Loans for STR Investment

When considering an investment in short-term rentals, it’s important to understand the different loan options available and how they align with your financial goals and investment strategy. it’s crucial to adopt a strategic financial plan that considers both borrowing costs and market conditions. Consulting with a mortgage professional experienced in the STR market can be invaluable in securing a suitable loan.

Conventional Mortgage Loans

Conventional mortgage loans place significant emphasis on the borrower’s financial stability. However, not every lender offers conventional mortgages for short-term rental (STR) properties, so thorough research is essential.

These loans generally require a minimum credit score of around 620. Additionally, they necessitate a more substantial down payment, typically starting at 15%. A down payment of 20% or more can eliminate the need for Private Mortgage Insurance (PMI), which is required for down payments below 20% to protect lenders in case of default.

The terms for conventional mortgage loans usually span 15, 20, or 30 years. While shorter terms result in higher monthly payments, they often come with lower interest rates.

Ideally Suited For:

  • Investors Prioritizing Stability: Ideal for those seeking predictable payment schedules, especially with fixed-rate options.
  • Long-Term Planning: Suitable for investors planning long-term strategies, aiming to build equity over time.

Key Considerations:

  • Higher Entry Requirements: Stringent credit and down payment requirements can be barriers for some investors.
  • PMI Additional Costs: PMI adds an expense for those with lower down payments until sufficient equity is built.
  • Interest Rate Sensitivity: Changes in the mortgage market can impact borrowing costs, making mortgage rates a crucial factor for investors.

Debt Service Coverage Ratio (DSCR) Loans

A Debt Service Coverage Ratio (DSCR) Loan, a type of commercial loan, is tailored for acquiring or refinancing investment properties. The DSCR measures a property’s ability to generate enough cash flow to cover its debt obligations. Unlike conventional loans, DSCR loans base eligibility on the property’s cash flow rather than personal income, making them particularly advantageous for Airbnb investors as they consider the rental income potential of the property.

This ratio is calculated by dividing the property’s annual net operating income (NOI) by its annual mortgage debt service. A DSCR of 1.25 or higher for STR properties indicates that rental income exceeds debt obligations by at least 25%, providing a cushion against vacancies or unexpected expenses.

Ideally Suited For:

  • Investors Seeking to Maximize Income: Beneficial for those targeting properties with high rental yield potential and steady occupancy rates.
  • Experienced STR Investors: Best for seasoned investors with a track record in managing STR properties and navigating market complexities.

Key Considerations:

  • Rigorous Financial Assessment: A thorough analysis of rental income and operational expenses is crucial to ensure the property meets the required DSCR.
  • Regulatory Compliance: Investors must be knowledgeable about local STR regulations, which can affect the legality and profitability of the rental.
  • Property Management Experience: Lenders prefer borrowers with proven property management experience in the STR sector to reduce perceived risk.

Hard Money Loans

Hard money loans offer specialized short-term financing for real estate investors, using the property itself as collateral. Also known as bridge loans, they are often used to finance one property while preparing to sell another.

These loans are funded by private investors or companies rather than traditional banks, offering the advantage of rapid approval and funding—essential when quick access to capital is needed.

Ideally Suited For:

  • STR Investors Facing Tight Deadlines: Ideal for those needing to complete renovations and start generating rental income quickly.
  • Fixer-Upper Properties: Best for acquiring and updating properties to meet STR standards, enabling rapid market entry.

Key Considerations:

  • High Cost of Borrowing: Higher interest rates and closing costs can impact the profitability of investment projects.
  • Short Repayment Period: Typically ranging from 6 to 24 months, requiring a clear exit strategy to manage the financial risk associated with principal repayment due at the loan term’s end.

Source: AirDNA, Nashville Hospitality Group, LLC

Barb is the president of NASTRA and has spent her professional career in hospitality and real estate. After acquiring her first short-term rental in 2018, Barb moved her focus to legal advocacy after she sued the city of Nashville over a permit issue. Over the last three years, she has mentored more than 2,800 new STR hosts and is the Community Leader for Airbnb in Nashville, as well as an Airbnb “Ask a Superhost” Ambassador. Barb has appeared on numerous radio broadcasts, television shows, and podcasts to talk about her love of hosting. She also manages and co-hosts a number of short term rentals across Tennessee and Arkansas. Barb and her husband Pat own a hotel brokerage, development and consulting company. Look for her upcoming podcast series, “Women of Airbnb.”

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