Before You Make an STR Offer: 5 Financing Checks That Can Save the Deal
A short-term rental can have an incredible location, impressive projected revenue and beautiful marketing, and still create financing challenges.
Before making an offer, investors should understand how the borrower, property, income documentation and selected loan program work together.
Reviewing the financing before committing to a property may help identify concerns involving rental-income calculations, insurance, property eligibility, reserves and closing requirements.
Here are five areas to review before making an offer on a short-term rental.
1. Choose the Right Financing Strategy
Not every short-term rental should be financed the same way.
Depending on the borrower's qualifications, intended use, property and available documentation, possible options may include DSCR financing, conventional investment-property financing, second-home financing when the borrower and property legitimately qualify, or another investor loan program.
The lowest advertised rate is not always the most important starting point.
The better question is:
Which financing strategy fits this borrower, this property and the investor's long-term goals?
Different programs may have different requirements for credit, down payment, reserves, property type, ownership structure and rental-income documentation.
That is why the financing strategy should be discussed before the offer, not after the investor is already under contract.
2. Confirm Which Rental Income May Be Used
Projected Airbnb or VRBO revenue does not automatically become qualifying income.
Depending on the loan program, a lender may review market-rent information, an appraisal rent schedule, acceptable short-term rental projections, existing rental history or other documentation.
The amount displayed on a listing, property-management projection or third-party rental report may not be calculated exactly as the investor expects.
Before relying on projected revenue, confirm:
- Which income source the loan program accepts
- Whether historical income is required
- How occupancy and expenses are evaluated
- Whether third-party market data may be considered
- Whether the property must meet a specific DSCR requirement
A strong revenue projection can be helpful, but it still needs to be evaluated under the selected loan program's guidelines.
3. Review the Complete DSCR Calculation
A DSCR loan is not determined by the nightly rental rate alone.
The calculation generally compares acceptable property income with the applicable monthly housing expense.
Depending on the program, that expense may include:
- Principal and interest
- Property taxes
- Homeowners insurance
- Association dues
- Other applicable housing expenses
An increase in insurance, taxes or association dues may materially affect the calculation.
That means a property with attractive projected revenue may still produce a weaker qualifying ratio once the complete expense is included.
Investors should review the entire calculation rather than focusing only on gross annual revenue.
4. Identify Property and Insurance Concerns
A borrower may qualify financially while the property still creates lending concerns.
Possible issues may include:
- Unusual property types
- Deferred maintenance or condition concerns
- Limited appraisal comparables
- Private or difficult access
- Well or septic considerations
- Large acreage
- Mixed-use features
- Unpermitted additions
- Insurance availability
- High insurance premiums
- Certain amenities or property risks
Insurance should be reviewed early.
The property's age, condition, roof, location, prior claims and amenities may affect both availability and cost.
A higher insurance premium may also change the qualifying calculation.
Reviewing these items before the offer gives the investor more time to gather information, compare options and make an informed decision.
5. Calculate the Cash, Reserves and Closing Requirements
The down payment is only one part of the cash needed for an investment-property purchase.
Investors should also consider:
- Closing costs
- Prepaid taxes and insurance
- Required reserves
- Appraisal and inspection expenses
- Insurance deposits
- Association-related fees
- Ownership and LLC requirements
- The expected closing timeline
Some programs may permit closing in an LLC, but ownership structure should be discussed before the contract and closing documents are finalized.
Reserve requirements may also vary based on the borrower, property, loan amount and selected program.
Understanding the complete cash requirement helps prevent surprises after the offer has been accepted.
Found a Property You Are Considering?
Send Lisa the listing before making the offer. Lisa will review the available property information, discuss potential financing paths and help identify questions that should be addressed before you commit.
Not ready to submit a property yet?
Review the Financing Before You Commit
A great short-term rental opportunity involves more than the purchase price and projected revenue.
The borrower, property, documentation, insurance, expenses and loan program must work together.
Identifying potential financing concerns early may help investors avoid delays, unexpected cash requirements and last-minute surprises.
Before making your next STR offer, send Lisa the property and review the financing strategy first.
About Lisa Stepp
Lisa Stepp has more than two decades of mortgage-industry experience and helps investors evaluate financing strategies for short-term rental and investment properties.
All loans are subject to borrower, credit and property qualification. Program availability, terms and guidelines vary and may change. This content is educational and is not a commitment to lend.
Lisa Stepp-Seritt, NMLS #680403 · Mpire Financial, NMLS #2108504 · Equal Housing Opportunity