Can You Get a Business Loan For a Short Term Rental?

44 Replies

I currently have no salary to show mortgage companies cash flow to get a mortgage approved. I don't want to have to spend $250k cash on a house to use as a short term rental because I want to have multiple projects running with less cash locked in. The STR model is a well proven one and I have data to support the market I am going into. Is it possible to get a US business loan for this? If so, what type of interest rates are you hit with?

My research has shown that business loans cannot be used for real estate investing.  

If you can show income on a Schedule C or Schedule E, use that to qualify for a conventional loan; it doesn't have to be from a W-2 salary.

You could also pay cash and then finance it when you have the documentation together.

@David Lowe Forgot to mention. One thing you could try is put a long term

tenant in to get financing and then one financing in place then convert back to short term. While you have to be patient with this approach it gets foot in door.

@Julie McCoy Thank you. I will check out Schedule C o E and see if there is anything I can use. I have just come across a few loans that are specifically for short term rental properties. I might go with one of these versus all cash so I can do multiple projects. 

Originally posted by @David Lowe :

@Wendy Schultz What if you show the market average cash flowing (for the city you are going into)? Surely that is sufficient to prove a model for a loan? 

 My guess is this works better in a city with a 100-year history of (legal) vacation rentals like Gatlinburg?

In many cities, VRs are new terrain so lenders are (rightfully) hesitant given rental rate volatility, occupancy volatility, & legal volatility

Originally posted by @David Lowe :

@Eric P. Fair point. My only thought would be that a city like Gatlinburg would not be on the top of the list for Airbnb travelers and therefore have high vacancy rates. 

 We most certainly are on the top of the list and have very low vacancy.  13 million tourists per year. #1 national park by a long shot. Check my calendars they’re packed year round. 

@David Lowe Gatlinburg gets 12 million visitors a year to the Great Smoky Mountain National Park. The vast majority of that traffic stays in short term rental cabins. We have very little hotel presence, and have some of the highest occupancy rates in the country. I own 5 here. It’s definitely in the top 5 best markets to invest in short terms/vacation rentals. It would have to be an in-house loan, but I have several lender contacts who can use projected rent income for this situation. You just have to find a lender who is local to the market you’re looking to invest in who sees this kind of thing often, not a big national bank or online lender.

@David Lowe Avery and Lucas nailed it. Also, Gatlinburg is on EVERY top list I see for vacation rental success areas. AirBNB works well here, but VRBO appears to be king with 3x as many listings. Regardless, great area and despite rising home costs still opportunities abound. One only lightly-tapped area is buying lots and building rentals from ground up. Lots of that going on with large homes, but don't hear of too many 2-3 bedrooms being built. Lots of opportunities indeed.

As for the OP and business loans, my 2 leveraged properties are currently business loans from local institutions. However, they favor locals and there is good reason for doing that. Lending to out-of-area investors is not very high on their list. One solid reason is locals will help to keep money in the area while out-of-state people are assumed to be removing money from the local economy.

@David Lowe Check local E Tennessee institutions too. While as an out-of-stater you are at a disadvantage, local financers know the area, understand the role and business of short-term rentals here better than other lenders. 

@David Lowe @Eric P. it would depend on the bank but like Eric said, your best bet is probably going to an area with a long history of short term rentals vs an area where it’s fairly new (urban areas). There’s a lot of discussion in municipalities about how they are impacting communities not traditionally short term and you need to go in with eyes wide open. 

I thought of another idea. There’s a company that we work with that guarantees rent for short term rentals. You sign a lease with a property management company and they manage your property as a short term. You get the same amount of rent each month and a lease to show the bank. After awhile you could go back to traditional short term property management. 

Originally posted by @David Lowe :

@Eric P. Fair point. My only thought would be that a city like Gatlinburg would not be on the top of the list for Airbnb travelers and therefore have high vacancy rates. 

 You probably know it as the Smoky Mtns not Gatlinburg but yeah - HUGE VR demand for 100 years strong. @Avery Carl can you drop that link showing Smokies visitors by year? The visitor numbers are so huge it’s mind boggling, even through the recession - #1 visited national park in the US, with year-round demand (little lighter in jan/feb)

@David Lowe If you find a deal money follows even if you don't have the requisite experience. Heck I funded my last deal just talking about having a problem of having three deals going on at same time and had two people

offer to invest for equity. Get the deal first, show a detailed plan and you will find someone.

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@David Lowe checkout host financial for short term rental financing. The only company I’ve found that will finance a purchase and give you some credit towards the short term rents. I am in the process of trying to refinance through them. No proof that what they do works yet but they seem to have connections with multiple lenders and can find one that will fit your strategy. Good luck.

@David Lowe There are programs for Air Bnb, VRBO, Sonder, and other short term rental strategists where you can get a loan based on DSCR calculated by market rents. We'd run 1004/1007 appraisals to inspect sales comps and rental comps. If the market rent would cover your proposed debt/expenses, you have a strong FICO, and some real estate experience then you could qualify. It functions just like a business loan, but its a mortgage based on property income.

*Some programs will even consider 110% of market rents when calculating the DSCR. In the past, many investors have had to utilize high interest rate loans but this market is getting more aggressive. Now you can get rates in the 5% and 6% range for short term rentals.

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