Rental Property Investor · Green Bay, WI · Member since 2017 · 50 posts · 7 votes
I want to get a short term vaca rental in Nashville but I just ran into a roadblock. My lender said that they can't qualify short term rental income as income since it's not guaranteed. It seems silly to me that they assume the property will get $0 income in their Debt to Income (DTI) ratio. This pushes my DTI into the 50's- well above their 45% cutoff. Is this just this lender or is that gov regulations?
Does anyone know of any lenders in Nashville who accept short term rental income as income? Even taking 75% of a very conservative number would be helpful to meet their DTI requirement. Additionally, if you know of any ways to get around this somehow I'd be very grateful if you'd let me know, thanks!
Rental Property Investor · Nashville, TN · Member since 2013 · 63 posts · 43 votes
7y
I would recommend that your first concern should be local regulations.
Nashville is very short term rental antagonistic, permits are required and no new permits for non-owner occupied short term rentals in areas zoned R or RS have been issued since June 2017.
Multifamily (zoned RM) is permitted by city ordinance, but then you've got the HOA to worry about.
I realize your question was about financing, not regulation but just wanted to mention. I’d hate to see somebody go through all the effort to purchase a property and then find out it can’t be used for their intended purpose.
Rental Property Investor · Nashville, TN · Member since 2013 · 63 posts · 43 votes
7y
I would recommend that your first concern should be local regulations.
Nashville is very short term rental antagonistic, permits are required and no new permits for non-owner occupied short term rentals in areas zoned R or RS have been issued since June 2017.
Multifamily (zoned RM) is permitted by city ordinance, but then you've got the HOA to worry about.
I realize your question was about financing, not regulation but just wanted to mention. I’d hate to see somebody go through all the effort to purchase a property and then find out it can’t be used for their intended purpose.
Rental Property Investor · Green Bay, WI · Member since 2017 · 50 posts · 7 votes
7y
Hey @John Oden, thanks for the reply. I’ve been very diligent about that side of it as I’ve done a ton of research and also have a realtor and Turnkey property management to make sure about all the permits and what not. There’s only a handful of existing hoa’s that allow for short term rentals which is why so many condo developments are coming to Nashville soon to accommodate for short term vaca rentals.
Just curious if you know anything about the financing side of it or can tag someone who does?
Newport Beach, CA · Member since 2017 · 38 posts · 24 votes
7y
@Kyle Seidel The simplest work around would be to tell them that you are going to get a long term tenant and use that potential income to help to your DTI. You may even think about doing a 6mo or 1yr lease to start then going for the short term rental option if the city allows it. Nevertheless, make sure that you're not breaking and major rules that could jeopardize your loan with the bank.
Rental Property Investor · Green Bay, WI · Member since 2017 · 50 posts · 7 votes
7y
Hey @Daniel Gutierrez, thanks for the reply. That was the 1 alternative that this lender mentioned but it would need to be for 1 yr with a signed lease and security deposit/rent/etc all before close. I guess if every single lender classifies short term rental income as $0 this would be how I’d have to do it... But I’d hate to wait for a year before I could stay at my place. I guess another option would be to get a 1 year lease but get someone who wants to move out before and make the penalty for moving out before a year be a slap on the wrist. I’d rather just find a lender that accepts short term rental income as income though.
Newport Beach, CA · Member since 2017 · 38 posts · 24 votes
7y
@Kyle Seidel I'm not sure any lender will accept short term rental income as they all have to follow the same regulations. It may just come down to the loan officer/ lender's office that decided to officially wright it down as long term rental income... Try out the smaller banks as they are often more helpful.
I'm in the process of setting up a STR management company, so if anyway I can help regardless of which direction you end up going, please let me know.
It is frustrating that lenders don't count STR income. It's such a new industry, and in their eyes the income stream is potentially unstable so it's going to take the lending world a while to catch up.
Nashville is a great town and a great STR market, best wishes for success!
Real Estate Agent · Nashville, TN · Member since 2018 · 123 posts · 74 votes
7y
@Kyle Seidel it does stink that they are so slow to come around on this. I'm a realtor in the Nashville market and specialize in STRs and have since started branching out my resources to help investor clients. I've got a lender that will let you use STR income to value and qualify these properties. I'll DM you.
Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
7y
Short term means to all banks as short as one night in a given 3 year. It must be proven having consistent income from last few years by income tax returns, or signed lease contract or both. Fannie Mae
Real Estate Broker · Hyde Park Tampa, FL · Member since 2019 · 2k+ posts · 3k+ votes
7y
That's the downside to short-term rentals when using a bank as your lender. The income cannot be used in DTI because there is no guarantee that it will be reoccurring and tends to be cyclical. It's not only standard lending practice but it's the criteria by which credit inspections are completed by federal/state auditors on lending institutions. Recommendation: You may need to switch to a non-bank commercial lender (non-bank lenders are growing in popularity for the reason you encountered and more).
Investor · Roseville, CA · Member since 2016 · 893 posts · 1k+ votes
7y
@Kyle Seidel
You should be able to use existing STR rental history for further loans from your Schedule E or C. Getting the first one is the hard part though so you might have to just say it's a long term rental or 2nd home to start. Or put more down.
Rental Property Investor · Green Bay, WI · Member since 2017 · 50 posts · 7 votes
7y
@Daniel Gutierrez If I could find a bank or any type of lender that would use long term rental estimates without having to see a signed lease/sec. deposit that would be great!
@John Oden Thanks and I agree! I'm leaning towards Turnkey Property Management (18% commissions) but I would love to have a back-up option if they don't work out for me so keep me posted on your STR management company.
@Sam Shueh Thanks for your reply- I wish my mortgage guy told me that up front instead of saying everything will pass his underwriter easily.
@Patricia Steiner I'm not familiar with non-bank commercial lenders at all to be honest... Would something like a credit union work? Do you have any non-bank commercial lenders that you know of in Florida or Nashville that could do this that you could point me to?
@Jon Crosby Putting more than 25% down isn't an option but unless I can get some type of lender to pass this through it is starting to look like I may need to do a 1 year lease to start.
Rental Property Investor · Green Bay, WI · Member since 2017 · 50 posts · 7 votes
7y
I've been thinking about the 1 year lease option and am very confused as to how it would work... Supposedly it's supposed to have a lease signed and sec. deposit/rent paid before close but how can I get a renter to do that before I close and even have keys to the place to show them? I'm not sure if the builders would give me a key and let me show that unit to a bunch of renters when I technically wouldn't even own it at that point?
Real Estate Broker · Hyde Park Tampa, FL · Member since 2019 · 2k+ posts · 3k+ votes
7y
You'll want to google "Non-Bank Commercial Lenders" and look at their criteria as well as who they are. I do know that these firms are growing in popularity as investors are looking for other ways to diversify and maximize ROI.
Real Estate Agent · Sevierville, TN · Member since 2015 · 1k+ posts · 1k+ votes
7y
@Parker Borofsky is a Tennessee-based loan officer with tons of experience in loans for STRs, I'm sure she can lend some insight re: the DTI requirements and why they are the way they are. I agree it's very frustrating!
Lender · Knoxville, TN · Member since 2018 · 54 posts · 98 votes
7y
@Kyle Seidel I am happy to help you with this! I have done many STR's using projected rental income. It's really about what the appraiser deems as "fair market rent" and "highest and best use". If the market supports STR income then the appraiser will take this into consideration. Worse case scenario, the appraiser would base it on LTR's and we could still use 75% of that number. Feel free to PM me. Thank you @Julie McCoy!
Rental Property Investor · Green Bay, WI · Member since 2017 · 50 posts · 7 votes
7y
@John Oden That's awesome! Just curious as to what your commission structure is, how you get places booked, and what you all cover? What would I need to do on my own from out of state?
@Patricia Steiner Thanks for that info and I'll do that and post any options I find for this particular scenario which I think more and more people will find themselves in.
@Julie McCoy Thanks for bringing @Parker Borofsky to the show! Parker I need a lender who'll classify my short term rental income as income that can be counted towards my DTI ratio. It's bizarre how all lenders seem to classify this as $0. If you can somehow get it to pass underwriting as long term income without me having to get a lease signed and all of that that jazz that would be huge.
Lender · Knoxville, TN · Member since 2018 · 54 posts · 98 votes
7y
@Sam Shueh and @Patricia Steiner the conventional lending guidelines do not specify short term vs long term rentals. To use projected rental income on the subject property, we just have the appraiser do a fair market rent schedule and we can use 75% of that number. In order to use rental income on a property already owned by the client, we need either a current lease agreement and can use 75% OR for the income to be reflected on a schedule E of a filed tax return. In order to use rental income for an already owned STR, there would have to be at least one return with a schedule E reflecting this income - and it does not even have to reflect a full year. There are lenders who may have additional requirements, but we do not. Additionally, if there is schedule E for an LTR, we do not also require a current lease - so if that rental Ian between tenants, we could still use the rental income from the tax returns. Hope that helps!
Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
7y
Are you looking to qualify the income of a property you own, or a property you are considering purchasing? Sounds like you are talking about a new purchase?
Rental Property Investor · Green Bay, WI · Member since 2017 · 50 posts · 7 votes
7y
@John D. It is for a new purchase and it's most likely going to be new construction since there are only a few existing hoa's in Nashville who allow for short term rentals... Not sure if it'll be one freshly built or one that won't be fully built until end of this year or next year if that makes a difference.
@Parker Borofsky I just messaged you. What you are saying makes a whole lot more sense to me. For an investment property I don't yet own the appraiser should do a fair market rent schedule and use 75% of that number to be conservative as you're saying. The other lenders saying I'll get $0 income in the DTI ratio is just silly and makes no sense. If the worst case scenario is the appraiser using 75% of long term rental income (which would be an even lower/more conservative # than STR income) that's fine by me!
Lender · Knoxville, TN · Member since 2018 · 54 posts · 98 votes
7y
@Kyle Seidel correct! Appraisers must evaluate a property based on the "highest and best" use. For example, I do a lot of lending on cabins in the Gatlinburg/Pigeon Forge/Sevierville area and there are thousands of them. When an appraiser here does a fair market rent schedule for a cabin, they have to base it on STR income, because that is all they have to compare it with, and that will obviously be the "highest and best" use. In the Nashville market, it may take a little while for that to be the case since these developments are a little newer - but worse case, the appraiser would base it on LTR income. BTW - I am closing on my Nashville STR condo March 1st and I own 3 cabins in the Smokies thanks to @Avery Carl!
Investor · South Jordan, UT · Member since 2016 · 89 posts · 72 votes
5y
Hey @Kyle Seidel reach out to Tracy at Visio lending. They'll look at short term rental income for your DTI. They will still only lend on a % of the appraised value but the DTI issue is a non-issue with them. Id put his contact info on here but that gets blocked. Feel free to message me if you want his email