Underwriting MTR for DSCR Loan

[Alexander Scher]

I'm interested in getting into the MTR space, and I want to use a DSCR loan to finance the rental. What're some tips for underwriting a MTR (or even STR) if you've never owned one? It's easy to estimate rental income for a long term rental based on comps, but MTR seems more difficult to estimate. How would I go about underwriting a MTR so I could acquire a DSCR loan?

[Robin Simon]

Quote from @Alexander Scher:

I'm interested in getting into the MTR space, and I want to use a DSCR loan to finance the rental. What're some tips for underwriting a MTR (or even STR) if you've never owned one? It's easy to estimate rental income for a long term rental based on comps, but MTR seems more difficult to estimate. How would I go about underwriting a MTR so I could acquire a DSCR loan?

DSCR Lenders are going to underwrite the loan/property themselves regardless of how you look at it as an investor - most DSCR Lenders on an acquisition will use Long-Term Market Rents to underwrite, potentially STR (airdna, etc.) if it makes sense as trending more towards as a STR (shorter "medium term stays").

Should aim for a DSCR Lender thats heavy in the STR space and more flexible/forward-thinking on MTRs rather than more of the traditional ones.

Heres an article I published recently on BiggerPockets that talks about potential next steps (evolution) for DSCR Lenders in the MTR space

https://www.biggerpockets.com/blog/what-is-coming-in-2024-fo...

Medium-Term Rentals

One of the biggest developments in real estate investing in 2023 has been the rise of medium-term rentals. The medium-term rental (sometimes referred to as mid-term rental) is an investing strategy that combines elements of short-term rentals and long-term rentals.

Investing in medium-term rentals, which are typically defined as tenants renting properties for more than 30 days but less than a year, has become a preferred strategy of many investors. The seminal book on the strategy, 30-Day Stay, published here on BiggerPockets and written by MTR pioneering investors Sarah Weaver and Zeona McIntyre, has helped popularize the method.

Real estate investors are attracted to medium-term rentals to gain the benefits of extra cash flow versus long-term rentals while avoiding regulatory risks, high turnover, and intensive management of short-term rentals.

While many investors are now turning to medium-term rentals to build their portfolios, the lending world has unfortunately been a little slow to keep up. Over the last couple of years, many DSCR lenders have embraced and adapted to financing short-term rentals, including using data-driven tools like AirDNA to qualify rents on short-term rental properties, but there is yet to be a similar tool for medium-term rentals.

Many investors use a general rule of thumb for midterm rentals that they should earn about 50% more in rents than an equivalent long-term rental (whereas short-term rentals should earn double or 100% more than if the property was utilized as a long-term rental).

However, for DSCR lenders, change can be slow and challenging, and many lenders prefer and require more precise qualification measures than rules of thumb. Thus, the next challenge and frontier for many DSCR lenders seeking to serve the growing number of real estate investors pursuing this strategy is to cement a qualification and underwriting methodology to properly qualify MTRs and accurately project their revenues.

Potential next steps would be for a data provider to emerge similar to AirDNA for medium-term rentals to take on this growing opportunity. Until then, DSCR lenders will have to be creative and flexible to tap this growing market.