Should DSCR for STR include LTR rental comps?

Question

Hello Bigger Pockets!

tl;dr — Do DSCR loans always include LTR rental comps for underwriting even when the target property is an STR in a predominantly STR market?

Context:
I'm in the late stages of buying my first rental — a beach property as a STR. We are using a DSCR and closing in just over a week. The lender just came back and said the STR comps are really good but the LTR comps from our appraisal are very low. Because of the LTR comps, they won't give us the rate or terms we locked. Their investors either want 65% LTV (instead of 75%) or a .75% increase in the interest rate.

We are buying in a STR market, and there are no LTRs available except in the off season. The LTR comps they pulled really aren't comparable—they included a 3 bed/2 bath even though ours is a 5 bed/4.5 bath, comps are much less sqft, and much older (16-18yo vs 1yo).

I would appreciate anyone with DSCR for STR experience sharing your perspective! (Also rates are 8.125% increased to 8.875% — any thoughts on those?)

Robin Simon · Answer

Hi - you should shop for other DSCR Lenders - this is the behavior of some more traditional or conservative DSCR Lenders that still require qualification based on LTR rents instead of STR. There are DSCR Lenders now that will qualify based on AirDNA projections for properties such as this and/or order a 1007 appraisal with STR rental comps. You are shooting yourself in the foot by trying to finance a STR with a DSCR Loan with a lender like this (anti-STR)

Michael Baum · Answer

It is possible they are hedging their bets. If the STR fails, they want to make sure you can fall back to a LTR. That is my guess.It sounds like they feel the risk as a STR is a bit too high for their comfort.

Robin Simon · Answer

There are many DSCR Lenders that will lend on STR with AirDNA to qualify and with 1007 comps that are STR-based instead of LTR-based

Corby Goade · Answer

Nah- I totally understand why lenders don't care about STR rates. They're volatile, unpredictable and can easily be regulated out of existence. If it works as an LTR, the bank knows there's a safe, predictable stream of income from that property. They're concerned about their liability, not yours. It's just part of the game. No different than on conventional loans with LTRs- underwriters don't care what you think the NOI for that property will be, they're concerned with the value of the property next door.

Robin Simon · Answer

There are some DSCR Lenders that will not require LTR qualification as a backup plan just FYI!

John Morgan · Answer

@Joe BeutlerYes, this is what my DSCR lender does just in case the economy goes south and you need to turn it back into a LTR.

Devin Peterson · Answer

Joe,Absolutely not! If you are purchasing a short term rental property, I wonder she be utilizing short term rental to calculate the DSCR. They would either do this via AIRDNA or STR comps. Sounds like you are using a broker or lender who is not well-versed or focused on short term rentals. There are definitely STR purchase programs out there that allow you to go 75LTV. There are also some creative brokers out there that will allow you to use the AMC of your choice! Sounds like this is what you need to save this deal.

Caroline Gerardo · Answer

Comps must be closed with a loan in last three months with similar square footage, similar view, similar amenities such as pool/jacuzzi that are permanent/square footage, should be in last three months - a year old means there are no recent comps. Valuation is a residential one. Personal property not included (no furniture/hot tub/ toys)Rental survey the 1007 is long term compsYour lender should have gone over this before you paid for the appraisal.

Brad S. · Answer

A STR is a business (or trade), not solely a real estate investment. While there may be some Lenders (portfolio, private, etc) that may underwrite with str rates, if they are loaning strictly on the real estate, certain factors should be accounted for (deducted from) in a proper valuation, like personal property which is usually included (furniture, other going concerns, possible intangible assets, etc).Put another way, most buyers of a str or buying for the "business" potential, not the sole value of the real estate. And most lenders loan on the real estate exclusively. Therefore, they would rely more on ltr rates, not str rates. While it seems some non-traditional lenders will utilize str rates, that does not appear to be the norm.In some areas, there are many str's and therefore, some of those non-RE values may be incorporated within many comp's sales prices. That may lead to higher comp prices and therefore, higher values than just the RE. That is not the norm though.

John Morgan · Answer

Yes, but less and less are doing it now just in case the economy ever goes into a recession which history shows happens every 8 years. It’s to protect them for when consumer spending falls off. But yes, there are a few out there that are willing to take that big risk.