Before You Make a Short-Term Rental Offer: 5 Financing Checks

Before making an offer on a short-term rental, a buyer should understand five things: the financing strategy that fits the borrower and the property, which rental income may be used for qualifying purposes, the property's DSCR based on the complete monthly housing expense, any property, insurance or association issues that could affect financing, and the cash and reserve requirements that apply to the selected loan program.

Requirements vary by lender, loan program, borrower and property, so the answers for one purchase may not apply to another.

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 the five areas to review.

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. You can compare the available investor loan programs to see how the options differ.

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. For more on how projected short-term rental data may be treated, see how AirDNA income may qualify for a short-term rental loan.

Review the Short-Term Rental Cash Flow Worksheet

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. You can calculate the property's DSCR using the estimated income and complete housing expense.

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

Association rules deserve the same early review. If the property sits in an HOA, condo or resort association, request the governing documents and review any rental restrictions, minimum-stay requirements, permit or registration rules, rental caps and other property-specific restrictions before making an offer. These documents can affect how the property may be used and how the income is evaluated, so it is worth reading them early rather than after going under contract.

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.

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.

Use the Investor Closing Cost Guide

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 short-term rental offer, send Lisa the property and review the financing strategy first.