Navigating the world of short-term rental (STR) loans can be complex, but understanding these top five terms can make a significant difference in your investment strategy. Let’s break them down:
Warning – self-promotion alert!: Diggifi does STR loans and one of our loan consultants will be only-too-happy to analyse these loan terms with you on the phone. Get in touch with us here for a quick, free loan consult.
1️⃣. Loan to Value (LTV) 📈
Definition: Loan to Value ratio is a financial term used by lenders to express the ratio of a loan to the value of the asset purchased.
Importance in Short-Term Rentals: In short-term rental loans, a lower LTV often means less risk for the lender, potentially leading to other loan terms being better for the borrower. However, these better terms come at a cost – as a higher LTV would allow investors to purchase a property with a smaller down payment, enabling them to leverage their investment.
2️⃣. Interest Rate 💰🔍
Definition: The interest rate is the “price of money”, ie the percentage of the loan amount charged by the lender for the use of their money.
Impact on Short-Term Rentals: The interest rate affects the overall cost of borrowing. In short-term rental investments, securing a lower interest rate can significantly reduce monthly payments and increase cash flow from rental income. On the other hand, don’t be scared of paying interest – whatever your monthly interest payment, it’s “just” a cost of doing business.
3️⃣. Maximizing Loan Proceeds 📊💡
Approach: To maximize loan proceeds, it’s crucial to demonstrate high rents (either actual or potential), which can increase the property’s valuation. These potential rents and higher valuation, coupled with LTV, allow the investor to max out the loan proceeds.
Strategy for Short-Term Rentals: Getting a loan done will almost always require an appraisal. By presenting data on rents (including comparable rental incomes) and highlighting the unique features of your property that justify higher rents, you can influence the appraisal positively.
As not all Short Term Rentals have a lengthy history of STR income, you should work with a lender that is prepared to work with market-level estimates (like those from AirDNA or Rabbu), in place of actuals. This, in turn, can lead to a larger loan amount, giving you more capital to work with.
4️⃣. Debt Service Coverage Ratio (DSCR) 🧮✅
Definition: The Debt Service Coverage Ratio (or DSCR) is a measure of the cash flow available to pay current debt obligations (aka, your loan). It compares the property’s annual net operating income to its annual mortgage debt service, including principal and interest.
Relevance in Short-Term Rentals: A higher DSCR indicates that the property generates sufficient income to cover the loan payments. Lenders typically look for a DSCR above 1.0, as this signifies that the income is more than the debt service. At times, you can even qualify for a loan below the magic 1.0 level – but that’s not easy. For short-term rentals, showcasing strong rental income is key to achieving a favorable DSCR.
5️⃣. Duration of Loan (Loan Term) ⏳📆
Explanation: This refers to the length of time over which the loan is scheduled to be repaid.
Optimal Term for Short-Term Rentals: The duration of a loan for STRs can vary, and, as loan terms are all inter-related, different investors may choose to optimize for Loan Term vs. Interest Rate vs. LTV . Shorter-term loans may have higher payments (esp in today’s higher-rate environments) but less total interest over the life of the loan, while longer-term loans offer may have lower monthly payments but more total interest over the life of the loan. The choice depends on your cash flow needs, investment strategy, and long-term financial goals.
📢 Looking for Tailored Loan Solutions? 📢Each short-term rental investment is unique, and understanding these key loan terms can help you navigate your financing options more effectively. For personalized advice and loan solutions that align with your investment goals, connect with a Diggifi loan officer today. Let’s make your real estate dreams a reality! 🚀🏘️🤝