Loan Officer Training 10/01/2024 - Master Short-Term Rental Property Loans

Want to supercharge your loan officer business and become the go-to expert in short-term rental property loans? In this must-listen episode of Loan Officer Training, we reveal the secrets to tapping into the fast-growing short-term rental market. Discover how to assess these lucrative investments, craft perfect loan solutions, and position yourself as an industry leader.

Packed with actionable strategies and insider tips, this episode will help you attract more clients and close more deals.

Don't miss this chance to elevate your skills and unlock new opportunities—tune in and take your career to the next level!


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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 Based Mortgage Programs, No Ratio CDFI Loan Programs, DSCR Investor Mortgages, Commercial Mortgages, Fix and Flip Mortgages and thousands more!

Our Mortgage Loan Originators are trained to be loan consultants to guide borrowers throughout the entire loan process. A licensed Loan Officer i

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 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...

Transcript

Restream recording Oct 01, 2024 • 04:02:46 PM: 0:13

So welcome everyone. My name is Kyle Hiersche. I'm the COO of the Mortgage Calculator joined here by our President Nick Hiersche and our CSO Jose Gonzalez. We are a lender that specializes in non QM loans and what we do every Tuesday, Wednesday and Thursday at 12pm Eastern on the show is go through an in depth loan officer training topic. Today's topic is going to be something we love doing here at the Mortgage Calculator, which is short term rental property loans. So Jose will take us through a presentation of how to boost your business. By offering these types of loans and really knowing the ins and outs and being able to consult your borrowers on these types of transactions, which the typical loan officer is not going to do. So, with that being said, Jose, I will turn it over to you so we can go ahead and get the presentation started. Good morning, everyone. Thank you, or good afternoon, actually, depending where you're at. Thank you for joining us for today's training on mastering short term rental property loans to boost your loan officer business. Uh, a very true point that Kyle just made there. Um, this, uh, scenario is easy to mishandle. And if you give the incorrect consultation to your borrower, uh, it will not result in a loan, uh, if they actually have a short term rental property. You know, if you're trying to put that square peg through the round hole and then you end up with a loan denial and then no time to pivot to the actual product that should have been offered in the first place. Now, a short term rental property is definitely one of the, uh, highlights, um, um, Of the mortgage calculator as lenders. So let's get right into, uh, today's offerings. Okay. What exactly is a short term rental property? Seems to be, um, some misconceptions there as well. A short term rental property is a property that can be legally rented by the day you buy it. week, month, or any other time period that is less than six months in one day. Because anything less than six months, anything, let's say six months or less, is considered a short term rental. Six months in one day to 12 months is a rental. a long term rental. Now, uh, short term rental properties, uh, those of you that follow the industries know that there is a big, there's a lot of movement, uh, with investors purchasing short term rental properties, right? As they would say, they're all the rage. Uh, that's why it's so important for you to understand, uh, what we're talking about here today. What makes them So appealing is a number of factors, but the most important factor is that they have a higher return on investment than long term rents because they have higher rental rates, right? You're charging per day, you're charging per week, you're charging per month. That's on a short term rental basis. That's going to definitely result in a higher rate paid by the occupant than a long term rent. Uh, plus there's other factors. that are taken into consideration. Uh, for example, there, there's no lease. Uh, so there's no, uh, tenancy involved, right? So if they don't pay or they decide to stay, you just change the code and get them out of there because they don't have a right to be there. Uh, like a long term tenant would have where you would have to evict. So that's just one of the little nuances that is appealing as well. But the main reason is the higher return on investment to hire ROI. which is what is driving the short term rental demand. Now, very important not to confuse a short term rental property, which allows, you know, by the definition we stated above, with condo hotels, right? Condo hotels, you know, are going to allow short term rentals as well, by their name, you know, they're a hotel type property. But do be aware that condo hotels have deed restrictions that usually restrict the amount of time that an owner can occupy the property and also restrict who can manage the property as a short term rental. Uh, in most cases, you're going to find the condo hotel, which isn't going to allow the owner, for example, to occupy the property for more than 30 days at a time, or may not allow the owner to occupy the property for more than six months in a calendar year. And may not allow the owner or a private property management company, in other words, anybody other than the hotel to manage the property. So you always hear of the, you know, put your property in the hotel program. when it's a condo hotel for them to manage it because then there, there's much higher fees when it's managed by the hotel than if they are managed by private property managers, right? The hotel may charge 50%. A property manager may charge anywhere from 15 to 30%. So also be aware to not confuse them because condo hotels tend to have more restrictive financing options, right? Condo hotels tend to have a front desk to receive guests. And one of the, um, the questions in a condo questionnaire is, does the property have a front desk to receive guests upon arrival? Because if it does, then it's going to be deemed to be a condo hotel, and then you're going to have additional restrictions. It's not going to be like a regular DSCR loan, for example, if it's a condo hotel. It would be a condo hotel using DSCR or a condo hotel using a full dock or whatever all dock options are applicable for that loan. And then it's not going to be the same loan to value and definitely not going to be the same rate. So first and foremost, make sure that you're properly categorizing the property, properly categorizing the property, right? Now, What are some of the potential issues that you can face, uh, when you're struck trying to structure your short term rental property loan, be it a purchase or be it a cash out refund. One of the main issues is remember that just by definition, uh, the short term rental property is usually not leased. Now you may have a scenario, not very common, but it is out there where the short term rental property is leased. under a master lease to the property manager. The, um, property owner gets that master lease amount every month. And then the property manager is free to lease, you know, rent the property on a short term basis. However they do make whatever income they make, that's theirs. The property owner only gets the income from the master lease. So in essence, that's a leased property. That's not a short term rental property where the owner is earning short term rental income. So typically though if the property is not leased then remember it may be considered vacant and then it may result in LTV reductions. Now usually the exception to a quote unquote vacant property is if you provide documentation that is being rented on a short term At that point, depending on the guidelines you're reviewing, they may not hit you for an LTV adjustment due to the property being vacant, but they may hit you for an LTV reduction or a loan level price adjustment for the property being vacant. a short term rental, you know, loan level price adjustments, meaning there's going to be an additional fee for the property categorized short term rental. That is the case with some of the investors out there. And there also LTV reductions also may be applicable depending on the guidelines that you're looking at, because remember non QM guidelines are all specific to the investor that you're considering submitting that loan to. Uh, please also note another potential issue is that the higher cost. of the short term rental property, the higher purchase price when compared to long term rental properties may limit the use of long term rental comps as the DSCR will be lower comparatively speaking for the higher price property at the same income than the lower price property. Also be aware that the scarcity of short term rental comps, uh, May limit the use of air DNA that does happen every so often you have a property in an area That's not really a short term rental popular area, but our investor says hey, you know, I'm a short term rental master I got my business model. I got my clientele. I got my database. I got my infrastructure It's gonna work in that property. I just need to close on it Okay, that's fine. We'll figure out a way later. I'm going to show you in the slides coming up, but do be aware then that if that's the scenario, you don't have any comps for AirDNA, then you're going to have to look at some of the alternative options that I'm right in the following slides. Now, another really big issue to be aware of is that the borrower is a first time investor. Please do look closely and scour those guidelines because in many cases, If the borrower is a first time investor, uh, they are not going to be allowed to, uh, use short term rental income to qualify. Or if they do use short term rental income and they're a first time investor, there may be a big loan, uh, a big LTB adjustment. But the main thing I've noticed is In a lot of scenarios of the guidelines I've been reviewing is that the first time investor does limit being able to use short term rental income to qualify the borrower. You don't want to get caught off guard on that one, so make sure that if it is, uh, STR that you're looking at, uh, make sure that there aren't any restrictions on short, on first time investors. Another issue that we face, uh, this is where when you're getting ready to order the appraisal, you have to do your due diligence, um, reach out to the AMC and make sure that when you put in the order that they have an experienced, um, appraisal, appraiser pool, uh, that will be able to handle a short term rental. comp appraisal. Be very specific in your order in the, in the required and the request, right? Because that's where you have to lay it down exactly what you need in that appraisal. How you need those short term rental comps to be documented. If you're using air D. N. A. If you need to provide us five comps for air D. N. A. According to the guidelines, that's what you got to read the guidelines and you have to include in your order For the appraisal, whatever it is that you need, they are not mind readers. They're not going to be able to let you, you know, put it together the way you think you need it, according to whatever guidelines. You're looking at that's where you have to instruct them in a detailed manner in the appraisal order because it's been cases where we've had to, you know, order a second appraisal because the first one just wasn't usable because the appraiser knew nothing about using short terminal comps or we actually have AMCs that, um, subscribe to AirDNA and the other, uh, short term rental comp databases where then they assist the appraisers In obtaining the short term rental comps. So make sure that you have that under control. And another potential issue is that the property has five or more units, very restrictive to be able to use short term rental income to qualify the borrower when a property has five or more units. So please do make sure to scour. Those guidelines. So in our, in our first option here, um, I'm going to demonstrate, you know, explain a little bit more detail how we would qualify the borrower for our short term rental purchase using long term rent. I mean, remember this, it's a purchase, right? What the proposed use will be. It's totally up to the borrower. So we have to look at the guidelines and see what is the simplest path to be able to close this loan in a compliant manner, uh, adhering to the guidelines of the, of the, uh, product that we have selected, right? So if, if you, I mean, you definitely have to consider the full or alt doc option. Uh, now this option, when it's a purchase. will allow a vacant property to be financed using the borrower's income. Plus, you know, whether you're using the traditional full dock or whether you're using alt doc, it's still traced back to the borrower's income. It's not DSCR. So you're going to use a borrower's income plus 75 percent of the long term rental income calculated from the 10 0 7 market rent schedule. Another 10 0 7 is for a one unit. The 216 is for a two to four unit. And again, since we are, you know, possibly dealing with a vacant property here, please be aware of any guidelines restricting the use of the 1007 income for unleased properties, which may result in no income contribution from the subject property due to it not being leased. Right. And this is where you're not going with the short term rental option. Uh, that was for full doc. Now, another option we have when qualifying the short term rental properties using long term rent is the debt service coverage ratio option. Remember that the DSCR loan qualifies the borrower only using 100 percent, not 75 percent, Like in the full and outdoc option, but using 100 percent of the property's gross market rental income, again, as obtained from either a 1007 market rent schedule or a 216 income and operating expense statement for a two to four unit small multifamily property. Now, uh, best options are at a 1. 0 or above DSCR. And please note that we are LTV can go as high as 85 percent when you're going 15 percent down DSCR using long term rent to qualify 15 percent down is all you need. Now, if the debt service coverage ratio is below one, right, for that trophy property, we're due to the high price, the rental income. Does not cover the full housing expense. But our borrower is telling us, Jose, I really want that property. I can make it work. Look at my track record with short term rentals. I have the system down pat and you know, I can do it. Okay, fine. Then we can offer our low ratio DSCR option or our no ratio DSCR. The low ratio is 0. And the no ratio is less than 0. 75. These, both of these options go up to a maximum 75 percent loan to value, right? So that's a great option for considering for a property. That's not cash flowing. On a one to one basis, uh, trophy property. Again, great option only 25 percent down very good rates too, for those two programs. Now for refinances, and if you're looking to, uh, qualify the short term on a property using long term rent, that's where you're going to have an issue. For full doc loans, whether it's full doc traditional or full doc going out doc, because the issue is going to be caused by the fact that there is not a lease, no lease is present. So then look at the guidelines and we have some guidelines that simply go with You know, whatever you provide. So if you provide a 1007, they'll go off a 1007. If you provide a lease, they'll go off the lease. If you provide, um, you know, that's basically it. Market rent or a lease or short term rental, actually. So we do have, uh, one option that allows you to provide any of the three. Then they give guidance if you do provide a short term rental income. And then they also let you know that there's like almost a three point hit. With that particular, uh, investor for using short term rental income. But if it's full dot, we're going to have the issue with, uh, it being considered an unleased property. It is DS here alone. You may have an issue because even if it's, it's furnished, it will be considered a vacant property, which may limit the LTV or the percentage of the income that can be used when you are not categorizing the property as a short term. Now, once you categorize it as a short term rental, the vacant property issue may be resolved, but then again, you may have other issues with LTV and low level price adjustments. and borrower experience as well. Um, so now, uh, if you are going to qualify the property and the borrower using short term rental income, then, you know, we have a multiple, you know, multiple options now. AirDNA is the one that's, uh, has, you know, probably the most popular one. AirDNA uses the short term rental projected income. From the AirDNA database. Now please note, scour the guidelines closely because using AirDNA may have, or may result in a higher minimum DSER requirement. Or an LTV restriction, right? Besides any low level price adjustments in some cases that are added, it may result in like in some cases, uh, like the guidelines that you're looking at right here, which is from one of our investors notice that it says for air DNA, minimum DSCR of 1. 15. Others may say minimum DSCR of 1. 5. So you've got to really review the guidelines. To make sure, uh, what is the effect when using Air DNA but on the plus side, air DNA is awesome because it allows for qualifying with a higher rental income projection. And, uh, and the great news here is that not only do we have this option for purchases, but um, uh, we also have it for, uh, properties. Recently put into service. Like for example, you just renovated the property, bought, you know, all, all the new furniture spruced it up on the inside, made it look brand new. And now you just listed it on one of the platforms as a short term rental property. That property would qualify to be able to use air BNA. that you see there. However, look at what the restrictions are when using air DNA stuff like a minimum occupancy rate of 50%. Needs to be a 12 month forecast period. Uh, you must have five comparison properties, right? Five comps, uh, must be similar in size, room count, amenities, availability, and occupancy. And please also note for two to four units, okay? You got to pull the air DNA report on each of the individual units and then add them all up together for the combined rent. So you see how air DNA can be used, which is pretty cool. Another option that we can use for short term rental income is 12 months of short term rental revenue reports, or also bank statements, either, or 12 months of short term rental revenue reports from the platforms. Such as Airbnb, VRBO and booking. com and all the others. If you have the property listed on five platforms and all five platforms get bookings, then you'd have to provide five revenue reports and then reconcile them all, maybe in one process or cert to show what the actual income is. Uh, same with the bank deposits. Uh, please note that the revenue reports can be used for a purchase if the seller provides the, uh, income. I recently closed a short-term rental sale transaction like that where the seller provided the appraisal. Uh, the revenue reports and the appraiser used that income, uh, for the 1007. Uh, please also know that the appraiser can actually look for short term rental comps and add them to the 1007, just like long term rental comps. It could be from the MLS, right? People have the daily and weekly rentals and monthly rentals in the MLS. As well, uh, and like I stated, uh, in the prior slide, the appraisal management company, the AMC, may also have resources available to offer the appraiser short term rental comps. Now, when you are using AirDNA and or you are using. the short term rental revenue reports, please be aware that there may be a, uh, an, an expense factor added. This is commonly known in the industry as a haircut. It could be a haircut of anywhere from 20 to 30 percent depending on the guidelines, uh, being used for the loan when using short term rental income, right, because some guidelines reduce the LTV again if using short term rental income and also offer all types of additional guidance. So, very important that you are aware of the different, uh, paths available when looking at the loan, right? Recapt it here. You can either go the full doc traditional route, uh, for the purchase. Usually you're going to be tough to do it, do that route for a refund, or you can go, uh, air DNA or other all doc, uh, for short term rental income. To be able to qualify the borrower's short term income and the property. So, uh, make sure that you, uh, pay close attention to everything here and hopefully it will assist you in properly consulting your investors, right? The investors are really big on, uh, the loan consultant adding value to the transaction. And this is one of the ones where, you know, you're going to have an opportunity to shine. Give some good advice, uh, differentiate yourself from the masses out there and land those deals. Absolutely. Okay. I don't see any questions, surprisingly, no questions there, but definitely amazing information. And as Jose said, I can't stress enough how important it is to know these types of things to consult your borrowers, especially because a sophisticated investor is going to be somebody that's going to really appreciate this and give you deal after deal after deal if you become their trusted loan consultant, right? Does it? Yes, man. You know, they give you that one, right? But usually that one is just the tip of the iceberg. And they'll probably give you the toughest one too, something like one of these short term rentals. But once you get and you put that one together, all of a sudden they're letting you know, Okay, uh, how about these other five that I have over here? And then they're also referring you to all of their associates that, that may be in their invest, investors club that a lot of them belong to. And that's, uh, really where you're going to get those multiple deals, the three, four and the five and the six pack. Right. Perfect. Still no questions. So we'll go ahead and wrap it up. Remember that we do this at 12 p. m. Eastern every Tuesday, Wednesday and Thursday where we go through a new loan officer training topic. So we'll have a new topic for you all tomorrow. We'll see you tomorrow at 12 p. m. Eastern for the next episode of the loan officer training series with the mortgage calculator.