Deep Dive into Today’s Short Term Rental Loans

Posted at March 27, 2023 Posted In Equity Insights Newsletter

These days it’s all about value-based, cash-flow investing! Speculators are getting weeded out and the search is on for real, steady, dividend paying investments.

For many real estate investors this means adding short and mid-term rentals to their real estate holdings.

Our work-from-home, experience-rich and active-for-longer culture continues to take advantage of AirBnb, Vrbo, etc…

Demand for short term housing has many legs to stand on …

  • Vacations
  • Business travel
  • Temporary housing during a relocation move
  • A place to stay while waiting for a new home to finish being built
  • Short-term living arrangements for those that prefer to call the grandscape of the world their “home”

The real winning ticket with short term rentals is above-average (even exceptional!) cash flow.

Top 3 Loan Programs for Short Term Rental Properties

#1 – Second / Vacation Home

The lender doesn’t mind if you rent out your second home when you’re not using it, as long as you occupy the property for “some time out of the year” (no minimum number of days or % required). However, as a Second Home, you will NOT be allowed to use any rental income from the property to help you qualify for the mortgage. You must be able to support the entire new housing expense off your personal income (meeting all the usual DTI requirements).

  • Only 10%* Down Payment required
  • Lever Up using personal income to qualify
  • JUMBO Loans up to $2.5mil available
  • Up to 50% DTI
  • 40 year Fixed Rate Option
  • Gift Funds Allowed
  • Interest-Only Option available

#2 – Conventional Investment Property

As a conventional investment property, you’ll get the benefit of using the market rents from the appraisal to help support your qualifying income. This can be really helpful if you’re tight on your DTI (debt-to-income ratio). If the property is slightly negative cash flow (off appraiser’s market rents), you can qualify covering the shortfall from your personal qualifying income.

  • No Minimum Loan Amount
  • 30 year Fixed Rate
  • No Prepayment Penalty
  • Delayed Financing Cash-Out
  • Just 15%* Down Payment on 1-unit rental property
  • Negative Cash Flow is OK! No DSCR required.
  • Market Rental Income Counts (even with no lease agreement!)
  • Purchase, Cash-Out or Rate & Term refinance

#3 – Investment Property Cash Flow Qualifier

The non-conventional (outside of Fannie & Freddie) world of lending is getting comfortable with short term rental properties and are starting to be creative with income documentation (accepting actual AirBnB or even AirDNA income reports). In this arena you qualify solely off the cash flow of the property and do not need to show any personal employment or income (wow!). Be aware that these loans often come with prepayment penalties.

  • Qualify based on Long Term or Short Term Rental Income
  • DSCR =/> 1.0 preferred
  • No DSCR needed with 700+ FICO!
  • No lease agreement required, vacant property ok
  • No Personal Income / No Employment / No DTI needed
  • As little as 20% Down / up to 80% LTV
  • 40 year Fixed Rate & Interest Only Options
  • ARM Products available
  • No Limit on total number of properties
  • Loans up to $1.5 million, $75K minimum
  • Purchase, cash-out or rate-term refinance
  • Properties can be in LLC’s name
  • Non-Recourse options available
  • First Time Buyer options available
  • Options to Qualify off AirDNA or AirBNB Reporting

*While low down payment options are being offered on second homes and investment properties, with today’s (early 2023) LLPA’s (Loan Level Price Adjustments) for market and credit risk, unfortunately in many cases in order to get the upfront points down to a reasonable (and compliant) level these deals are taking 20-25% down.

Pricing is usually best on a Second Home deal structure, but with the current bond market volatility there are times when alternative options pencil better once you consider all terms (for example, the interest only option).

Every situation is unique! Reach out if you have questions about your particular financing goals.

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