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If you're a real estate investor seeking financing options, you may have come across DSCR (Debt Service Coverage Ratio) loans. These loans are used to evaluate a property's ability to generate enough income to cover its mortgage payments. In this video, Bo Eckstein, the host of the Investor Financing Podcast, addresses an important question from a viewer regarding DSCR lenders and their consideration of short-term rental income.
How Do DSCR Lenders Evaluate Rental Income?
Eckstein explains that most DSCR lenders will conduct a rental survey on a property. If the property is vacant, the lender will rely on the appraiser's estimate of the property's rental income. For example, if the appraiser states that the property can be rented out for $2,000 a month, the lender will use this amount in their DSCR calculation. This is relevant when the borrower is seeking to qualify for a loan based on the long-term rental income of the property.
Short-Term Rental Income and DSCR Loans
But what happens when the borrower is considering renting out the property on a short-term basis, such as through Airbnb or other vacation rental platforms? In this case, some DSCR lenders may accept short-term rental income to qualify the borrower for a loan. However, this varies from lender to lender, and it's important to do your research and find a lender that will accept short-term rental income if that's what you plan to do with the property.
Projection Based Loans
Eckstein suggests that if the long-term rental income of the property is not enough to qualify for a DSCR loan, then a projection-based loan may be a better option. Projection-based loans take into account the potential income that the property can generate, including short-term rental income, and use that to qualify the borrower. Eckstein recommends that borrowers interested in exploring this option should reach out to him for a free strategy call.
Conclusion
In conclusion, if you're a real estate investor considering a DSCR loan, it's important to understand how lenders evaluate rental income. While most DSCR lenders will consider long-term rental income, not all will accept short-term rental income. If you're planning on renting out the property on a short-term basis, it's essential to find a lender that will accept this type of income. Additionally, projection-based loans may be a viable option if the property's long-term rental income is not sufficient to qualify for a DSCR loan.