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Why Don’t Banks Lend on Short-Term Rentals?

Updated: May 30, 2023

Article by Fred SaintAmour

Banks do not like to lend on short-term rentals. The main reason is a simple thing called assignment of rents. Often when closing on an investment property, one of the documents you sign is an “Assignment of Rent”. Not only do you pledge the asset (the property), but you also pledge the rental income of that asset. In the event you stop paying and foreclosure is initiated, the bank has all the rights to the rent being collected. On a short-term rental, there is no long-term rent to collect, and banks aren’t going to want to run your short-term rental operation while they are foreclosing. The asset won’t generate any income during the foreclosure process and will most likely sit empty, opening it up to other losses (broken water pipes, looting, vandalism, etc.).

Eventually, banks will come around and accept short-term rentals as a viable business model. It has already proven itself in the marketplace. Airbnb and VRBO are now household terms. The concept has proven itself and is no longer some fringe idea used by vagabonds. Banks are also realizing some of the possible benefits of a landlord involved in short-term renting: more profitable, less wear and tear, more frequent inspections of the landlord, ease of ridding yourself of an undesirable tenant.

Until banks embrace short-term renting, there are still ways to buy them. The simplest way it to buy the house as a long-term rental, and then transition it to small term rental when the market is right. If the house is currently rented, you can use that current long-term lease to qualify. If the house is vacant, then you can use the market rent provided in the appraisal report to qualify. If you can’t get qualified this way with a bank, then you can get financing through a non-bank lender.

Non-bank lenders are nimbler and more aggressive when it comes to lending on non-owner-occupied investment properties. They understand short-term rental strategies and lend on them every day. If the property you are buying or refinancing is already a short-term vacation rental then they can simply get a printout from Airbnb and/or VRBO to prove the income on the property and qualify you that way. Lastly, non-bank lenders do not require tax returns. They are only interested in the income of the property to qualify for the loan.

Article written by Fred SaintAmour, Commercial Loan Executive at Boathouse Commercial Funding Group,

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