scalability. These loans can be underwritten with projected short term rental income from sites like AirDNA and Rabbu, if the property doesn't have prior operating history. I just recommend doing your due diligence and make sure you work with a lender that understands short term rentals, a lot of DSCR lenders out there claim they can do short term rentals, but really try to underwrite with standard long term rental / market rental rates and most of the time that does not work out and the deal falls apart or gets re-traded on terms.

Robin Simon · Answer

Congrats on the success so far, check out this article I published recently here on BiggerPockets thats perfect for your exact need - all the options, pros/cons, etc. of financing STRS

https://www.biggerpockets.com/blog/short-term-rental-loans-a...

Jason Wray · Answer

Collyn,

Easy fix you have few options first there is DSCR which requires No employment and does not look at or use any personal or business income.  If the investment property you are buying can debt service itself each month from a "Common Rent" standpoint its approved.  The home can even be vacant because it uses the appraisal 1007/rent schedule to verify local rents. The rents have to be equal to or greater than the PITI payment for a good rate.

There is a DSCR options that goes under 1.00 so if the DSCR is .85% for example it can still be approved but rate will be higher.

You also have either a Bank Statement or 1 Year 1099 program that allows you to use either 12 or 24 months bank statements to use an average of gross deposits to qualify.  If you have few employees or none they can use 75% of your gross deposits Divided by 12/24 for the monthly income.  The 1 year 1099 program is as it sounds the UW will use the most recent 1099 to do a 12 month average.

If you had a year that was slow or you wrote everything off DSCR is not a bad choice and depending on a few factors rates are not bad.  It also offers options like 30/40 year amortization and I/O Interest only of needed.  The good thing about I/O interest only is the underwriter will use the (ITI) to qualify not the PITI.  So they use the Interest, Taxes & Insurance payment to qualify the DSCR ratio.  This can also help cash flow higher until you refinance down the road for cash out or lower fixed rate.

Staci Rogers · Answer

Hi Collyn,

Being self-employed is definitely not a deal breaker. Since your most recent tax return is from 2022, it would be helpful to provide your lender with 2023 balance sheet and P&L statement until you can get your 2023 tax return complete. Feel free to reach out if you have any questions.

Staci Rogers

Collyn Bennett · Answer

All helpful! It does seem that the DSCR option and/or a partner to help secure financing are the best options.

I do have 2 years of tax returns for both my rental income and my business. Until this year my business was a side business, so I was less focused on the bottom line income. One more year and I'll be a "normal" borrower again in the bank's eye.

Alyson Gordon · Answer

Congratulations on knocking your first STR out of the park! If you have 2 years of tax returns I believe you can count that as "income" in addition to anything you're bringing in for self-employment. It will take more time but consider looking for a seller-financed deal as well or partnering with someone to find a subto deal for you.

Michael Baum · Answer

Hey @Collyn Bennett, well you can't beat 3 lenders chiming in about how to proceed!

I also think the DSCR loan is the best way to go for you. :)

Big success for first STR how to grow from here?

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