Brokers, lenders and investors are taking advantage of the real estate boom in major US vacation spots, such as areas around theme parks, ski resorts and Gulf of Mexico beaches in Texas and Alabama.
Bloomberg reports that vacation rentals are a fast-growing and potentially risky business, especially as the market cools due to rising interest rates.
Owners are reaping the benefits of today’s market, assembling mini-empires and managing them remotely with smartphone apps. Even those with little or no experience in real estate are profiting from the game, including software engineers, middle managers, teachers, and even TikTok influencers. They snap up properties, often invisible, at extraordinarily high prices.
Locals and longtime residents are not so happy, however, complaining that investors are changing the character of their communities and making housing unaffordable.
This wouldn’t have been possible without a special type of business loan fueling the boom, reports Bloomberg. These loans allow borrowers, including the self-employed, to qualify based on projected future income from the property they are purchasing rather than their current salary. These are also known as “debt service coverage ratio” loans, which means that rents must be at least enough to cover monthly mortgage payments.
According to Inside Mortgage Finance’s analysis of mortgage bond offerings, last year’s investment real estate loans without taxpayer support totaled $9.9 billion, an eight-fold increase since 2018. vast majority of these investors qualified based on their rental income.
Typically, tenants who regularly pay long-term leases are the consumers who back those loans. But investors have become more interested in vacation rentals – vacation homes and Airbnbs have become all the rage. Over the past year, more lenders have started letting borrowers qualify based on what they expect to charge per night for stays booked on sites like Airbnb and Vrbo, a unit of the travel agency Expedia Group Inc.
Real estate investors are realizing that they can generate more revenue by renting a property for hundreds of dollars a night than by renting a lease to a long-term tenant. For their part, future owners, some of whom are young and generally inexperienced, can afford increasingly expensive properties.
Two examples are featured in the Bloomberg article: Chelsea Jones, a 29-year-old former grocery store manager, bought four rental units in the Smoky Mountains. In total, Jones has borrowed $1.1 million over the past year for properties like Big Bear Lookout, a luxury four-bedroom vacation rental with shuffleboard, a hot tub and a bathroom. games.
The monthly mortgage payment for his Big Bear property is $2,600, so a stable long-term tenant’s rent would barely cover it, let alone having to pay extra for repairs and maintenance. Instead, Jones rents the property for an average of $350 a night on Airbnb, so she can earn $6,000 a month, more than double her monthly loan payment.
Austin-based Visio Lending funded Jones’ mortgage and calls itself the “national leader in rental lending.” Its competitor, HomeXpress Mortgage Corp., is also urging more brokers to sell this type of loan, with account manager Christopher Berrey saying on his LinkedIn account: “Our DSCR loan helps your real estate investors close their next loan in DAYS, not weeks! ! No income verification, no jobs listed, 1007 used for rent projections. AirBNB and VRBO are ACCEPTABLE!!!”
Hometown Equity Mortgage LLC, also known as TheLender, promotes “Non-Homeowner, No Income” or “NONI” loans to mortgage brokers. A Facebook ad features an older woman (since NONI is Italian for grandma) pointing to a sign that reads “The NONI No-Nee” and the qualifications below that read “As low as 0 months supply, FICO as low as 620, new investors allowed, no LTV restrictions and no rate or price adjustments.
However, these transactions are beginning to worry long-time observers and analysts of the real estate market. According to analyst Court Lake of Fitch Ratings, in a weak economy, borrowers who qualified on the basis of rental income are more likely to default at three times the rate compared to those with conventional mortgages.
The new owners might have been too eager to buy these properties without first considering the volatile rents or the cushion they will need for unforeseen repairs.
“The influx of starry-eyed, inexperienced investors is artificially boosting demand and causing the rental market to overheat,” said Patricia McCoy, former deputy director of the Consumer Financial Protection Bureau. “This whole class of lending and, in particular, some of these underwriting practices are a sign of market euphoria. It rarely turns out well.
However, other industry executives are not so pessimistic. They say these loans require high credit scores, which makes them quite different from the subprime mortgages that led to the 2008 housing crisis. The current housing shortage shows demand for rentals, and this is loans to businesses, not homeowners – another notable difference. Lenders can foreclose businesses more easily than consumers, so it is easier to recoup losses in the event of default.
HomeXpress requires borrowers to have one year of rental history per night, although buyers with short-term rental experience can qualify with appraisals that consider comparable properties.
Chris Ledwidge, president of the retail division at TheLender, told Bloomberg that they will only approve borrowers for loans on a daily rental basis if they have a year’s experience as a Airbnb-style hosts or two years long-term property rental. term. They must also be located in strong rental markets.
Bloomberg asked what would happen if families cut back on travel during a recession? Would that mean trouble? Jeff Ball, co-founder of Visio Lending, said that might be the case. “It’s an interesting question,” he said.