Maximizing Profits: How a DSCR Loan for Short-term Rentals Can Boost Your Rental Business

Short-term rentals are a great way to build wealth, and with Airbnb’s growing popularity, it’s easier than ever to become an active real estate investor. With regular bookings, a short-term property can outperform a long-term property like an apartment or a single-family home. You can also expect the value of your home to rise — or decline — over time.

One of the biggest challenges real estate investors face is funding. Getting a loan to buy a rental property is not always easy, but that doesn’t mean it can’t be done. A DSCR loan for short-term rentals can help in financing your rental property.

Understanding DSCR Loan for Short-term Rentals

Debt Service Coverage Ratio (DSCR) loans are an essential part of the investment property market, especially for short-term rental property loans. Essentially, a DSCR compares an investment property’s cash flow to its debt obligations.

Lenders calculate the DSCR by dividing the property’s annual NOI (net operating income) by the property’s annual debt service (debt service). Net operating income is the revenue generated by a property after deducting operating expenses but before taxes and loan repayments.

A DSCR (distributable cash-flow ratio) of 1 indicates that the property’s income is sufficient to cover its debt repayments, while a higher DSCR indicates excess income. One key difference between a short-term rentals loan and other types of loans is that approval is based on the property’s rental income rather than the borrower’s personal circumstances.

With this feature, short-term rental property loans can attract investors with a property that produces high rental income but may not be eligible for traditional financing because of factors such as low personal income or high debt to income.

How to Qualify for a DSCR Loan for Short-Term Rentals Loan

To qualify for a DSCR loan for short-term rentals, you must demonstrate through AirDNA comparative data that your DRSCR will be at least 1.00.

When buying new short-term-rental properties, the following applies:

• 700 Minimum Credit Score
• 1.00 minimum DSCR
• 25% minimum down payment (for borrowers with one year of experience operating STRs)
• 30% minimum down payment (for borrowers with less than one year of experience operating STRs)
• Projected annual revenue divided by 12 months
• Occupancy rate >50%

Benefits of Short-Term Rental Property Loans

One of the most significant advantages of short-term rental loans is that you don’t need to provide personal income documentation to qualify. DSCR loans do not require personal financial information, making it easy for new investors to get financing.

Other benefits of short-term rental property loans include:

• Faster closing times: Because lenders only need to verify the DSCR of a property and borrowers do not need to provide personal financial data, the DSCR process is usually quicker to apply for and close.
• There is no limit on the number of properties: DSCR loans let you invest in more than one property at the same time, so you don’t have to worry about paying off your loan before buying a new property.
• Unlimited cash-out: With a DSCR loan for Airbnb, you can borrow up to the amount of money you need based on your home’s equity.
• Separates personal and business finances: If you decide to close in the LLC’s name, you can separate DSCR loans from your assets to ensure you pay for the loan using your business assets.

Financing Your Rental Property Has Never Been Easier

It has provided growth-focused financing to real estate success stories across the country for over ten years. Our experienced lending professionals create tailored solutions that help in financing your rental property. We consider your financing needs, objectives, risk profiles, and time frames, ranging from 6 to 18 months on flips to 15 to 30 years on long-term positions.

Contact us today to learn more about how a DSCR loan for short-term rentals from trusted partner which can accelerate your real estate growth. Our specialists are ready to create strategic financing plans for your 2024 goals.