The Trouble With Short-Term Rentals

The rise of short-term rentals has been meteoric to say the least.

Short-term rentals offer diversity in destinations, types of property, and ease of booking for consumers.  It’s no wonder that borrowers are seeing these properties as an attractive option in the real estate market.

So, you would think it would be fair to assume that the lender would treat short-term rentals the same as any other residential rental property? Well, for the most part they are treated the same.

But why are some lenders still hesitant to get on board when it comes to short-term rentals?

After all, these are generally well-maintained properties in good locations.  And the revenue that they produce often far exceeds what they would produce on an annual lease.

So, what’s the problem?

It’s not so much a problem as it is a matter of how the property is categorized by the lender.

• When a property is rented on an annual basis, it’s considered a passive income investment.
• When a property is rented nightly, on a short-term basis, it’s treated by lenders as if it were a business.  In other words, the property is considered to be similar to a hotel.

When a property is considered a business, it may add GST implications and other issues to the underwriting.  And with that change in use, the underwriting changes completely.  In fact, many lenders don’t lend on hospitality related properties.

But don’t worry, that’s just the bad news.

There’s still the good news.  And that is that if your ‘A’ lenders decline a deal because of the use as a short-term rental, it’s worth asking around with your network of private lenders.  If the property, the LTV, and the strength of the borrower make sense, you may find a more receptive audience with your MIC and alternative lenders.