Navigating Short-Term Rental Financing

As the short-term rental market continues to thrive, understanding the nuances of financing these properties is critical for investors. In this episode of the Tax Smart REI Podcast, Stacey Dowling, an experienced short-term rental lender, shared her expertise on loan options, tax implications, and success stories in the world of short-term rentals. Here’s a breakdown of key insights from the episode.

The Fundamentals of Short-Term Rental Financing

Short-term rental financing differs significantly from loans for primary residences and long-term rentals. While primary residence loans qualify borrowers based on personal income and long-term rental loans account for 75% of rental income, short-term rental loans often require more creative solutions.

Two common loan options are:

• Vacation Home Loans: Require only 10% down but don’t allow rental income to offset loan qualifications.
• DSCR Loans (Debt-Service Coverage Ratio): Focus on the property’s income-generating potential but often require a higher down payment and favorable income-to-payment ratios.

House Hacking: A Path to Success

Stacey highlighted house hacking as a powerful strategy for building wealth. Investors can purchase a property, live in part of it, and short-term rent the rest. Once they move to a new primary residence, the entire property can be converted into a rental.

Case in point: A couple used this approach to acquire six properties in just three years.

By leveraging their short-term rental income, they are now purchasing a $1.4 million dream home, demonstrating how house hacking can fast-track financial freedom.

Tax Implications and Lending Considerations

Tax returns play a pivotal role in securing financing. Stacey emphasized the importance of properly prepared tax returns:

• Depreciation Add-Backs: Bonus depreciation and cost segregation often create large tax losses, but lenders add these expenses back to income for lending purposes.
• Accurate Expense Reporting: Misreporting recurring expenses, like property taxes and insurance, can hurt loan approval.

Extensions and amendments can delay the lending process. Stacey recommends filing tax returns on time to avoid complications, especially for new investors without a track record.

Regulatory Challenges in Short-Term Rentals

Short-term rental regulations are tightening in many markets. Cities like Denver and New York require owners to live on-site or ban short-term rentals altogether. Investors must conduct due diligence and understand local laws before purchasing.

When faced with regulations, midterm rentals (30+ days) offer a viable alternative. They often bypass short-term rental restrictions and provide higher returns than long-term leases.

Creative Solutions and Success Stories

Stacey shared inspiring stories of clients who built thriving real estate portfolios:

• Scaling Short-Term Rentals: Some clients manage multiple properties or turn their experience into businesses, like short-term rental interior design or property management.
• Adapting to Challenges: Investors have overcome legislative hurdles by pivoting to midterm rentals or fostering good relationships with neighbors to prevent disputes.

Key Takeaways for Investors

• Choose the Right Loan Product: Understand the differences between vacation home loans, DSCR loans, and other options to find the best fit.
• Leverage Tax Benefits Wisely: Utilize bonus depreciation and cost segregation without fear of compromising lendability.
• Research Regulations Thoroughly: Avoid markets with restrictive short-term rental laws or prepare backup strategies like midterm rentals.
• Explore House Hacking: Start small by renting part of your primary residence, and scale as you grow.

Conclusion

Financing short-term rentals can be complex, but with the right strategies and expert guidance, it’s possible to achieve substantial success. Stacey’s insights highlight the importance of proactive planning, accurate tax filings, and creative problem-solving for real estate investors.

If you’re ready to explore financing options for short-term rentals, you can reach Stacey at sdowling@dg-lending.com. For tax strategies and proactive planning, visit TheRealEstateCPA.com.

Invest smart, and happy renting!

If you’re looking for tailored tax strategies, schedule a free consultation with our team.

Transcript

Intro: 0:00 – 0:05

Narrator:

You’re now listening to the TaxSmart REI Podcast, the number one tax podcast for Real Estate Investors.

Episode Overview and Guest Introduction: 0:05 – 1:10

Thomas Castelli (0:05):

Hey, thanks for tuning into this week’s episode of the TaxSmart REI Podcast. Today, we’re joined with Stacey Dowling, a short-term rental lender, and we’re going to be discussing what you need to know about obtaining loans for your short-term rental, as well as some case studies and other great stuff. We’ll be tuning into all that in just one minute.

Sponsor Message: 1:10 – 1:54

Sponsor:

Pure Property Management is recognized by Forbes as one of America’s best startup employers and is transforming rental property ownership. The company helps you maximize returns through expert insights and proactive management with a unified, tech-driven approach and dedicated local teams. Pure ensures a hassle-free experience for property owners like you. Backed by over 2,000 years combined expertise and with more than 12,000 five-star reviews, Pure has become a trusted partner for simplifying investment journeys and making rental property ownership truly rewarding. To learn more, visit rentpure.com. Again, that’s rentpure.com. We’ll see you over there, but for now, let’s dive right into today’s episode.

Guest Introduction: 1:54 – 2:12

Thomas Castelli (1:54):

All right, and we are back. So, Stacey, thank you so much for joining us today on the show. Would you be able to share a little bit about your background and how you got involved with the world of short-term rental lending?

Stacey Dowling (2:04):

Sure, thanks for having me, you guys! I’ve been a residential mortgage lender for over 30 years. My journey into short-term rental lending started when I helped a realtor secure financing for a vacation home. From there, it just snowballed, and I began specializing in this unique space.

Differences in Short-Term Rental Lending: 2:12 – 4:00

Thomas Castelli (2:12):

What would be the difference for a short-term rental investor? What do they need to be aware of that may differ from someone buying a home for themselves or a long-term rental?

Stacey Dowling (2:24):

For a primary residence, you qualify based on your income to make the payment. For long-term rentals, we can offset 75% of the rental income to help qualify. With short-term rentals, it’s more nuanced, and products vary. Knowing the available loan options is key.

Ryan Carriere (3:29):

The two most common loan options we see are vacation home loans and DSCR loans. Would you say those are the go-to options, or are there others?

Stacey Dowling (3:35):

Those are definitely the most common. Vacation home loans require 10% down but don’t factor in rental income. DSCR loans, on the other hand, assess the property’s income but typically require a higher down payment.

House Hacking and Short-Term Rentals: 4:00 – 6:04

Thomas Castelli (4:00):

House hacking seems popular with short-term rental investors. How does that play into financing?

Stacey Dowling (4:18):

House hacking can be a great way to enter the market. For example, someone might buy a property, live in part of it, and short-term rent another part. Later, when they move to their next primary residence, they can use that rental income to offset mortgage payments.

Ryan Carriere (5:13):

Does the lack of lease agreements for short-term rentals affect qualifying for vacation home loans?

Stacey Dowling (5:20):

Yes, because vacation home loans don’t allow you to use rental income for qualifying. It’s all about your ability to qualify for the payment outright.

Tax Returns and Lending: 6:04 – 9:10

Thomas Castelli (6:04):

When evaluating a taxpayer’s ability to pay, what role do tax returns play?

Stacey Dowling (6:12):

Tax returns are critical. Lenders look for properly documented income and expenses. For example, bonus depreciation is added back to income, but if all income is written off as losses, it could limit lending options.

Ryan Carriere (8:43):

So, bonus depreciation doesn’t hurt lendability?

Stacey Dowling (8:51):

Not at all! We add it back. What matters more are recurring expenses versus one-time events like a new water heater.

Case Studies: House Hacking Success: 9:10 – 13:55

Thomas Castelli (9:10):

You’ve seen some successful short-term rental investors. Could you share any case studies?

Stacey Dowling (9:22):

I have a couple who started house hacking in 2020. They each bought a primary residence, rented part of it, then moved to their next home. Now, in 2023, they own six properties and are buying their dream home for $1.4 million with over 20% down.

Short-Term Rental Legislation and Midterm Rentals: 13:55 – 18:04

Thomas Castelli (13:55):

Legislation is a growing concern for short-term rental owners. How should investors navigate this?

Stacey Dowling (14:05):

Work with knowledgeable agents who understand local regulations. Some areas, like Denver, only allow short-term rentals if the owner lives on-site. Others are more flexible.

Ryan Carriere (17:05):

What about midterm rentals, like renting to traveling nurses? Does financing change for those?

Stacey Dowling (17:18):

Midterm rentals can be a great backup. From a lending perspective, they’re treated similarly to long-term rentals.

Client Stories: Building Success and Navigating Challenges: 18:04 – 25:10

Thomas Castelli (18:04):

Have you seen clients use creative strategies to overcome challenges?

Stacey Dowling (18:10):

Yes, I’ve worked with clients who started small, like managing one property, and scaled into larger ventures. For example, one client now manages over 40 short-term rentals and turned their experience into a full-fledged business.

Ryan Carriere (24:10):

What about neighbors causing issues with short-term rentals? How do investors navigate that?

Stacey Dowling (24:20):

Building relationships with neighbors early on is key. Setting minimum stays of two nights can also deter parties, which often cause neighbor complaints.

Financing Options and Market Trends: 25:10 – 30:10

Thomas Castelli (25:10):

Are there any states where you’re seeing the most short-term rental investments?

Stacey Dowling (25:20):

Texas, Florida, and Colorado are all popular. Texas surprises me a bit, but it’s booming for short-term rentals.

Ryan Carriere (29:10):

What about financing for midterm rentals? Does the income calculation differ?

Stacey Dowling (29:18):

No, we often use appraiser rent comps and 75% of the projected income for qualification.

Closing Remarks and Contact Information: 30:10 – 33:00

Thomas Castelli (30:10):

Stacey, thank you for joining us. For listeners looking to finance their short-term rental, how can they reach you?

Stacey Dowling (30:20):

Email is best: sdowling@dg-lending.com. I’ll send you a link to my calendar.

Thomas Castelli (30:40):

Thanks again, Stacey, for sharing your expertise and insights today. For listeners, whether you’re exploring short-term rentals or looking to scale your investments, Stacey is a fantastic resource.

If you need help with tax planning, book a free consultation. If you’re a CPA or EA looking for a career change, reach out to us at onboarding@wholecpallc.com.

See you next week on the TaxSmart REI Podcast!

Disclaimer: This podcast summary and transcript were partly generated and may contain some errors or miss key points from the audio recording.