It's hard to remember sometimes, but Airbnb is only 13 years old, founded in August 2008 at the height of the real estate mortgage crisis. While there have certainly been ups and downs over the years, it is undeniable that the revolution it unleashed has empowered everyday people to build businesses, wealth, and financial freedom through ownership of investment real estate and cash flows from short term and vacation rentals.The financing side of the short-term rental equation has matured similarly over the past 13 years as well. For the first several years, financing was limited to conventional means, whereby you would have to settle for qualifying for a traditional home mortgage, or non-QM “2nd Home" mortgage, qualifying through your own personal income and DTI.

The Problem

This type of financing makes it incredibly hard to scale, as without being able to count significant STR income to your bottom line, banks would judge you unqualified to add properties and mortgage debt because your W2 or long-term market rent (typically half of what you earn on an STR) was too "low." Many budding STR magnates were locked in frustration, not being able to scale their STR portfolio to create the immense wealth and financial freedom that is possible, due to lack of financing options.

The Solution

Things improved once "DSCR" loans hit the scene in around 2018. These are non-conventional mortgage loans with much friendlier qualification standards than traditional mortgages (no income verification, no tax returns, and most importantly, no DTI) and rates that were still very competitive (typically no more than half to three quarters of a percent higher than conventional). No DTI calcs and quick and easy process meant you could scale and grow rapidly. What’s more, DSCR lenders would allow you to qualify these mortgage loans using the actual prior years’ history of booking income from your STRs (“TTM Actuals Method”), or if that wasn’t available, a non-DTI qualification based on “long-term market rents.”

This led to the next hyper-growth phase of STRs as many investors used DSCR loans to scale their portfolios, acquire lots of properties and build strong cash-flowing businesses. As thousands of investors achieved financial freedom through STRs, more lenders and capital entered the market. Investors would be able to purchase properties through easy qualification based on long-term market rent, plug them into their fine-tuned STR machine and then execute a cash-out refinance a year later; banking higher leverage and recycling STR cash flows into more properties.

In 2021, during a blazing-hot real estate market, property prices were rising and investors who had become professionals in the STR space began struggling to qualify to buy properties that wouldn’t qualify under long-term market rent. They also didn’t want to wait a whole year to build up TTM Actuals when they knew they could hit big STR numbers from day 1. Investors that could access high-leverage loans that would qualify based on STR income on acquisitions could jump-start a scaled portfolio that would enable massive wealth — and allow them to outbid and outmaneuver the competition. Some lenders that specialize in lending on short term rentals will qualify the properties on purchase through AirDNA projections. This allows professional investors to purchase at high leverage (only 20% down) and qualify based on STR income from the start. No more waiting a year for a cash-out refinance (and going through the fees, appraisal worries, paperwork, etc.) or locking up capital by reducing leverage to qualify through long-term market rents (generally only half of what can be earned as an STR, especially for a professional).

I personally think we are entering a buyers market, where STR professionals are going to be able to pounce on properties that novices are going to give up on, and there should be some great deals out there. Thoughts?

A Short History of Short Term Rental Financing

The Problem

The Solution

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