Lender needs a long term lease for refinance - can I lease to my LLC? Other ideas?

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Lender needs a long term lease for refinance - can I lease to my LLC? Other ideas?

Evan Holly
Rental Property Investor · New York, NY (nyc) · Member since 2021 · 39 posts · 18 votes

I have a few successful strs in Georgia. I am looking to refinance a couple of them, however my lender requires 2 years of income shown, and I don't have that for these particular houses. They will, however, accept a long term lease. I read somewhere that it might be possible to long term lease them to my LLC, since the LLC is for the STR business, (essentially rental arbitrage myself). Anyone have thoughts on this? I'd love to hear!

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Zach Edelman
Lender · New York, NY · Member since 2022 · 1k+ posts · 1k+ votes
2y

Another vote for DSCR loans - plenty of DSCR lenders can qualify the rental income either with actual booking history or Air DNA depending on how long you've owned the asset and whether or not you rehabbed it (and how recently).

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  • Scott Mac
    Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes
    2y

    Hi Evan,

    Did you ask the lender if this is acceptable to them--that might be a good person to talk to about it--everyone else will just be guessing.

    Good Luck!

    3Reply
  • Dallas Sauer
    Lender · Phoenix Arizona · Member since 2018 · 89 posts · 51 votes
    2y

    Another option is a DSCR loan. You don't have to have a long term lease in this case but the amount you can borrower is based on the 1007 income of the property if it was rented as a traditional rental.

    0Reply
  • Doug SmithPro Member
    Lender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes
    2y

    Some lenders require a long-term lease...others to not. Often times, there might be an LTV ding without a lease, but in the case of most DSCR lenders, they use the figure from the 1007 in the appraisal. Ask the lender/broker if they have other options. There are options without the long-term lease.

    1Reply
  • Jayson Cain
    Lender · Manhattan Beach, CA · Member since 2017 · 423 posts · 268 votes
    2y

    If you have a history on those STRs and you do a DSCR Loan, you can use the STR income to calculate the DSCR calculation. This will let you get the most cash out possible. You won't need to get a long term lease.

    0Reply
  • Alex BekezaBusiness Member
    Lender · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
    2y

    @Evan Holly No need to get that creative. I think you just need a new lender. There are programs that will allow you to calculate DSCR using Air DNA data so you don't need to worry about 2 years of income, what the long term market rate is, a fake lease or any of that. www.shorttermrentallender.com. We do this all the time even on AirBnBRRRRs that have no operating history at all and just got the place furnished and listed. 

    To answer the question directly though, no, most lenders would not approve a lease from you to yourself if they're requiring a lease to qualify. 

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  • Zachary Ware
    Member since 2022 · 405 posts · 455 votes
    2y

    I think you already have some great advice here. Talk with some DSCR lenders about your options and what they will accept. You will find lenders who can refinance the STR with their current state and look at projected revenue or the market rent on the appraisal. I think that leasing the property to yourself to qualify does not sound like a great idea and I would disclose this upfront with your lender if this is the route you go.

    0Reply
  • Evan Holly
    OP
    Rental Property Investor · New York, NY (nyc) · Member since 2021 · 39 posts · 18 votes
    2y
    Thank you all for the advice!  I'm aware of the DSCR, and have used it before.  I just have an opportunity to get up to 90% LTV, so I'm trying to figure out a way to go that route.  That said, if I can get lending to based on the STR income (not the house), that would be the most solid route! I wasn't aware of that option, so I guess I'll be reaching out to some folks.  Thank you again
    0Reply
  • Evan Holly
    OP
    Rental Property Investor · New York, NY (nyc) · Member since 2021 · 39 posts · 18 votes
    2y
    Quote from @Jayson Cain:

    If you have a history on those STRs and you do a DSCR Loan, you can use the STR income to calculate the DSCR calculation. This will let you get the most cash out possible. You won't need to get a long term lease.

    Thanks Jayson!  I'm not sure if I'm hearing this right. Are you saying I could get a loan based on the income (as a business), rather than off the appraised value of the home?  I know you can do that in multifamily, but did not realize it could be done on a SFH.  This could be a game changer if it's true.
    0Reply
  • Jayson Cain
    Lender · Manhattan Beach, CA · Member since 2017 · 423 posts · 268 votes
    2y
    Quote from @Evan Holly:
    Quote from @Jayson Cain:

    If you have a history on those STRs and you do a DSCR Loan, you can use the STR income to calculate the DSCR calculation. This will let you get the most cash out possible. You won't need to get a long term lease.

    Thanks Jayson!  I'm not sure if I'm hearing this right. Are you saying I could get a loan based on the income (as a business), rather than off the appraised value of the home?  I know you can do that in multifamily, but did not realize it could be done on a SFH.  This could be a game changer if it's true.

     @Evan Holly - It probably wouldn't be that high of an LTV for a DSCR Loan. It will be closer to 75%. As far as using the STR income, yes, you could use that income to calculate the DSCR if the property has a revenue history. The valuation is still based on sales comparables in the area, but the difference is that instead of using LTR market rents, you can use the STR income history of the property. My clients with STR experience do this all the time.

    0Reply
  • Ethan Gidcumb
    Lender · San Diego, CA · Member since 2022 · 130 posts · 75 votes
    2y

    Hey Evan! I would reach out to your lender about that to clear up any confusion. In my own business, we would not allow properties to be leased to yourself or your relatives on a long-term loan. It might be different for your lender.

    I hope this helps!

    0Reply
  • Andrew SteffensBusiness Member
    Tampa, FL · Member since 2022 · 3k+ posts · 3k+ votes
    2y

    Every decent lending broker should have multiple options just for situations like this. Not every lender does, thats why a broker will shop it to multiple brokers. You should definitely be able to refi it based on the appraisers long term rental estimate or using a DSCR lender (some accept LTR rent projection, and some even do STR rental projections).

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  • Jonathan Taylor
    Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes
    2y

    @Evan Holly DSCR loans (already mentioned above) have STR specific options for you considering you have experience. These loans are very similar to LTR DSCR loans but use appraised market ST rents to qualify the debt coverage ratio. These loans can close in an LLC or personal name (state dependent) but would solve your problem. There are a lot of pitfalls to renting from your own LLC that could potentially kill the deal and are more amenable options that would make this loan work.

    0Reply
  • Sarah KensingerPro Member
    Real Estate Consultant · OH · Member since 2023 · 2k+ posts · 1k+ votes
    2y

    Yes, you can "rent" a property to your LLC but if you can get a DSCR loan for a STR, that would probably be the best option. Host Financial and The Lender both offer DSCR loans for STR, and I've heard really good things about Northpointe Bank.

    [email protected]330-557-3021
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  • Robin SimonBusiness Member
    Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
    2y
    Quote from @Evan Holly:

    I have a few successful strs in Georgia. I am looking to refinance a couple of them, however my lender requires 2 years of income shown, and I don't have that for these particular houses. They will, however, accept a long term lease. I read somewhere that it might be possible to long term lease them to my LLC, since the LLC is for the STR business, (essentially rental arbitrage myself). Anyone have thoughts on this? I'd love to hear!

    you should be looking at DSCR Loans - not conventional requiring DTI/2 years of income.  Most STRs / LLCs need to be financed in this way
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  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    2y

    I would be really curious about renting the property to an LLC that you own in order to acquire a better rate or lower down. This sounds like fraud to me.

    It might be time for me to get on the horn again with a bunch of lenders to see what they would say about it. 

    0Reply
  • Zach Edelman
    Lender · New York, NY · Member since 2022 · 1k+ posts · 1k+ votes
    2y

    Another vote for DSCR loans - plenty of DSCR lenders can qualify the rental income either with actual booking history or Air DNA depending on how long you've owned the asset and whether or not you rehabbed it (and how recently).

    11Reply
  • Adam WindhamPro Member
    Lender · San Diego | Phoenix | Miami · Member since 2019 · 39 posts · 65 votes
    2y

    @Evan Holly Not much to add here other than the DSCR loan is the way to go - make sure to vet your lender and ask them specifically how they are going to underwrite the debt coverage ratio and get you approved - are they going to use projections from AirDNA, Rabbu, or Others (if so, what if any % discount are they going to apply to the gross income), or are they going to rely on the rental rates on the appraisal 1007 form. If they are using the 1007 - are they going to request that is be completed on a STR or LTR basis? Will they apply any % discount to this income figure? Ideally you would get this underwritten using projections, assuming it debt covers, so you know up front that the DSCR wont be an issue and you won't get re-traded on the loan terms mid-process.

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  • Erik EstradaBusiness Member
    Lender · Member since 2022 · 6k+ posts · 1k+ votes
    1w

    Hey Evan,

    You are better off working with another lender. There are many DSCR STR lenders that allow short-term rental income on the property. They also do not have a look-back period.

    Creating a lease to your LLC would not make a difference unless your lender allows this. Most lenders will treat this as an owner-occupied commercial lease, and it may disqualify you for regular financing.

    I would keep it simple and work with a lender that accepts the short term rents.

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