Where Strategy Drives Approval: Leveraging Premium Income #
The Short-Term Rental (STR) market (Airbnb, VRBO) offers significantly higher revenue potential than traditional long-term rentals (LTRs). DSCR lenders recognize this premium, but they require a specialized approach to underwriting and risk management.
1. The DSCR Difference for STRs #
When underwriting an STR DSCR loan, the lender cannot use a fixed, 12-month lease. They must rely on projected income.
A. Income Verification (The AirDNA Factor) #
- The Lenders’ Tool: The lender requires a third-party revenue projection report (e.g., generated by AirDNA, Mashvisor, or a certified appraisal) which estimates the gross annual income based on comparable STR performance in the immediate area.
- The Multiplier: Lenders often only credit 70% to 80% of the projected gross income to account for seasonality, property management fees, and cleaning costs.
- Strategic Action: Choose properties in proven, high-occupancy vacation or business districts to ensure the projection report supports a high DSCR score (ideally $>1.25$).
B. LTV and Down Payment #
STR loans often carry slightly higher risk profiles due to the volatility of transient demand.
- Higher Down Payments: Be prepared for a standard minimum down payment of 20% to 25%. For maximum leverage, a 30% down payment is sometimes required.
- Reserve Requirements: Given the potential for greater income swings, lenders may require more months of PITI reserves (e.g., 9-12 months) compared to a stabilized LTR.
2. Operational Risks & Mitigation #
Higher revenue comes with higher operational complexity. Successful STR investors master these three areas:
A. Local Regulatory Compliance #
- Licensing & Zoning: STR regulations change rapidly. Before purchasing, confirm the property’s zoning allows for short-term rentals and that the local municipality is issuing new permits. A lack of compliance can nullify your income.
- HOA Restrictions: Always verify the Homeowners Association (HOA) covenants. Many HOAs prohibit or heavily restrict short-term rentals.
B. Dynamic Management & Expenses #
- Management Fees (15-25%): Professional STR management is far more intensive than LTR management (cleaning, guest communications, maintenance). Budget 15-25% of gross revenue for professional services.
- Consumables: Account for the cost of consumables (linens, soap, coffee, paper products). These are operating costs not present in LTRs.
- Price Adjustments: Successful STR requires dynamic pricing (adjusting rates daily based on demand, local events, and seasonality).
C. Insurance Specifics #
Standard homeowner or landlord insurance will not cover commercial STR activity. You must purchase a specialized commercial liability policy (e.g., business package policy) that explicitly covers short-term renting.
Investor Takeaway: The STR DSCR loan is a profit accelerator, but only for the investor who treats the property like a legitimate, demanding hospitality business, not a passive investment.
