How to Finance Rehab to Convert Long Term Rental to Short Term Rental?

[Matt J.]

Hey everybody. We own a duplex in a city where there is a cap on the number of vacation rentals allowed EXCEPT in certain areas which are called form districts. This property is in one of those form districts. It is currently operating as a long term rental, but the income would at least triple if we were to convert it to a short term rental. 

We own a single family house on the same road, just 4 blocks away in this same form district that is on pace to earn us $35,000 after expenses in 2024, so am confident this duplex would perform well also. Our plan is to convert it from a duplex to a single family home, and I'm just wondering what financing options are out there for a project like this. 

[Benjamin Aaker]

Sounds like a great idea. Of course, you need to be certain that your municipality will allow short term rentals. I'll also assume your 35k net operating income number is solid.

Easiest way would be to self finance the rehab, then get a commercial mortgage on the finished property. That'll require you to determine how much the rehab will cost and pay that up front. Then you will need to have a cash out refi to pay yourself back. To get this cash, you could obtain a line of credit on the property as it stands, assuming you have enough equity.

If you don't have the cash or equity for that, you could possibly do a cash out refi on the property now, using the proceeds to do the build.

You could also get a bridge loan. Talk to the commercial banker at the bank where you have your current mortgage. This will also depend on the equity you currently have in the property.

Nearly all of these options will hinge on your ability to produce that level of income once complete. I strongly recommend you write up an eye-catching pro forma on what you intend to do. This is a lot like a business plan. People often skip this and get denied by the bank. I don't know your level of STR experience, but having some would be a big help. This pro forma is also a resume and is your way to show the bank that you can actually make it work and are worth lending to.