Short-Term Rental Financing: Guide to STR mortgage loans for rentalpreneurs

[AJ Wong]

Let's dive into the short term rental financing process and provide you with the tips and tools to finance new STR properties anywhere and anytime.

What is STR financing? - Refers to loans and mortgages that cover the costs of purchasing and launching your short-term rental property and business.

The First Step in vacation rental financing: Who, What, Where and Why? Investors focus on the vacation rental space for a variety a reasons. Some want to acquire an asset in an area they enjoy visiting and are less focused on optimizing profit and others primary objective is to maximize returns. Having clear intentions is key. 

Choosing the best vacation rental loan option: Traditional/Conventional vs Non Conventional/NonQM. Conventional financing will offer the most competitive rates but can be more income restrictive and can be unscalable as investor portfolio expand. With asset based or DSCR (debt service coverage ratio) loans or rental specific loans, lenders calculate the income by the PITI (principal, interest, taxes and insurance) to qualify for the mortgage loan. Many lenders will even utilize proposed or STR income to qualify.

KEY STR METRICS: Rental Income, Occupancy, NOI, DTI, DSCR, FICO. The key evaluation data points for STR investors are accurate records of rental income and occupancy and/or projections from local mangers and online tools. Debt to income and debt service coverage ratios will provide a framework for qualifying. Good to excellent credit scores are preferred for optimal vacation rental mortgage rates and minimizing down payments.

Most of our out of state coastal STR investors are conventionally financed and utilize low down payment 10-25% to qualify.