The concept and the benefits
A vacation rental is a residential property rented by the night or the week through platforms such as Airbnb and VRBO instead of by the year to a single tenant. The economics are different from a long-term rental in both directions: gross income per property can be far higher, and so can the vacancy, the operating cost, the management effort and the regulatory risk. A well-run short term rental in a strong market is one of the highest-yielding residential assets an investor can own; a poorly located one is an expensive second home.
The benefits investors cite are consistent. Revenue that can be two or three times the long-term rent in the right market. Personal use of the property between bookings. Pricing that adjusts to demand week by week rather than lease by lease. Furnished, well-maintained properties that appreciate with the neighbourhood. And an asset class that can be scaled from one property to a portfolio with a management platform.
The obstacles are also consistent, and financing is the first of them. A conventional lender either will not count short term rental income at all or counts it only with a long history and heavy discounts, which means the property has to qualify on the borrower’s personal income as if it produced nothing. That is where the DSCR loan comes in.
Financing options
Conforming
Where the borrower’s personal income is strong enough to carry the payment without the rental income, a conventional loan on a second home or an investment property is the cheapest financing available, and the short term rental income is simply upside. Most investors past their first one or two properties do not qualify this way, because each property adds a payment and the rents are not counted.
Non-QM: the DSCR loan
The loan built for this asset. A debt service coverage ratio loan qualifies on the property’s income against its payment, with the borrower’s personal income left out of the calculation. Loan Goat’s rental DSCR loan publishes the parameters investors need: short term rental income permitted, ADU income permitted, non warrantable condos permitted, recently listed properties OK, DTI not calculated, large deposits do not need to be sourced, first time investor OK, no prepayment penalty and interest-only options available. The card: 5, 7, 30 and 40 year fixed terms, LTV up to 80%, rates from 6.50% on the Non-QM tier, a minimum credit score of 620, on non owner occupied SFR, condo or townhome and 2-4 unit property.
How the short term rental income is measured for a specific property, whether from the platform’s booking history, a market rent analysis or a projection, is set in underwriting; a property with twelve months of records on the platform is the easiest file, and a purchase with none is underwritten on the market evidence.
Hard money bridge
For the two moments the DSCR loan does not cover. First, the purchase that has to close fast: an off-market property, a cash-only listing, an auction, a seller who will not wait. The bridge loan publishes a close in 5-7 days, terms of one or two years, LTV up to 75%, loans from $150,000 to $25,000,000, rates from 9.00% to 13.00% and no prepayment penalties, so it can be replaced by the DSCR loan the day the bookings prove the income. Second, the property that needs work before it can rent: the fix and flip loan funds the renovation through a holdback, and the DSCR loan or a sale follows. A bridge to the season, then a term loan on the numbers, is the structure most vacation rental investors use on their second and later properties.
What underwriting asks for
- Permission to operate. The city or county short term rental permit or licence, the zoning that allows the use, and any cap or registration the jurisdiction imposes. A property that cannot legally rent by the night is a long-term rental for the lender’s purposes.
- The income evidence. Platform booking and payout records where the property has a history; a market rent analysis for comparable short term rentals where it does not; the operating expenses, including management, cleaning, utilities and platform fees.
- The building’s rules. For a condo or a planned community, the association’s rules on short term rentals, which can prohibit the use outright.
- Insurance. A policy that covers short term rental use, which a standard landlord or homeowner policy often does not.
- The operation. Who manages the property, how it is priced and how turnover is handled; a professional platform strengthens the projection.
- The borrower. A credit score above the program floor (620 on the DSCR loan), the down payment (the DSCR loan publishes LTV up to 80%) and reserves, with DTI not calculated and large deposits not sourced.
The potential
The upside of a short term rental is a function of four things: the market (a coastal, mountain or destination location with year-round or seasonal demand), the property (bedrooms, amenities, a pool, a view, the things guests pay for), the operation (pricing, photography, reviews, turnover and a management platform) and the regulation (permits, caps, taxes and the risk that the rules change). An investor who gets all four right owns an asset that outperforms the long-term rental next door by a wide margin; an investor who gets the fourth wrong owns a long-term rental with expensive furniture.
Financing follows the same logic. The DSCR loan sizes the loan on the income the property is expected to produce, so a stronger market and a better operation mean more leverage, and the lender’s questions (what will it rent for, how often, at what cost, under what rules) are the same questions the investor should have answered before buying.
Where vacation rentals fit
- Rental property loans for the DSCR loan that counts short term rental income.
- Bridge loans for the purchase that has to close before the season.
- Multi-family hard money loans for the small building run as several short term units.
- Non-warrantable condos for the resort condo that fails the conventional building review.
A vacation rental is financed on what it earns, and the DSCR loan is the one that counts it. Send the address, the booking records or the market analysis, and the plan, and Loan Goat will tell you how the property qualifies.
