Johns Island, SC · Member since 2011 · 4 posts · 2 votes
I`m selling a 31 unit apartment bldg. and looking to do a 1031 exchange and have been looking at investing in STR but can`t find a lender that will let you use the short term rental income to qualify. The banks I`ve talked to want to see a long term lease agreement to be able to use the income. The property I`m interested in is at the beach and would be the perfect property for a STR. It has 3 single family homes on 1 lot.
I guess I could always buy it with long term leases in place and turn it into a short term rental afterwards but I was wondering if anyone has had any luck or found any other ways to finance without going through a traditional lender or getting a short term loan with a balloon payment from a community bank.
Lender · Knoxville, TN · Member since 2018 · 54 posts · 98 votes
8y
Hi Scott - I am a Loan Officer and I do a ton of investment properties in the Smoky Mountains which are short-term/overnight rentals. The guideline for Fannie is that you can use 75% of a fair market rent value assigned by an appraiser. Because most of the market in the Smokies is short-term the appraisers typically use this value. However, even if the appraiser did a fair market rent value as a long-term you should be able to use 75% of that value for qualifying rent income purposes on an investment purchase. If you have an existing short term rental and want to use rent from that property to qualify you would either have to have a schedule E with one year's results to use or yes a long term lease if you have owned it less than a year and do not have a schedule E yet. Hope that helps!
Real Estate Agent · Sevierville, TN · Member since 2015 · 1k+ posts · 1k+ votes
8y
To the best of my knowledge, Fannie and Freddie won't consider STR income as qualifying for a new property purchase. You must have a minimum of two years of tax returns showing that STR income in order for them to consider it. Thus, you're left with either qualifying without that income, or going with a non-conforming loan.
It's definitely frustrating - what I have with one of my properties is a portfolio loan with an adjustable rate, and I'll refi either once I get my DTI back up OR I have 2 years of income to submit, whichever comes first.
It's been my experience that DTI limits, impacted by not considering STR income in the first two years, is the biggest thing keeping me from scaling out more than I already have.
You may want to see about a local bank providing a commercial loan - I know some STR investors have had success with that, however I'm not sure if you could get one for what is otherwise residential property.
Sorry it's not better news! If you find a way around it, I'd love to hear about it!
Johns Island, SC · Member since 2011 · 4 posts · 2 votes
8y
Thanks for the input.
I`ll talk to TD bank who I financed a ministorage loan with and see if they would give me a long term loan and use the short term rental income to qualify. They are a portfolio lender and may do it since the property is residential and not commercial and I have 14 years experience owning apartments. I just don't want to do a short term commercial loan for 5 years amortized over 20-25 years with a balloon payment at the end and prepayment penalty for the full five years like I had with my ministorage loan.
If I have to get that type of loan the cashflow would be tight but once you get some type of loan to finance the property, I think you could probably refi in a couple years and the conventional lenders may use the income if it is reported on your tax returns under an LLC, C corp or S corp.
Real Estate Agent · Fort Walton Beach, FL · Member since 2018 · 219 posts · 275 votes
8y
@Scott Mackinnon Hi, Scott, I'm not sure if this will apply to your situation or not, but two years ago I sold an investment rental property in Memphis (long-term rental) and did a 1031 exchange for a vacation rental in Ft Walton Beach. The 1031 intermediary company I used was IPX. I had a hard time getting a fixed rate loan but did get a 20 year ARM (5/1) with a decent rate through BancorpSouth. I did not use projected income from the new property to his the required ratios, but did use income from other properties. The property I bough is a condo on the beach and considered "nonwarrantable" so loans are tough. A lot of loans on short-term rentals are apparently "portfolio loans" for banks, but they do exist.
Lender · Nationwide Lender · Member since 2015 · 1k+ posts · 814 votes
8y
@Scott Mackinnon Before you start your 1031 make sure you work with a qualified intermediary to make sure the loan you get the the correct one. 1031 has requirements proceeds, total amount AND title. If the property you are selling is in an LLC title, then the new property HAS TO BE in the same LLC title. This will limit your option to a portfolio loan, since Fannie/Freddie will not do LLC title loans.
Lender · Knoxville, TN · Member since 2018 · 54 posts · 98 votes
8y
Hi Scott - I am a Loan Officer and I do a ton of investment properties in the Smoky Mountains which are short-term/overnight rentals. The guideline for Fannie is that you can use 75% of a fair market rent value assigned by an appraiser. Because most of the market in the Smokies is short-term the appraisers typically use this value. However, even if the appraiser did a fair market rent value as a long-term you should be able to use 75% of that value for qualifying rent income purposes on an investment purchase. If you have an existing short term rental and want to use rent from that property to qualify you would either have to have a schedule E with one year's results to use or yes a long term lease if you have owned it less than a year and do not have a schedule E yet. Hope that helps!
Contractor · Sheboygan, WI · Member since 2016 · 917 posts · 266 votes
8y
Parker, as a loan officer, will you lend to an investor who is putting a down payment with Solo 401k funds. What are minimum down payment guidelines for non- recourse loans? Does it matter if the property is 4 units or larger, that is, a multi family property?
Lender · Knoxville, TN · Member since 2018 · 54 posts · 98 votes
8y
Hi Todd,
We only originate residential conventional loans 4 units or less. Min down payment for 2-4 units is 25%. Min. down payment for single family unit investment is 15%.
Investor · Knoxville, TN · Member since 2016 · 76 posts · 29 votes
8y
@Scott Mackinnon Are you talking to a commercial loan officer? As you may know from your experience with the apartment building, commercial lenders start talking in terms of debt-service coverage ratio (DSCR) instead of DTI. In this case, the income on the property is used in order to qualify for a loan versus your personal income. I have found a couple commercial bankers who look at my DSCR instead of DTI, which by definition includes the STR income of the property. Just keep calling on bankers.
Taking a note from "Long Distance Real Estate Investing"... contact the best commercial agents you can find in the area and ask which bankers they recommend. They'll know the ones that can get deals done. From my experience, the smaller the bank, the better. Mileage will vary with that, though.