Short-Term Rentals and DSCR Loans: 3 Deal-Killers to Avoid!
I just closed a loan for a total nightmare of a client who bought a short-term rental using a DSCR (Debt Service Coverage Ratio) loan.
(Hi, it’s me. I am the client.)
Honestly, there’s nothing wrong with that plan. You would think a broker doing her own loan would go for the cheapest interest rate possible, but spending my time on the business plan was worth more to me than the lower rate. Doing my own DSCR loan for my short-term rental property reminded me of some of the biggest issues that my clients have run into when purchasing an Airbnb, VRBO, or other type of short-term rental using non-QM financing.
Issue #1. The lender evaluates debt service based on long-term rents:
For a traditional DSCR purchase, the projected property income used to service the debt is based on the appraiser’s report of comparable long-term rents. Frequently, for a short-term rental purchase, the property would not cash flow as a long-term rental; so, structuring the loan that way would lead to a denial due to insufficient debt service coverage.
Solution: Ensure you find a lender who is evaluating income projections via short-term rental models.
Issue #2. You can’t document your investor history:
Most lenders with competitive rates for DSCR loans require that you can document experience managing properties. Having nearly a decade of originating and underwriting these purchases didn’t quite qualify me, nor did my husband’s commercial real estate license — go figure. We had to do some real digging to find documentation that was sufficient for underwriting for the investor I chose, and my clients have frequently run into the same challenges. If you have not yet filed a tax return with your short-term rental income, or prefer not to include that, your profiles likely do not show your legal name tying you to your listing for underwriting.
Solution: Ensure that you have sufficient documentation showing experience with property management to qualify for the best rate and lower down payment options.
Issue #3. The wrong income projections:
Most of my investor clients have several properties and are underwriting their own cash flow, much in the way that I did. However, to underwrite your loan, the funding lender will typically want to use an AirDNA (or similar third party) report generated by someone who does not have a vested interest. For example, my property is close to a major event venue, which wasn’t taken into account on some platforms and would have tanked the deal if I were stuck with just PriceLabs. Additionally, AirDNA accounts for a fairly significant percentage in expense for property management by default, which may not apply if you self-manage.
Solution: Check these data providers and let your lender know up front if their numbers are inaccurate.
We can help short-term rental investors because we know the business inside and out, so we won’t treat your loan like any old rental property. We work with several investors that offer specific short-term rental DSCR loan options to help you purchase your next investment. No matter who you use, be careful to ask up front whether they will be underwriting it as a short-term or long-term rental — the answer could mean the difference between a new house in your portfolio or a loan denial at the last minute!
Note: Because these loans are considered Business-Purpose, we can offer them in all 50 states — not just Virginia and Florida!
