Refinancing rent-by-room property

[Ryan Deasy]

Hello,

Does anyone know a lender that would refinance a rent-by-the-room property? basically, i am looking to get a commercial appraisal that utilizes the income approach on one of my duplexes. this property makes significantly more rent than just doing it by the unit and i am looking to capitalize on that. i just paid over 2000$ for a commercial appraisal and the appraiser really didn’t get it...... thank you in advance!

[Sasha Mohammed]

This is a fantastic question, @Ryan Deasy! I'm sure you're not alone in this inquiry.

I'll start by saying the income approach on appraisals in and of itself are difficult to obtain. Appraisers are not typically told "go out and appraise this property based on income approach" -- they're given a property assignment, and when they get there (or after they've looked at the property and are sitting down to write their report), they determine "highest and best use" to decide which value determination best fits the property. 9/10 this is comparable sales. if there aren't good comps, next best option is most-often cost to rebuild. The caveat to this being if the appraisal was ordered WITH a rent-roll, and even still, the rent roll would be comparable rents from other neighboring and similar properties. 

Even IF you luck out and get the income approach, it will be based on comparable rents. Not your individual property's room-by-room income, even with lease agreements in-hand. 

With that said (because i'm currently in a similar situation and have looked into this for myself), there are lenders out there that will allow for a refinance based on the ACTUAL income of the property, even if the appraisal doesn't support it. Some lenders are opening up to things like Airbnb income, those might be where I would start my search if i were in your shoes. This is because lenders that are allowing you to qualify based off of short term rental income realize that your property may be cash-flowing better than the comps. So long as you have those lease agreements, and can document (maybe by bank statements) the deposits from tenants, they might be willing to take a look.

The other option is to look at lenders who might be willing to go negative cash-flow. The rates might be a bit higher, but if you're forced to use the appraiser's rent schedule as "income" for the property, may as well give it a try with a lender who is comfortable lending on the property, even if it doesn't meet a 1:1 DSCR. They exist, it's tough to find, but they are out there.