How to Start Your Short Term Rental Business
How to Buy a Short-Term Rental with No Income
One of the best types of loans that many people in the industry recommend are DSCR loans. These types of loans are flexible and require no personal income to qualify.
Start Your Short Term Rental Journey Without Using Your Personal Income
Buying a short-term rental (STR) property can be extremely lucrative. According to Airbnb’s annual survey, the average host saw an 85% uptick in earnings between 2019 and 2021. The earnings potential that short-term rentals provide is prompting more and more investors to enter the short-term rental market.
If you're thinking about getting into the short-term rental market, you're probably looking into loans that can help you buy your first short-term rental property. You may also be wondering what the best loan option is for you.
A huge misconception that plagues new short-term rental investors is that they need to make a lot of money from their main job in order to qualify for an investment property loan. In reality, there are a lot of different loans out there that can help you purchase and make money through short-term rental properties.
Ever wondered how 23 year-old smart asses can own 20 properties?
Meanwhile you're stranded on one — trying for two but getting rejected by lenders.
The answer is DSCR.
— Beeline
What is a DSCR Loan?
One of the best types of loans that many people in the industry recommend are DSCR loans. These types of loans are flexible and require no personal income to qualify.
But before you make any financing decision, it’s important to understand what DSCR loans are and how they work. It's also important to consider other financing options and how they fair compared to DSCR loans.
If you want to start buying short-term rental properties with no income, here’s everything you need to know about your STR financing options.
DSCR stands for debt service coverage ratio. A DSCR loan is a loan that is given to an investor based on the property's ability to generate enough rental income to cover the debt payments associated with the loan.
To be approved for a DSCR loan, your property must typically have a debt service coverage ratio between 1.00 and 1.25. This means that your property's Net Operating Income (NOI) must be at or 25% more than your annual debt service payments.
For example, let's say you're looking at a property that has an NOI of $30,000 per year and your annual debt service payments are $24,000 per year. In this case, your property would have a DSCR of 1.25 ($30,000/$24,000), which would make you eligible for a DSCR loan.
Why Do People Recommend DSCR Loans for
Short-Term Rentals?
There are a few reasons why people in the short-term rental industry recommend DSCR loans over other types of short-term rental loans.
The first reason is that lenders tend to be more willing to give out DSCR loans because they're considered low-risk. Lenders understand that your property generates enough income to cover the debt payments associated with the loan, so they're less likely to lose money if you default on the loan. This allows them to qualify you primarily on the property value, condition, and potential to generate recurring rental income.
Another reason why experts recommend DSR loans for short-term rentals is that they tend to have competitive interest rates than other types of loans. Most of the time you can get a loan with a fixed interest rate and mortgage payment which is ideal in a rising rate environment.
If you're able to get a lower interest rate on your loan, this means that you'll have more money available each month to pocket or put towards future short-term rental acquisitions—and who doesn't want that?
Lastly, DSCR loans don’t require any personal income verification. This means that you don't have to provide proof of receipt of any personal income, allowing you to obtain a loan even if normally your personal income couldn’t support the monthly loan payment.
Since DSCR loans are based on the property's ability to generate income, rather than the borrower's credit score or income, they're a great option for people who are just starting to invest in the short-term rentals.
Are There Any Downsides to Getting a DSCR Loan?
Of course, no loan is perfect and there are some potential downsides to getting a DSCR loan that you should be aware of before making a loan decision.
One downside is that lenders will typically only lend up to 70-85% of the property's value when it comes to a DSCR loan—so if the property is worth $100,000, in some cases the most you could borrow would be $70,000 to $85,000.
In certain cases, this may not be enough money for some investors who are looking to put less money down to acquire new short-term rental properties.
Another downside to getting a DSCR loan is that lenders often require you to show proof that you have enough financial assets to cover 6-12 months of monthly mortgage payments. This is in case the property is vacant and isn’t generating any revenue to offset your loan payment.
Other Types of Loans You Should Consider
If you're not sure whether a DSCR loan is right for you, there are some other types of loans that may be better suited to your needs—although they do come with their own set of pros and cons that you'll need to consider before making a decision.
Some other types of loans that investors often use for their short-term rental businesses include conventional financing (FNMA and FHLMC), home equity lines of credit (HELOCs), cash-out refinances, and private lenders—each of which has its own set of benefits and drawbacks.
Key Takeaways
Taking out a loan is one of the biggest financial decisions you can make—so it's important you do your research before making any decisions about which type of loan is right for your short- term real estate investing strategy.
DSCR or debt service coverage loans are a great way to buy short-term rental properties without having any personal income. While the lending limits are a bit more constrained compared to other alternative loan options, DSCR loans can provide you with the freedom to get into short-term rental investing at an accelerated rate.
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