Creative financing for STR?

14 Replies

Hey all! I have a relatively unique financial position and am interested in sourcing financing for my next STR - I'd love your input/experiences with different possibilities.

Thumbnail of my situation: I'm a professional in the film/television industry, which by its nature consists of short- to medium-term employment. I recently finished working on a TV show, and am now unemployed until I get my next gig (which I'm not in a big hurry to do, since full-time employment means 70-80 hours/week). I rent my residence and have one mortgage on an investment property (STR), and I have a good amount of cash on hand.

I want to dive into my next STR investment, but given that I don't currently have W2 income, I don't believe I'll qualify for a conventional loan. My current STR grosses between $3-4k/mo, and for the time being unemployment will yield $1800/mo. I have excellent credit and my debt-to-income ratio is currently acceptable; when I'm employed it's excellent.

Any thoughts on how I could secure low-interest financing for my next STR? I'm looking at homes with established histories as profitable STRs, with a purchase price between $200-250k. Are there good financing options for me or should I just wait until I'm employed again before I purchase, and get a good ol' conforming loan? Thanks in advance for your input!

Conventional loans will be very tough without a W2. Not impossible, but my wife and I spent 6 months getting our primary residence refinanced because she was self-employed as a Realtor. Any change in employment and they ask for tax returns and documenation like you are on the "operating table". It was brutal, for me anyway.

Do you have any equity you can pull out of your investment property? You need assets as collateral, its nice to have cash, but the lender wants to feel secure about loaning out 200-250, as you well know. 

Hard money, private money, I would hope you could get 8-12% on money in CA, which you may need to do, for now, to get the deal done, build up more cash and keep doing a few deals to get to the point where you don't need OPM (other people's money). You can shop online, but most investor deals without a conventional loan, the note will be 6-7%, which is fine with cheap money for 30 years, but if it were me, its all about the assets you have now, for collateral. You might want to find a partner to help with a flip and raise more cash for your projects. Wish you the best of luck!

Thanks for your input, @Jack Bobeck !  Yeah, your thoughts are pretty in line with mine - better possibilities with hard money, but with them come higher interest rates, etc.

Unfortunately, my existing STR is a pretty new acquisition, so there's not significant equity built into it yet. (and yes, getting a loan for that one with my employment history required a ton of paperwork! But my lender was pretty excellent about adapting) And while I might be able to get into a smaller property with my cash on hand, I would really like to use leverage to maximize the reach of my money.

Perhaps I'll just have to be patient and wait for the W2 master to kick in again... of course, once I'm working, I won't have as much time to focus on RE!  Ah, the catch-22... 

@Julie McCoy You really dont need a lot of time in real estate. Build your team now, while you have time, your handymen, painters, realtor, RE lawyer, title company. You can do this now, to save you time later. 

if a deal is a great deal, dont let high int rates get in the way of the deal. You are only using OPM to get the deal done. 

I agree it's not time-intensive once systems are up and running - it's the getting up and running that takes time!  I wore myself out this summer shopping/closing on the house, furnishing it, developing my system, etc. on a property 3 hours out of town while working 70-80 hours/week.  Would love to use my current downtime instead of putting myself through that again.  

This time SHOULD go smoother because I have one under my belt now, but I'm looking out of state this time, so given the option I'd rather not do it while I'm working my day job.  (however, that will NOT stop me! :) )  Also, I enjoy being hands-on at first to make sure when I launch my rental it's in its best possible form - but I recognize that's not a necessity.

I suppose I could also look at a larger down payment and an eye to refinancing if rates stay low, or borrow on the built-in equity later... 

You can use a commercial or hard money loan for long-term financing too. I've seen rates between 5% - 7% on those. They still care about DSCR like a normal long-term rental. However, some of them don't require a lease in place and can use market rents.

Even if you are using the property for STR, you should always have a back-up, and a good one to fall back on is to turn it into a long-term rental that will cashflow.

My lender has said that Airbnb will count towards my income as long as I have a two year track record.  I know you said that you don't have very much equity, but do you have at least two years of Airbnb experience on your tax returns? This might be able to help you with conventional financing.  I also co-host several other Airbnbs to increase my income stream from this, which looks better in the bank's eyes. 

There are some other options you could do:

1. get a cosigner - family member, friend, colleague, etc. They don't put any money down, and you pay them for the use of their credit score.  You can refinance after a few years and take their name off of the mortgage. 

2. Banks and lenders are unfortunately more friendly towards traditional long term rentals.  I've had a bank tell me that my Airbnb income doesn't count, but if I had a signed lease agreement it would.  It might be worth considering long term rentals until you get portfolio up and running or build up more equity.

3. set up a line of credit with a bank. With your good credit and debt to income ratio, you could potentially qualify for enough to get a smaller house, and since this is considered "cash" you could get a better deal and wouldn't have to wait to refinance.

I personally haven't had very good luck with hard money or private money loans for use with Airbnb.  The seem to cater more to flippers, and the ones I have talked to want their money back too quickly (6 months-year) which doesn't give me enough time to qualify for a conventional refinance.  Not saying it can't be done or not to try it, but that has just been my experience.  

@Julie McCoy   Sounds like you already got some great feedback!  Just a few other options to always consider are looking for properties or situations where you can leverage seller financing (usually only pertains if there is no existing mortgage on property) and what I'm currently ALWAYS asking for lately, is Lease Option agreements.  Neither of them are very easy to come by, but it's always worth the 'ask' if possible as it can buy you the time you need until your W2 income kicks back in.  

Best of luck to you! 

Cheers!

~Jon

Thanks so much, @Nghi Le , @Jenessa NeSmith , and @Jon Crosby !  Some really good avenues for me to explore here.  An additional difficulty for me is that I haven't been in the AirBNB game for long - I closed on my first property in June of this year, so alas, the business history is still in its infancy.  

I'll do some exploring with commercial loans, hard money, and lines of credit (hadn't considered that one!) - if I can get a reasonable interest rate, those are definitely good options.  And yeah, Jenessa, the thing that worries me about hard money is I don't want a short-term or balloon note, so I'm not sure if they'll want to deal with me.  But I'll never know until I ask...

Jon, why didn't I think of those things??  And it made me consider looking into an arbitrage agreement, too - which I've researched in my city of LA, but for some reason haven't thought about in this other market.  Thanks!

@Jenessa NeSmith @Julie McCoy

I've seen non-bank lenders who can do 3-25 yr loans. Call them what you want (commercial lenders, hard money, bank alternate, stated income lenders, etc), but they're out there.  If you're interested in pursuing this route, PM me and I'll get you connected.

@Julie McCoy I have recently started specializing in arbitrage deals and they can be a huge win-win for both parties especially if your lender requires a signed lease for your next investment.  

I would also check out Clearbanc, they specialize in financing the STR industry. I've heard of people getting loans from them and I think they have a pretty solid reputation.

Thanks @Tyler Work !  I am certainly interested in arbitrage deals - though it looks like what your company does is signs a long-term lease with the property owner and then do profit-sharing?  That's a super creative business model!  Let's chat about some options.

I've looked into Clearbanc a little, they appear to loan a maximum of $100k - which is a little less than what I'm looking for, but is an option I should look into more.

@Julie McCoy , as a fellow film professional (but one who left LA-living a while back), I understand exactly where you are coming from. I couldn't even refinance my house because I didn't "currently" have a job, even though I had already made well over 6 figures that year and had a large savings account. Connection brokers don't get it.

I am currently under contract for two condos in my area that I will use as STRs. I am using a commercial lender at a local bank and getting 5% interest with 20% down. They are working with me mostly because I have good income year to year, even though I haven't worked in 3 months, but also, because I dumped AirDNA data, Airbnb and VRBO comps, and my own yearly Airbnb/VRBO numbers on them.

Most conventional lenders will not touch STRs at this point, because like our jobs, they don't get it. I set up a LLC to work with this lender because I am planning to purchase more down the road, and it is easier than a second mortgage. I would recommend calling/emailing/dropping in on a small, local bank that does commercial lending in the area you are looking to buy, and convince them of the merits. Might be easier than you think!

p.s. If you know if anyone looking for an AD, let me know!! 😃

Thanks @Richard White !  I'm an AD too - let's hope we aren't going for the same jobs!  ;) 

I do need to reach out to the local lenders - I'm currently staying at the top of a mountain in western NC, so cell service is not good for professional phone calls. :p  Back to LA tomorrow, though, and then I can get on the horn. :)  Those look like some pretty great terms that you got - hopefully I can find something similar!

So you set up an LLC for the primary purpose of getting that loan? My first property I purchased with an investment loan, but they didn't care that I didn't have an LLC. Though as I look to expand my holdings, it's definitely something I've considered.

@Julie McCoy I'll let you take all the jobs in LA, how's that??

I originally offered on a 6-plex here in coastal NC, which is why I investigated forming a LLC and working with a commercial lender in the first place. When that fell through, I talked to my CPA and attorney about it, and since my long-term strategy is purchasing other units, we concluded it wouldn't hurt to go ahead and form the corp and keep the commercial loan. Plus, I was already pre-approved by the lender for the 6-plex, so finding two properties that toall a bit less than that wasn't a problem for him.

Properly-run STRs make more money than LTRs. Yes, it's more work, but if you have a good team in place, it's easier to be much more profitable. I have a spreadsheet of % down, all expenses, projected rental income, and NOI that I give the lender each time I find a place and offer on it.

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