Best Questions to Ask Your DSCR Lender (For STRs)

[Zach Edelman]

Question #1: Is the lender using Air DNA projections?

• For scenarios in which there are no historical STR bookings, certain lenders can give credit to the property’s rental income potential through utilizing and underwriting with Air DNA projections. Examples of situations in which this becomes relevant is acquisitions of properties that were previously vacant, owner occupied, or utilized as long-term rentals, or refinances post-rehab (commonly known as “Air BnBRRRRs”).
• If there are no historical STR bookings available, if the lender is not able to use Air DNA projections, they may be forced to rely on the 1007 market rent qualify the DSCR ratio, and thus the property might not cashflow (market rent will not equate or exceed monthly PITI). Once the property does not cashflow, the lender might need to cut leverage, adjust the rate, points, etc., but the investor is already so deep in the process (since this typically occurs after the appraisal arrives) and as a result is stuck between a rock and a hard place, and most of the time, is forced to stomach the worsened terms.

Question #2: If the lender is unable to underwrite with Air DNA, and therefore has to underwrite with market rent, are they able to use STR comps for the 1007?

• DSCR lenders that can't underwrite with Air DNA in the situations where there are no STR historical bookings available will be forced to bank on the 1007 cash flowing at a certain DSCR ratio for the loan to work. As STRs grow more and more into becoming a legitimate asset class, appraisers have started to become comfortable using STR, rather than LTR, rental comps in 1007. However, investors need to make sure that if the lender they're talking to is forced to bank on this option, that they can accept and underwrite with an appraisal that's 1007 has STR comps. Chances are, if you are doing a loan on an STR, but LTR comps are used in the 1007, the property's not going to cashflow at the necessary DSCR the investor needs it to.
  

Question #3: What happens if the property appraises as “rural?”

- STRs, as properties that are oftentimes tailored around vacation and/or leisure, in some cases may be in areas that are considered “rural” since they are designed to appeal to people “getting away from it all,” or getting away from the big city.

- An appraiser, may indicate in the neighborhood section of their report for that property to be “rural” which is triggered by the following:

            -Surrounding area zoned agriculture

            -Distance to schools and amenities greater than 25 miles

            -Less than 25% of surrounding areas is developed. 

           -Multiple comparable properties are more than 5 miles from the subject property 

- If an appraisal is indeed marked as "rural" some DSCR lenders will be unable to finance the deal or will have to cut LTV. For investors looking to get a loan on a property in which the city population is anywhere from 15,000 or below, he/she should ask their DSCR lender what happens to the loan terms if the property appraises as rural.