Investment Loans (DSCR?)

[Aamna Kidwai]

Hi Everyone, 

I am trying to understand if lenders for DSCR loans will take midterm rental rates into account or only long term rents of the area? This would be specifically for a property that doesn't have previous rental history. What would you guys say are the downsides of DSCR loans? Are there other loan products similar to the DSCR loans that can also be utilized for investment properties?

Additionally if anyone is a broker and can help find the best loan terms for DSCR (or other investment loans) in the Cincinnati Ohio area please let me know!

Thank you,

Aamna

[Robin Simon]

Quote from @Aamna Kidwai:

Hi Everyone, 

I am trying to understand if lenders for DSCR loans will take midterm rental rates into account or only long term rents of the area? This would be specifically for a property that doesn't have previous rental history. What would you guys say are the downsides of DSCR loans? Are there other loan products similar to the DSCR loans that can also be utilized for investment properties?

Additionally if anyone is a broker and can help find the best loan terms for DSCR (or other investment loans) in the Cincinnati Ohio area please let me know!

Thank you,

Aamna

Hi Aamna - MTRs are certainly a newer thing and most DSCR Lenders (and pretty much all "conventional" or bank lenders) will be slow to adapt, however the more forward thinking DSCR loan providers have embraced it.

I published an article here on BP just last year on the "next developments coming in 2024 for DSCR Loans" and MTR qualification was one of the main ones! Hope this helps in your search - typically can be doable - definitely best by lenders that are already very comfortable with STRs!

What’s Next For DSCR Loans? Updates For 2024 and Beyond

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

Now, we will go over what’s next in DSCR loans—an overview of what innovations or additions to the DSCR loan product lineup may come in 2024, as well as the next evolution of this revolutionary loan product.

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.