BRRRR but AirBnB instead of Rent?

21 Replies

Hi! My husband and I just closed on our first investment property last month, a duplex in High Point, NC. We're currently rehabbing it and hope to have it complete by the end of November. Since we're in an area that gets some decent traveler traffic, we're hoping to AirBnB instead of rent it. However, we'd like to BRRRR and pull our money out at the 6/12 month mark. Has anyone been successful in doing this? I feel like we're entering uncharted territory and I'm trying to prepare our game plan, which is difficult with very little refi info available.

TIA!

Andrea Cole

I don't know if I can or can't, although I know most banks ask for a signed lease agreement as part of the qualification process, which obviously we won't have.

I'm just looking for input from someone that has tried so I can be educated going into a discussion with a loan officer. There's tons of info on what to expect when you BRRRR but none on BRRRR'ing with ST rentals.

None of the lenders I have worked with in the past accepts airbnb income. It IS a problem. Hopefully some time down the road things may change. I'm sure you can find some, at a higher rate. Their point is: airbnb income is unpredictable and unstable due to changing regulations.

I do this currently in Tampa. The key for my clients are the end of month statements that I provide that detail the monthly cash flow. If your lender tells you no, kindly thank them for their time and go to another one. With properly managed property and monthly reports, you should be fine. If all else fails, come to Tampa! I would love to work with you!

Great question @Andrea Cole . I'm not a lender but hold classes about Airbnb and work with buyers looking for Airbnb-legal properties here in Denver. And as @Andrew Wong just pointed out, a lot of lender balk at short-term rental income.

Turns out Freddie Mac actually just announced that they would start considering STR income or Airbnb income for refinances. You can see the bulletin from Freddie Mac here or read an only slightly more understandable news story here . 

But the thing is: they still require 2 years of tax returns showing that STR income on your Schedule E, which isn't any different than other income. Most lenders I know don't ask where that income is coming from, so in practical terms, not much has changed.

I've been trying to find information on this as well. (Disclaimer - I am no expert and not a professional, just been scanning forums etc.) The big problem is where someone is looking to buy and there is no current short term income on the property. That is where most banks will use estimated "long term rental" estimates and will not consider any projected short term rental income. (i.e. where everyone plays let's pretend). Since you already have the property purchased you are in a much better situation since you get get started and bring in the short term income. Get all the short term income revenue on your tax returns its gold and no one can question it. I think 2 years of rental income on your tax returns should allow most banks to rely on it for re-financing. This is all theory and I have not actually seen it done. @Chris Mason is very good on these questions (albeit for California) and could steer you in the right direction.

Originally posted by @Andrew Wong :

Wow, okay I must be losing it. 

When you rehab a house, and then refi it, cant you show W2 income? Why do you need to show rental income to get a refi?

 Many investors need a mix of day-job and rental income to make the mortgage math work after a rental or property or two is in their portfolio. 

Good for you for not needing that. :)

Originally posted by @Andrew Wong :

@Chris Mason, ahh I see. I've never done a rehab + refi, only read about the process. It's really a function of the property's ARV compared to your W2?

BRRRR w/ conventional financing is far more nuanced than people doing it on the podcasts indicate. They, typically, are also on their 8th or 9th mortgage, so there's a lot going on that they don't even think to mention.

By default, if you walk into a  big bank or credit union:

- You make $10k/mo, no consumer debt.

- Personal home PITI $3000.

- Post-refi PITI of the property you just rehabbed will be $3000.

- $6000 / $10,000 = 60% DTI, loan denied

Better math that makes it work....

- You make $10k/mo, no consumer debt.

- Personal home PITI $3000.

- Post-refi PITI of the property you just rehabbed will be $3000.

- You put tenants in place, jump through a bunch of hoops (which do NOT include waiting 2 years for it to appear on tax returns), and the property will be cashflow positive $500/mo.

- $500/mo added to income, you now make $10,500.

- Total debts are just your primary residence @ $3000.

- $3000 / $10,500 = 28.6% DTI, loan approved

There are countless threads about folks stuck at the refi portion of BRRRR because they did the "walk into a credit union" option above.

Here's a thread about BRRRR + Financing Stuff taken to the extreme, done right.

The Math approach @Chris Mason shared has nothing to do with STR. It can (or can't ) be used in a LTR in the exact same way. Have no idea why some brokers/lenders accept the 2nd approach not all.

But if my W2 income covers both my primary and investment property mortgages and other debt at a DTI below 43% then we could potentially refi, correct?

Originally posted by @Andrea Cole :

But if my W2 income covers both my primary and investment property mortgages and other debt at a DTI below 43% then we could potentially refi, correct?

 Correct.

Woah, was just thinking about doing this today when I came across your post! No reason this shouldn't work with the right lender. Worst case scenario is AIRBNB doesn't pan out and then you just get a lease and go with a regular long term rental or sell property and reinvest profit! Best of luck! I am interested to see how this pans out for you as I am interested in doing the exact same thing!

Income is income, regardless of where it comes from. The lenders just want to make sure you have sufficient of it, the right DTI to get approved. Remember they want to make loans if everything checks right.

Originally posted by @Andrea Cole :

But if my W2 income covers both my primary and investment property mortgages and other debt at a DTI below 43% then we could potentially refi, correct?

 Yes it basically just means that you would refinance it as a "second home" and sure it gets rented out occasionally but you don't "need" to have it rented.

If your W2 works for this, its fine, the other math and forumlas really start to become a factor when it is house/mortgage #X rather than your second one, or if you could not quite cover it with your w2s.

Since airbnbs tax returns ard technically independent contractors, I have been told by several lenders that it takes 2 years of consistent Airbnb returns to be able to count it as income. The same is true of starting any other independent contracting business and claiming it as income. A traditional lease that is signed shows at least a one year "guaranteed" return. Lenders are more comfortable with the traditional buy and hold model. There are some things you can do: 

1. rent out rooms of your primary residence to start building up the two years income needed

2. Get a one year signed lease for the property for the purposes of getting refinanced and then you can convert it to an Airbnb afterwards 

3. Or, Find a tenant that would be interested in hosting  the other room/rooms as airbnbs. (I have not done this approach but zeona McIntyre who has been on the podcast and blogs about Airbnb is a good resource) 

I have thought about this a lot as I am having to get creative with my own debt to income ratio. My hope is that as STR become more mainstream, lenders will see the benefits