Commercial Magazine

The Quirks of Vacation Rentals

Closing loans for short-term rental homes can be lucrative work for brokers

By Eric Krattenstein

When a commercial mortgage lender recently introduced in-house rental loans for real estate investors, there was one question they often received: Do they offer Airbnb loans? Sometimes potential borrowers would call them Vrbo loans, and at other times they simply called them vacation-rental loans.

However it was delivered, the message was clear: These borrowers were looking to finance another type of rental asset that the lender hadn’t yet considered. As a group, hard money lenders are always looking to maximize loan origination volume by offering a variety of products to their clients, so the lender did the work and began offering loans for short-term rental properties.
Such loans are inherently riskier than traditional investment-home loans. Taking the necessary precautions and doing the proper due diligence before working with this unique asset class is key to success as an originator of short-term rental loans.
It’s important to understand that technology has allowed short-term vacation rentals to become much more popular over the past decade. Before third-party services such as Airbnb and Vrbo, it was tough for vacationers and property owners to find each other.
Today, the person who owns the property and the person who wants to rent it can find each other on their own time and come to a visible, transparent agreement about dates and costs without ever meeting. Of course, some property owners prefer being independent — meaning they’ll do their own marketing and bookings for their property to cut out the middleman — but internet-based tools still make it possible for short-term rental properties to thrive.

Flexible and inexpensive

Short-term rentals have taken off in recent years, in part because they offer flexible scheduling and relatively inexpensive lodging in a comfortable environment. A good example of this is happening in Kissimmee, Florida, a popular area for short-term rental services.
The main reason why is the city’s location. Kissimmee sits quite close to major Central Florida attractions, including the Walt Disney World Resort and the Universal Orlando Resort. Each year, these two theme parks alone bring tens of millions of visitors from all over the world to the Orlando area. Many of these visitors are looking for less expensive lodgings than those found inside the parks.
The location of these rentals in Kissimmee allows people to stay at reasonably priced, short-term rental accommodations. There are more than 10,000 vacation rentals in Kissimmee, according to Vrbo.

Underwriting differences

So, what’s the difference between lending on long-term rental properties and short-term rental properties? On the surface, underwriting loans for both types of properties look much the same.

Short-term rentals have taken off in recent years, in part because they offer flexible scheduling and relatively inexpensive lodging in a comfortable environment.

In both cases, the individual property is assessed using a debt-service-coverage ratio to determine its profitability as a cash-flowing asset, and it’s then compared to similar assets in the nearby vicinity. The risk-assessment process for short-term rental properties, however, runs deeper than the initial underwriting process might appear.
For example, many of these short-term rentals are based on seasonality, which adds another layer of complexity compared to long-term rentals. Some of these properties may generate 85% of their yearly cash flow during only 10% of the calendar year, which is a risky inconsistency that tends to make lenders apprehensive.
The question is, how do lenders underwrite an investment-property loan like this? They could look at market-rent comparables from an appraiser that won’t account for the seasonality aspect, or they might focus on the seasonality and accept the risk that comes with it. If the property has a proven history with Airbnb or Vrbo, an experienced lender will use the most recent year of income generated from that platform.
If the property is unproven and has no history of functioning as a short-term rental, however, then the lender will mitigate risk by using market rents for the deal. Sometimes this method will cause a dramatic difference in numbers, which may mean that the borrower won’t want to move forward with the deal. But the use of this method has been successful for lenders and helps them maintain a strong credit culture in the private lending space.

Not always ideal

Short-term vacation rentals aren’t always a typical asset class that lenders love to work with. An ideal situation for a hard money lender is a standard home or apartment complex with plenty of transparent history, meaning the risk on the deal is incredibly low. Fix-and-flip lenders, meanwhile, love a cookie-cutter house that appeals to the masses and is affordable to the largest possible segment of renters.
Many of these short-term rentals, however, are large or even luxurious properties that include multiple bedrooms, on top of the fact that the lease payments are often split between a group of people. These aren’t the standard, boilerplate lease terms associated with long-term rental properties, and they often aren’t the standard property type either.
This is where risk assessment comes into play once again. Identifying the properties that lenders are willing to finance — and the underwriting facets that they are willing to be flexible with — will help commercial mortgage brokers to prepare for the different kinds of assets that borrowers will bring to the table.
Also, since this asset class is relatively new, different issues are evolving every day. Municipal governments are constantly writing or adjusting laws that concern such rental properties, which could easily impact the profitability of a property at any given time.
This is where having local, boots-on-the-ground staff in areas where companies are lending can be crucial for making successful short-term rental loans. For example, if a lender is looking at a short-term rental property in Atlanta but the city is preparing to halt permits for these types of businesses, it impacts the viability of the deal and is an issue the lender needs to be prepared for.

Learning transparency

Lenders need to be upfront and transparent with brokers and borrowers about closing times and interest rate changes. This allows clients to retain trust throughout the process, making them more likely candidates for repeat business on their next deal.
If a borrower is asking about a loan for a property with no proven history of short-term rental income, a lender should explain why they’re going to need to use market comparables and how it will affect the overall feasibility of the deal. These processes and conversations will become easier with time, while the mistakes that lenders make along the way will prove to be learning tools that will improve their future business dealings and make their borrowers happier in the end.
With the growth in short-term rental properties over the past decade, it’s important for mortgage brokers to consider their options. As an investment asset class grows, so does the interest from investors and lenders alike. While the lending processes for long-term and short-term rental homes aren’t very different, the ways that a lender needs to assess these deals are unique. Long-term rental property has a level of safety and consistency that lenders love to see — and the less risk in a deal, the more willing a lender will be in backing it.
Vacation rentals can have issues involving seasonality or nonstandard property types, or they may be tied to laws that impact the property’s profitability. Understanding the potential issues and knowing how to proactively work around them are the key to being a trusted originator of short-term rental loans, which will pay dividends as this asset class continues to expand across the country. ●


  • Eric Krattenstein

    Eric Krattenstein is a partner, chief marketing officer and head of sales for Asset Based Lending (ABL), a private commercial mortgage lender that has funded more than 3,000 loans with a combined value of more than $1.1 billion for residential and mixed-use commercial properties. ABL is operated by knowledgeable and experienced real estate lenders who want to help investors succeed. Its mission is to help investors quickly and efficiently finance their business activities. Learn more at

You might also like...