How an investor finance multiple SFHs for short-term-rental?

Question

Hi BiggerPocket gurus!

I have a noob question that I couldn't wrap my head around. How do you finance multiple single-family homes for short-term rental purposes as a single investor without hitting DTI limit??

Hypothetically, if I have $1M in the bank, and say that I want to buy five(5) $1M houses with 20% down. The lenders wouldn't consider my rental income. If so, to meet the typical 36% LTI, then.. my monthly income should be somewhere around 75K (900K annual). (see the math below)

Are there any creative ways to finance the houses? Is DSCR even an option for short-term-rentals?

Thanks SO MUCH in advance!

* How did I derive $75K monthly income requirement?

- Monthly mortgage for 5 houses: Roughly $25K

- Loan-to-Income at 35% = 25K * (100/35 ) = ~ $75K/month = $900K/year

Kevin Romines · Answer

Okay, I'll open up the mystery box for you to uncover what can seem as hidden truths.

Lenders do give credit to a buyer that is buying a rental for market rents when the property is vacant at the time of the purchase. They do this via the appraisal. The appraiser will always show 2 values on the appraisal for a rental property. The current market value of the property and a comparative market analysis of the rents. It is this, that the lender will plug into their calculations to help offset the mortgage debt and help keep the DTI or Debt Ratio lower.

When buying rentals, it typically wont move the needle much as far as adding to the debt ratio or adding to income. You can literally buy your long term wealth so long as you have the down payment and closing costs, have a debt ratio that is workable to start with and have a decent credit score, usually a 660 or higher.

That said, even if you plan to do the short term rental kind of thing, they will still use the long term market rents as offsetting the PITI mortgage payment. The calc is Gross Rents X 75% minus PITI = If a negative number, it adds to your liabilities, if a positive number, it adds to your income.

Once you have tax returns showing the revenue and expenses for the short term rental, they will use that income or loss to determine your debt ratio.

Can a DSCR loan work, yes, its specifically designed for that kind of loan type, but as a loan officer, I would want all the income docs to first determine if I could do a standard conventional loan as these will give you better rates than a DSCR. only if I'm having an issue qualifying because of the debt ratio, will I then move to a DSCR loan.

I hope this helps.

Kevin Romines · Answer

@Keetaek Hong You are correct, these are for non-owner occupied loans. A vacation home is considered owner occupied even though the borrower must only occupy the property for 14 days of the 1st year. On vacation home loans, the borrower must qualify for the full amount of the mortgage without any rents, as this is considered a 2nd home and rents wont can cant be counted. That's not to say that it wont be rented out, it most likely will be in some cases, but they just cant count any income from that type of source when qualifying.

Your prior experience as a property manager wont really be considered on most of these loan types.

DSCR loans have been around a few years, not all lenders have done them or embrace them. I do more of these loans as my model is designed to cater to the real estate investor and my company has these products as party of our standard offerings. Some lender do them, some don't, but I suspect more and more will be doing these loan types as time goes on.

I hope this helps?

Brandon Beardt · Answer

Hi Keetaek,

In terms of financing options, DSCR has been the most popular as of late from my experience. It's a very easy and straight forward process & you can do multiple deals concurrently. For your second question, yes, generally these types of lenders are completely different from conventional lenders who deal with primary residential loans. These DSCR lenders are private money & don't package/sell their loans to GSE's. This allows them to operate and fund loans based on their own set of guidelines.

Keetaek Hong · Answer

@Kevin Romines - Wow thanks so much for the education! I surely didn't know that potential LTR income could be counted towards income. I may be stating the obvious, but I am guessing this is strictly an investment loan (not a vacation home loan). Also, does it matter if I have an experience in rental management or not? (just like how DSCR looks at your prior experience).

@Brandon Beardt - Out of those numerous creative financing options, are there a few that majority of investors rely on?

Would both of you say that the lenders who would consider these investment loans are a relatively different set of lenders who often deals with primary residential loans?

Brandon Beardt · Answer

Hi Keetaek,

To answer your 1st question, you can finance multiple SFR properties without hitting a DTI limit by either 1) Making enough income (like you provided) where your DTI threshold will suffice and still qualify or 2) going with alternative financing that doesn't take DTI into consideration at all. There are a TON of creative ways to finance properties (too many to list them all here), but to answer your 2nd question, yes DSCR is an option for STRs. I will say that guidelines for STRs are much more stringent than they were earlier this year, and experience is a big factor in being able to qualify for STR financing, but nonetheless, it's still very plausible. Each lender has their own guidelines/overlays regarding STR's so I'd recommend dong some research and finding out more info. Best of luck!

Kristin Fleming · Answer

Lender here... that's a prime opportunity for DSCR lending!

Jack Mawer · Answer

DSCR loans are certainly an option for STRs - I'd be happy to discuss your options!

How an investor finance multiple SFHs for short-term-rental?

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