Lenders that will use Airbnb income as 'qualified' income?

10 Replies

Hi folks- I am a very new RE investor looking for some guidance on short term rental income and lenders. I really appreciate any and all input in the matter!

I currently STR my primary residence (and only property) in Minneapolis while I have been travelling full-time for work. I am ready to make the jump into an investment property. I would really like to purchase a lakehome in northern MN and short-term rent. I currently cash-flow $1800/mo at my primary, taking into account all expenses excluding my time (~8hrs/mo) to message guests and coordinate cleanings. With lake-home STR comps, I estimate I can cashflow $2500/mo with a STR in northern MN.

Here is my concern: Of the 5 lenders I have been working with to get my next mortgage, 3 do not accept ANY STR income as 'qualified' income. The other 2 accept 50% of the average of the last 2 year's tax returns for Airbnb income. Are there any lenders that look kindly onto Airbnb income, albeit at a higher interest rate?

My DTI is OK to purchase another property. What I don't want to happen is have two STR properties generating $4000+/mo cashflow that will not be qualified income, and box myself into those two properties because my non-Airbnb DTI is capped.

I have read about investors setting up S-corps to receive Airbnb income, and then pay themselves W2 'property management' income from that S-corp as a way to show this income is consistent and qualified... I don't know if this is a standard practice or if is actually acceptable?

I really appreciate your time and advice, I am struggling as the loan officers I am working with haven't had much experience with STR and any paths forward I can take.

Thank you!

Greg

Airbnb can be consider a business. So business loan or called commercial loan will fit you the best. Also, you could bundle multiple properties together to get one loan as long as they are in the same county. But the rates are higher than residential loans, looking at 5.5-6.5% now.

If you have enough DTI to get into the 2nd home then just get in there, get stabilized and you should be able to find a lender that will accept up to 75% of your previous scheduled C/E income for your future purchases. You are not going to find much better then than that unless you go private money route. Worst case, you 'convert' one to a long term and show a lease agreement to get that qualified income add to your DTI.

Best of luck! 



  

@Greg Matson

Here is the guidance straight from Fannie Mae https://selling-guide.fanniema... you can see that it's case dependant but not possible to use STR income on the subject property on a purchase if it's a Fannie loan, Freddie has a similar guideline. If your lenders are allowing it on a purchase it's either a portfolio loan or more likely they do not know there is a guideline difference between LTR and STR. One other point, the lender may be using 50% of LTR rents as stated in the apprasal and not 50% of STR rents.

Can rental income that is generated from short-term rentals be used to qualify?

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Rental income derived from the subject property is acceptable on a two- to four-unit principal residence in which the borrower occupies one of the units, or a one- to four-unit investment property. If the transaction is a purchase money transaction, information on Forms 1007/1025 may be used to derive rental income (including short-term rental income) for qualifying purposes. If the transaction is a refinance, rental income may be used when reported on the borrower’s individual tax returns (Schedule E). The alternative to the tax returns is a lease agreement; however, since short-term rental occupants usually execute a terms and conditions agreement (not a lease agreement), this alternative would not meet our requirements and therefore the income would not be eligible.

Rental income derived from other property (not the subject property) must be documented either by a lease agreement or the most recent years tax returns. A lease agreement is usually not an option in the case of short-term rentals since the occupants do not execute a lease agreement. However, if the borrower is reporting rental income (including short-term rental income) on the most recent year's tax returns, then rental income may be considered as qualifying income.

See B3-3.1-08, Rental Income for complete documentation requirements and B5-6-02, HomeReady Mortgage Underwriting Methods and Requirements, for information regarding rental income on a one-unit principal residence.

Click here to see a list of all Top Trending Selling FAQs for March 2021.

Originally posted by @Greg Matson :

Hi folks- I am a very new RE investor looking for some guidance on short term rental income and lenders. I really appreciate any and all input in the matter!

I currently STR my primary residence (and only property) in Minneapolis while I have been travelling full-time for work. I am ready to make the jump into an investment property. I would really like to purchase a lakehome in northern MN and short-term rent. I currently cash-flow $1800/mo at my primary, taking into account all expenses excluding my time (~8hrs/mo) to message guests and coordinate cleanings. With lake-home STR comps, I estimate I can cashflow $2500/mo with a STR in northern MN.

Here is my concern: Of the 5 lenders I have been working with to get my next mortgage, 3 do not accept ANY STR income as 'qualified' income. The other 2 accept 50% of the average of the last 2 year's tax returns for Airbnb income. Are there any lenders that look kindly onto Airbnb income, albeit at a higher interest rate?

My DTI is OK to purchase another property. What I don't want to happen is have two STR properties generating $4000+/mo cashflow that will not be qualified income, and box myself into those two properties because my non-Airbnb DTI is capped.

I have read about investors setting up S-corps to receive Airbnb income, and then pay themselves W2 'property management' income from that S-corp as a way to show this income is consistent and qualified... I don't know if this is a standard practice or if is actually acceptable?

I really appreciate your time and advice, I am struggling as the loan officers I am working with haven't had much experience with STR and any paths forward I can take.

Thank you!

Greg

Greg

Stop torturing yourself. Fannie and Freddie are tightening investor guidelines and clearly don't want or understand short term rentals. Go with a DSCR loan. The rates and fees are a little more, but you can get a 30 year fixed with no income verification and significantly less hassle.

Stephanie

 

Maybe you can try to follow with what REIT did: Find IO commercial loan with 50% down and sell before year 6.

Also @Zachary Beach: do you have idea as well ?

If you don't want the lender looking at your W2s and worrying about how to figure in your rental income, Visio Lending and Host Financial will loan on forecasted (or actual) STR income from the target property. I just got a quote from Host - 5.95% rate for 30 year fixed. Prepayment penalties go down through year 5. Need 20% down and 6 months of reserves (I think reserves are just mortgage, taxes, insurance, not other costs).

Hi everyone- thank you so much for the advice. It seem like my best bet is to go for the STR and future rentals use a DSCR or commercial loan instead of conventional, or wait for schedule C/E income to show on tax returns and be counted.

THANK YOU!

The key thing when you go to DSCR loan is, it only makes sense if you have (a) large downpayment (b) you have good exit strategy in case the assumption in wrong.

Because HML interest rate is so high, it only makes sense if the property is producing at least *guaranteed* DSCR 2.1 or above.

With 1% interest rate and 25% LTV for example, for every 1% rate , your profit is gone 0.3-0.4 DSCR level.

Originally posted by @Carlos Ptriawan :

The key thing when you go to DSCR loan is, it only makes sense if you have (a) large downpayment (b) you have good exit strategy in case the assumption in wrong.

Because HML interest rate is so high, it only makes sense if the property is producing at least *guaranteed* DSCR 2.1 or above.

With 1% interest rate and 25% LTV for example, for every 1% rate , your profit is gone 0.3-0.4 DSCR level.

DSCR rates are regularly in the mid 4's and 5's on 30 year fixed. Certainly you're not thinking that's too high to consider for long term financing, especially with Fannie's tightening and rate increase from last month putting Fannie rates in the 4's. For example, I just looked at a Fannie rate from a competitive lender for a cash out, investor, 2 unit and they quoted 4.625 for a cost of .5% at 70% max. We're doing that same loan at 75% ltv for a similar rate or better with no income verification. DSCR rates are unreal right now.

I've been doing this a while and have found the profit margin for investors is very personal. Some are happy making 1.5% per month while others are happy to break even and still some wouldn't touch a property unless it's making double the rents monthly.  Just depends on the individual investor.

 

True, but in all my rentals I make sure the interest rate around 2%ish /25%LRV with actual DSCR income > 2.0.
All these properties require massive CAPEX and R/M issues so we need to count that as well. Otherwise, I'll work for you guys.

I'm also lending money to HML company that open the loan for the conservative project only(req. 50% LTV or less).