{"id":11939,"date":"2022-05-11T20:32:05","date_gmt":"2022-05-11T20:32:05","guid":{"rendered":"https:\/\/classvaluatdev.wpenginepowered.com\/?post_type=content_hub&p=4963"},"modified":"2022-05-11T20:32:05","modified_gmt":"2022-05-11T20:32:05","slug":"short-term-rentals","status":"publish","type":"post","link":"https:\/\/www.classvaluation.com\/blog\/short-term-rentals\/","title":{"rendered":"Class Valuation Update on Short Term Rentals"},"content":{"rendered":"

In 2018, the GSEs changed policy to allow Airbnb, VRBO, Vacasa, etc (also known as \u201cShort-Term Rentals\u201d or \u201cSTRs\u201d) hosts to claim STR income as part of the Borrower Qualifications side of the lending decision.\u00a0 However, the GSEs did not make a parallel change to the Property Qualification side of the lending decision.\u00a0\u00a0 While STR Income is allowed on the Borrower's income statement, the Market Rents for the collateral still needed to be based on longer-term leases.\u00a0\u00a0 This imbalance in the lending equation has created the situation we find ourselves in today. \u00a0Borrowers can take advantage of the superior STR income on one side and are denied that advantage on the other side.\u00a0 This is creating significant friction in the lending environment.<\/p>\n

The purchase of real property for the purpose of investment is not new.\u00a0 Some transactions are considered long-term investments, to live in it and accrue equity.\u00a0 \u00a0In other cases, we purchase a home for its income potential, renting the property to a tenant.\u00a0 In either case, the focus is on providing affordable housing to residents consistent with the GSE policies.<\/p>\n

With the introduction of STRs \u00a0it presents a profitable opportunity for investors of all kinds.\u00a0 The number of short-term rentals has increased exponentially over the last several years, and in some markets, investors are generating significant revenue; even on just one property.<\/p>\n

Those investors (borrowers) are going to want to seek financing for the purchase transaction or to support a refinance.<\/p>\n

Qualifying for a conventional mortgage on one of these properties is a challenge and without a tenant in place or proof of income, most lenders won\u2019t even consider financing the investment property.<\/p>\n

What does this mean for appraisers?<\/u><\/strong><\/h3>\n

Our Lender\/Clients will be looking for an appraisal to secure a loan on the STR; this is often considered a Debt Service Coverage Ratio (DSCR) Loan.\u00a0 These loans are generally High-Interest Rates, Adjustable Rates, Short Terms, Limited Locations, etc.\u00a0\u00a0 The request will include the 1007 Rent Comparable Schedule and the request from the broker, agent, borrower, and even directly from the Lender\/Client will be to utilize short-term rentals as comparables to develop an opinion of \u201cMarket Rent.\u201d<\/p>\n

There are plenty of financing options made with rental property investors in mind.<\/p>\n

STRs are considered a high-risk loan compared to properties with long-term leases in place for a variety of reasons.\u00a0 These types of properties require the investor to continuously rent the unit or dwelling out to drive revenue. \u00a0If you can\u2019t find occupants for a few months or even just a few weeks, then there is no revenue, and this will affect your ability to pay back a loan.<\/p>\n

If the Borrower is not the primary occupant, this is an added risk to a lender, and investment properties, specifically STRs, fall further down the priority list for payment when there is a financial crisis.<\/p>\n

In 2018, Airbnb partnered with Fannie Mae and several financial institutions to make it possible for their hosts to use their Airbnb Proof of Income on their refinance applications.\u00a0 Proof of Income, not the market rent. There was no parallel change in the GSE policies to allow the use of STRs in the formation of an opinion of Market Rent.<\/p>\n

The best tool to determine an estimate for an STR is through AirDNA.\u00a0 https:\/\/www.airdna.co\/<\/a><\/p>\n

Most appraisers who are using STRs to opine on the market rent are performing a simple math equation (nightly stay as of a specific date multiplied by 365 days and divided by 12 months); if only it were that simple.<\/p>\n

An STR represents a Going Concern Value which is most similar to the Market Value of a business operation which includes the assets of the business.\u00a0 Appraising the Going Concern Value is typically outside the scope of most residential appraisers.\u00a0 The STR is a business that competes with hotels and motels.\u00a0 Here are just a few considerations:<\/p>\n