Lending Options for Short Term Rental Investors

Lending options to consider when purchasing your first, second, third and tenth short term rental

When investing in real estate buyers rarely use their own cash to completely buy a property. More commonly, an investor will use only a portion of their own cash coupled with a bank loan. Even if a buyer has all their own cash for a deal, most experts still recommend using a bank’s money in most cases. The primary reason is to spread your own cash over multiple deals in order to truly grow your investing strategy and scale. To do this, you need to be aware of the types of loans you can take advantage of and how to qualify for them.

Conventional Mortgage

This is your typical 30 year mortgage that most banks and lenders offer. This is a consumer loan made to buyers who are buying investment properties in their personal names. Typically, this is for a single family home, but can also be for 1-4 units. Many lenders have options that allow for less than 20% down and have flexible rates and terms allowing things like early payoff with no prepayment penalty. This is your best choice if your debt to income ratio is within their guidelines, and your credit is sound. This loan typically features little to no fees and minimal closing costs.

DSCR Loan

DSCR or debt service coverage ratio is a calculation the lender does on the individual asset. Different from a conventional mortgage in that they are looking at the property you are buying and not your individual income sources to repay the loan. In most cases, as long as the property will break even (not make / nor lose any money) then this lender can be a good choice. This type of loan will have higher rates and fees but they can usually close within 45 days and will welcome you back for future deals.

Commercial Loan

A commercial loan is typically more nuanced/specialized, although in some cases this can be a good option for STR financing. These are the type of loans you must seek out for special use properties like mobile home parks and mini storage. However, if you can find a smaller, local community bank who understands the value of overnight rentals in your market this can work out quite well. This type of loan will heavily scrutinize all of your data. The bank is looking for not only a DSCR but also a GCFC or global cash flow coverage – this is another metric that combines all personal and business income and debt to determine a ratio similar to your DTI or debt to income. These loans will often be better rates than DSCR, but will come with much shorter terms, such as a five year fixed term. However, the commercial loan is typically amortized over 20 or more years to get the payment lower. After five years, you will need to reapply. Occasionally, depending on the dollar amount borrowed the bank may require financial data annually or even quarterly.

Finding Lenders

The easiest way to find an awesome lender is to first find an amazing investor-focused real estate agent in your target market. The agent should also be an investor themselves.