Loan Officer Training 06/12/2024 - How to Structure Short-term Rental Investor Loans

In this episode of "Loan Officer Training," we unpack the complexities of structuring short-term rental investor loans. As the popularity of vacation rentals and platforms like Airbnb and VRBO continues to rise, understanding how to finance these unique investment properties is essential for any loan officer.

We'll walk you through the specific requirements, from assessing property income potential to navigating different loan options tailored for short-term rentals. Discover key strategies for evaluating borrower qualifications, managing risks, and ensuring compliance with lending guidelines.

Whether you’re working with seasoned investors or first-time buyers, this episode provides valuable insights to help you craft optimal loan structures and support your clients in capitalizing on the lucrative short-term rental market. Tune in and enhance your expertise in this growing sector of real estate finance!

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About The Mortgage Calculator:

The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as over 5,000 Non-QM mortgage loan programs using alternative income documentation! 

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of over 350 licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as access thousands of mortgage programs using Alternative Income Documentation such as Bank Statement Mortgages, P&L Mortgages, Asset Base

Catch all the episodes of the Loan Officer Training Podcast at https://themortgagecalculator.com/Page/Loan-Officer-Training-Series-Podcast

Catch all the episodes of the Loan Officer Training Podcast at https://themortgagecalculator.com/Page/Loan-Officer-Training-Series-Podcast

Loan Officers for Unlimited Free Non-QM Leads & Trainings Join The Mortgage Calculator at https://themortgagecalculator.com/join

The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as thousands of Non-QM mortgage loan program variations using alternative income documentation!

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as acc...

Transcript

Restream recording Jun 12, 2024 • 11:02:59 PM: 0:13

So, welcome everyone. My name

0:18

is Kyle Hiersche. I am the

Restream recording Jun 12, 2024 • 11:02:59 PM: 0:19

COO of the Mortgage Calculator joined here by our President Nick Hiersche and our Sales Manager Jose Gonzalez. We are a lender that specializes in non QM loans and what we do every Tuesday, Wednesday and Thursday evening on the show at 7 PM Eastern is go through a new loan officer training topic and do an in depth training on it. And tonight we're talking about one of our favorite topics, which is how to structure short term rental loans. So Jose. I'll let you go ahead and take it out. Are you frozen? How's that? Oh, no, I'm just having a little trouble hearing you. I don't know if it's my audio or your audio coming in a little lower. We can hear you okay. You're good. Okay. Um, so today, uh, we're going to go over how to structure short term investor loans. Uh, the key component here is, um, to understand exactly what is a short term rental and then what would be the acceptable income streams for the property. Now this is a little bit different than when you're looking at your long term rental property and where the differences can really affect you is in refis when you're refinancing the property when the property's use is already established. When you're purchasing the property as an investment property it's basically an investment property and it's not really so much of an issue. Uh, what the current use of the property is. You're going to use it as an investment property. And then at that point, the consideration to make is does the long term rent qualify, or do you have to use alternative methods to qualify? So let's get right into how to structure short term rental investor loans. So like I was mentioning, first thing we have to note is what is a short term rental property? A short term rental property is a property that can be legally rented. by the day, week, month, or any other period less than six months and one day. Please note that the short term rental periods may be affected by local ordinances, so it may not necessarily be possible to rent for one day. But, uh, that is what a short term rental property is because a short term rent is any rental period that is less than 6 months and 1 day. That's how most of the, uh, local ordinances, uh, how they, um, uh, uh, Breakdown short term rentals. Now, please note that a short term rental property is not to be confused with a condo hotel. Condo hotels are deed restricted properties, may have certain restrictions like preventing owner use of the property for certain periods of time, uh, may also restrict independent property management, just to name a couple of, uh, Differences between a condo hotel and a property that is a short term rental. The only similarities, uh, between the two is that condo hotels are going to, uh, allow short term rental periods. But they're not necessarily what we're considering short term rental properties, short term rental properties have a higher return on investment than long term rent, right? The short term rent is going to be higher income than the long term rental income, which is why it's so popular. Uh, with investors, and as I noted, the short term rental property has to comply with local and state licensing ordinances. Uh, you're going to find that in many short term rental property guidelines when you are using short term rental income to qualify, they'll usually have some type of a notation there. Where you have to provide some type of evidence that the property is complying with local and state licensing ordinances. Usually a short term rental license will satisfy this requirement. Please also know, um, that short term rental properties, uh, usually, uh, Have no leases. That's why it may be an issue with a refinance transaction where a lease may be a requirement. That's one of the issues that we find with regular financing options using long term rent other than a DSCR loan is that they're usually going to require some type of a lease. And long term rent use only. So what are our eligible borrowers and properties? Well, here, it's pretty standard. Our 1 to 4 unit residential properties are going to fall under these guidelines. However, please note that most. Guidelines in this case, we're talking about non QM loans will not allow short term rental income to qualify for five plus unit property. So our five to eight unit, um, loan option, which is a very popular option will not allow short term rental income to be used to qualify the borrower. And then as far as the borrowers themselves, we're talking about us citizens, U. S. permanent resident aliens, non permanent resident aliens, which is a non U. S. citizen and a non permanent resident alien, uh, but they have U. S. status to be able to legally work here and to be residing here legally in the U. S. because of, could be a work visa or. Some other type of arrangement that has allowed the borrower to work here. So those borrowers can qualify for any type of financing, usually that a U. S. permanent resident or a U. S. citizen can qualify for. And lastly, foreign nationals can also qualify using short term rental Guidelines for many of the DSCR loan options that we offer at the Mortgage Calculator. Excuse me. So what are some of the potential issues, uh, that you can encounter When structuring your short term rental loans. Well, one of the ones that's, uh, can always come and bite you is that the property may be considered a vacant property, and then this may result in LTV. Restrictions, right? They may reduce the LTV by 5 percent or they may say maximum LTV at all using short term rental is 60 percent or 70%. So there, there may be some type of an LTV reduction. So this is usually why our DSEA loans are the best options for the short term rental property. Uh, when we have the option that does not. Uh, have this LTV reduction. That doesn't mean that every DSCR loan option does not have an LTV reduction. I'm just saying that DSCR loans are the guidelines where we find options without an LTV reduction. And again, this vacant property issue is really only going to be an issue on refis rather than purchase. Because as I mentioned a little bit ago, when it's a purchase, Whatever the current use of the property is not an issue to the borrower and if it's an investment property and it qualifies with long term rent, then no need to go any further than using the long term to qualify because there is no stated use yet for the property other than it's going to be an investment property, right? It's not stating like, Oh, we're going to do short term rentals here, or we're only going to do long term rent here. It's only. It's an investment property. It's going to be rented and the long term rent for the 1007 qualify. That's as far as it needs to go. So, uh, some of the issues that you may have is that the property may have a high cost compared to the projected long term rental income. When you are doing this, does it qualify with long term rental income analysis? And this is, uh, an issue you're going to have with your trophy properties, for example, that waterfront property, very exclusive location, but, um, it doesn't qualify with the long term rent because, uh, you're the borrowers paying more for the property because of the location because they know they're going to make money on it as a short term rent. So. Then obviously we would be using our short term rental options to qualify other than long term rents as I'm going to be breaking down in one of the slides to come. Another issue that we may have when we're structuring our loan where there's going to be short term rental use of the property is scarcity of short term rental comps in general. There may not be a lot of short term rental activity in the area, right? So this is going to limit you all the way around because, first of all, if you're using AirDNA to qualify for a purchase. on a short term rental or for a short term rental property refi where the property was just recently put into service as a short term rental you're obviously going to be affected and not going to be able to use air dna if there's no short term rental activity in the area because using air dna like anything else the comps are going to have to have proximity close proximity to the subject You can't have them being 10 miles away just because there were no short term rental comps nearby. This scarcity of short term rental comps is also going to limit the appraiser being able to complete a thorough, uh, 1007 using short term rentals as well. Another potential issue you may face when structuring your loan, and here's where you really have to review. All of the different guideline considerations for all of your options is that in some cases, limited or no short term rental experience by the investor is going to be an issue. Now, again, this is not with every single, um, non QM guideline across the board, just bringing up, uh, some issues you could face and this I found to be present in some guidelines. and not present in others. So make sure whatever option you select doesn't have this issue. And another, um, potential issue that we find, and this is part of the structure of, I guess, just making sure you select the correct AMC for the loan, because not all appraisers and not all appraisal management companies, um, uh, have access to air DNA, nor other sources for short term rental comps. And this is an issue. Could be a big issue, uh, which may result in, uh, paying a trip fee for an appraiser who goes out and then tries to give you an appraisal with longterm rent. You ask for it with short term rent. Now you're reaching back out to the AMC and they'll probably say, sure, we can send it to another appraiser, but. We have to pay this appraiser for their trip fee. So just make sure that when you are structuring your loan, you do take into consideration that making sure that you reach out to the AMC before putting the order through and making sure that they can handle your special requests for, uh, short term rental comps. In the 1007 in whichever manner it may be because sometimes those comps are an actual in the 1007. Other times it's just going to be a narrative for short term rent. Other times it's going to be air DNA for short term rent. So depending what is the option that's going to be required, make sure that that's clearly specified up front to the AMC so that you do not have a delay In your deal, because now you have to reach out to a second, the AMC has to reach out to a second appraiser, uh, to try to get your appraisal order completed. So how do we resolve these potential issues that we discussed? Well, I've alluded to it a couple of times already through throughout the presentation, and the first option. The, you know, the most, the simplest option, which is why, uh, we really love the DSCR loans, uh, as DSCR loans don't necessarily require a long term rent lease, depending on the guidelines, right, because the, um, DSCR loans are going to have their guidelines and now they break it down into long term rent option and short term rent option. So our first option is qualify the short term rental properties with the DSCR loan using long term rents. Now, when, when you do this option again, make sure that you're going to have. A multiple choices, depending on what your debt service coverage ratio is. And this is why. It's so important upfront to reach out to the realtor partners in the transaction, have the realtor partners provide rental comps as soon as possible in the transaction so you can confirm what's really going to be possible here because obviously 1. 0 or above DSCR is the preferred option. That's where you're going to get the maximum, uh, LTV, uh, especially, uh, You know, if you're going for the higher LTV options, uh, because the 1. 0, the options for less than 1. 0 are not going to have 80 percent LTV, for example. So you want to make sure you don't estimate a rent that's higher than it actually is, and then the rent comes at long term rent comes in lower. And now you are at 75 percent LTV because you're at a lower. than 1. 0 LTV. And that's the big point because your options are basically 1. 0 or above DSER or our low ratio DSER option, which is 0. 75 to 0. 99 or our no ratio DSER option, which is less than 0. 75. And the low and no ratio typically are the ones that are going to solve the problem for the trophy property that does not have short term rental comps. The long term rent doesn't get you above 1. 0, but it does get you to 75 percent LTV using the less than 1. 0 DSCR options. This is also for those properties that, you know, AirDNA options are not, um, AirDNA is not an option because you don't have, uh, any AirDNA comps within, Uh, close proximity and also where the, if it's a purchase, the seller is currently not operating the property as a short term rental. So it's not able to provide short term rental revenue reports. And, uh, you know, it's a refi and, uh, you don't have short term rental revenue reports either because once it's a refi, the current use of the property does, does come into play. And then option, excuse me, went a little bit too quick there. So then in our final slide here, option two is qualifying the borrower using short term rental income. Now, this is really where we get to Excel. At the mortgage calculator as non consultants because of all the different program options that we have. That's the key here, right? Uh, this is not a cookie cutter type of a situation. So you are going to have to scour all of the available guidelines and see which is the best one. Now, air DNA is the preferred option. Uh, for this, uh, short term rental income, it's, it can be the one to provide the highest, uh, ROI, projected ROI, uh, but what you have to be aware is proximity, right? Uh, now, AirDNA may have, uh, a restriction, an LTV restriction, depending on the guidelines, if you're using AirDNA. I can say, for example, uh, when using AirDNA, There may require a higher DSCR, like minimum 1. 5 or above DSCR to be able to use AirDNA or the LTV restriction or reduction of 5 percent or both. Again, it's really going to depend on the guidelines. It may state that you may need a 50 percent or a 60 percent occupancy, uh, showing on that AirDNA report. Also, and keep in mind, AirDNA is for purchases only or, uh, recent, uh, uh, or properties where it was recently brought into service as a short term rental because it may have just been renovated or something like that, where the borrower can show that it was just recently put. Into service as a short term rental, then you can use your DNA. Now that is limited. Uh, there's only a few guidelines that allow that because. Almost all the guidelines require, uh, that air DNA be used for purchases only. But at the mortgage calculator, we do have the ability to use air DNA for refis as well, so that that would be the preferred and the easiest option because it doesn't require option number two, which is producing 12 months worth of short term rental revenue reports. From the platforms. And what we're talking about from the platforms would be, uh, like Airbnb home away via RBO and booking. com for example, or for the popular platforms where the property hosts, that's what they call the borrower in those platforms. They are the host usually, um, uh, Publish the properties, and then that's where individuals go to rent the properties or book the properties. Now, with the 12 months short term rental revenue reports, you are, if you do not have 12 months, it's still possible. But then that means you usually have to have a certain minimum number of months. I believe in most of the times it could be nine months and then you average out over 12 months, right? So it's not like you're going to get nine months just because you've had it for nine months and you're going to average only by nine months, you're going to get your nine months worth of rent. Uh, per the remedy reports divided by 12. And that would be your monthly average. Now, uh, you can also, instead of using the short term remedy reports, uh, can provide, uh, proof of bank deposits. Uh, then obviously you'd have to be providing bank statements, 12 months worth of bank statements. If this is a purchase where you're obtaining the revenue reports from the seller, if the seller doesn't have revenue reports but has bank statements and is willing to share those bank statements to prove the income, then that would be an acceptable way of doing it as well. Keep in mind for any, uh, either option number one using your DNA or option number two, using revenue reports or bank statements that there is, or that exists, there exists the possibility of an adjustment for expenses. We like to call that a haircut. No, that's not in every guideline, but that's in most of the guideline. They're going to give you a haircut of anywhere from 20 to 30 percent of the gross amount of the revenue that's stated. And in option number three, the appraiser can find actual short term, uh, rental comps. And add them to the 1007. So you're going to have a 1007 where they're going to list the comps and this each one is going to have the source of the comp proximity and all that kind of good stuff. Just like a 1007 report has, and then there's going to be a reconciliation of the rent, and then there's going to be an average, which is going to be the rental income, uh, that, uh, projection for that property. So, and again, when using short term rental. Actual short term rental 1007 there. This also may be subject to an adjustment of anywhere from 20 to 30 percent. And that adjustment is for the man is expenses, but it's mainly for the management fee because it's common knowledge that the property management fee on a short term rental property is higher than on a long term rental property because of the extra. Work involved, uh, you know, you, you have properties getting turned over, could be weekly or could be every 2, 3 days where the property manager has to be basically working all each time that the property turns over. Hence. The higher fee. So again, you can see we're here. Uh, we have all these different options that are available because we have outside the box options at the mortgage calculator where we're not saddled by just the, um, agency guidelines that look at, uh, long term rents only that if it's a refi, you have to have a lease. Uh, you know, it can't be a short-term rental, which is an, you know, an unleased property unless you have a property management agreement. Then, uh, you know, like some type of a master lease, uh, with the property manager is the only time you may have a lease for a short-term rental. But other than that, it's gonna be an unleaded property, which in many guideline cases, uh, may be considered a vacant property and then may be rejected. Uh, you know, where they're going to deny it because it's considered a vacant property or you may have other issues involved. So, definitely, we can assist you here at the Mortgage Calculator with your short term rental property loans. We've assisted a lot of investors with the short term rental property loans, uh, using all of our innovative, uh, programs. Right. Thank you, Jose. So let's see if we have any questions here. Let's see question five plus units considered is five plus units considered to be commercial? Well, I mean, yeah, the five plus unit could be considered commercial, small commercial, but that's, but they, they, we do have DSER financing for them. So the issue Here is now that we don't have DSCR financing is that the specific DSCR guidelines for the 5 to 10 units. And again, remember, this is not 1 guideline for all 5 to 10 unit properties, but just in general, the ones that we've seen come up, uh, for 5 to 5 plus. It's usually it's either five to eight or five to 10 do not allow short term rental income to be used to qualify the borrower. So it has nothing to do with it being a commercial type property. And due to that, not being. a DSCR loan. Yes, we have plenty of DSCR loan options available for the five plus units. You just cannot use the short term rental income component to qualify the borrower. Let's go ahead and wrap it. I think we can go ahead and wrap it up. So remember we do this at 7 p. m. Eastern every Tuesday, Wednesday, and Thursday evening. So we will be back tomorrow with a new topic. We appreciate everybody tuning in. We'll see you tomorrow at 7 p. m. Eastern for the next episode of the Loan Officer Training Series with the Mortgage Company.