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Show Summary
In this conversation, Dylan Silver interviews Tanner Lewis from Easy Street Capital, focusing on the intricacies of private lending for short-term rentals. Tanner discusses the importance of understanding how lenders qualify short-term rentals, the lack of experience requirements for new investors, and the significance of cash flow ratios. The conversation also touches on the buildup period for new short-term rentals, investment strategies, and current trends in the real estate market, particularly in relation to interest rates and investor behavior.
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Investor Fuel Show Transcript:
Tanner Lewis (00:00)
Yeah. So the main question to ask any lender is like, how are y’all qualifying my short-term rental? I’ll say like 99 % of the lenders in particular in the DSCR space and on the market in general are qualifying deals based as like long-term rentals or they’re qualifying it with like 12 months book in history, right? A lot of the time, if I’m buying a short-term rental, it might not be used as a short-term rental right now. I’m not going to have this 12 months book in history, right?Dylan Silver (02:08)
Hey folks, welcome back to the show. Today’s guest, Tanner Lewis, is a senior account executive at Easy Street Capital. They’re a private lender headquartered in Austin, Texas and serving real estate investors across the country. You can find them at EasyStreetCap.com. Tanner, thanks for taking the time today.Tanner Lewis (02:26)
I appreciate it, Dylan. Thank you so much. Excited on the show.Dylan Silver (02:30)
We were talking a little bit before hopping on here and ⁓ Easy Street is really in a niche in the ⁓ private lending space. And you were mentioning to me how short-term rentals is something that ⁓ you guys really excel at. So I figured we would start there. For folks who are looking for ⁓ someone to lend on a short-term rental, what should they be looking for from their lender?Tanner Lewis (02:54)
Yeah. So the main question to ask any lender is like, how are y’all qualifying my short-term rental? I’ll say like 99 % of the lenders in particular in the DSCR space and on the market in general are qualifying deals based as like long-term rentals or they’re qualifying it with like 12 months book in history, right? A lot of the time, if I’m buying a short-term rental, it might not be used as a short-term rental right now. I’m not going to have this 12 months book in history, right?I’m not going to need or I’m not going to be able to qualify it as a long-term rental because long-term rents are well below what I’m looking at as a short-term rental investor. So the big, the big real question asked is like, are you qualifying a short-term rental like a short-term rental? Couple ways to qualify it, I guess in the market right now. ⁓ There is a short-term rental 10-7 and a couple other forms out there where it’s like appraised market rent as a short-term rental.
That’s kind of option A is it pros and cons to it, but the main, the main con to it is I don’t know exactly what the short term rental revenue is going into the deal before I get under contract and put my earnings money down and stuff like that. ⁓ Option B and the most popular one right now is qualifying a deal with AirDNA projected income. So, you know, on on the underwriting side, we just pull it.
bed bath count, plug it into AOD and name, and then spit sell projected revenue and it’s gross revenue. So that’s prior to cleaning and maintenance, property management fees, stuff like that. And then that’s what we’re generally underwriting with in order to qualify the deal essentially.
Dylan Silver (04:37)
Now when folks are coming to you and they may be a newer operator, walk me through the arithmetic that’s happening when you’re looking at, are we going to lend on this deal? Maybe they don’t have a short-term rental that they’ve previously done. ⁓Tanner Lewis (04:54)
Yep.Dylan Silver (04:55)
Would that be something that you would take a look at? then also, of course, credit’s going to come into play.But if it’s more of a rental grade property already, like let’s say it’s livable, how much experience would they have to have, let’s say, as a general contractor or doing flips for them to be qualified?
Tanner Lewis (05:54)
Yeah.Yep.
So, with our products at least, we don’t have any experience requirement for DSCR. We just require that you own a primary or own a property, if not a first time home buyer. But besides that, you can be a first time investor, rough kind of credit parameters. I want to say like a 680 credit score plus, and we can get up to like 80 LTV on a short term rental.
And then a lot of the time too, it’s like a lot of DSCR lenders, what they’re really under underwriting with is the DSCR ratio, right? A 1.0 is breakeven cash flow. So, you know, I, with
income coming in, I am paying for my principal and interest payment, your mortgage, taxes, insurance, and HOA fees, if there are any. generally a 1.0 is good.
And then there’s also a lot of products out there that are able to go what’s called negative cash flow, no ratio ⁓ as well. So let’s say, you know, let’s say we’re qualifying a deal. AirDNA is pulling really low because we have a lot of, a ⁓ lot of, a lot of people in the market have second hands that they toss up on Airbnb. So they’re running out like half the year. AirDNA projections are coming in low. We know that the investor knows that.
⁓ So we think it makes sense to qualify it as a no ratio DSCR land where let’s say underwritten income is 0.75 DSCR or you’re covering like three quarters of your monthly
PITIA payment. That’s still okay. You know, we can still qualify that anyways. So it’s a little bit more of like a holistic approach to each deal.
Dylan Silver (07:50)
Now, when we talk specifically about ⁓ what happens once they’re funded, right? In the short-term rental space, these properties might not be up and running for several months in the sense where you need some type of booking history, or at least you need an active account. So for folks who may not be…Tanner Lewis (07:59)
Yeah.Dylan Silver (08:15)
Well-versed in Airbnb they may think you know money may just start coming in immediately when in actuality There could be type of build-up period is this something that you you advise folks on or? Caution folks with when they are coming to you as a first time Airbnb and then also to add follow that up with is Are there any things that you have seen folks do that? They maybe should not be doing or things that they say should stay away fromTanner Lewis (08:21)
Mm-hmm.Yeah. So I guess regarding like the buildup period, there’s always like, say about three months worth of like, you know, time where you’re kind of getting up and running, getting more bookings, getting more income, stuff like that. Generally speaking, you know, we don’t really factor that in with our, with our projections for it. ⁓ mostly because a lot of it can be due to seasonality, right? If you, you know, buy one in outer banks, North Carolina, for example, during winter time.
You’re not going to get any bookings until, I don’t know, April, you know, hardly.
So a lot of it can be due to that. So we don’t really bake it into our underwriting projections, but I do think it, when you’re talking about, guess, things that they can possibly do better. I, what I’ve seen is a lot of short-term rental investors where I buy like a single family and let’s, let’s pick a city like Washington, DC area, right?
not exactly a hot short-term rental market. And they just tossed it off on Airbnb. They don’t do any kind of special renovations to the property. I’ve seen those investors not do so hot. ⁓ What I have found successful though, and there’s a couple of examples like here in Austin, there’s one Airbnb where it was
and it was fully painted top to bottom pink. ⁓ Their target demographic is bachelorette parties.
you know, so really going above and beyond, like in particular with the rehab. So I think what they did, they put a pickleball court in the back. They had like a pink dinosaur out back too. I don’t even know. ⁓ and then they had, it was like eight different like makeup vanities, like in the living room or something to like, literally just to get ready to go out for the night and awesome.
⁓ so I’ve seen those type of investors where they, they really go above and beyond with the rehab and in particular, with the experience that they provide to the customer, they’ve done very well. You know, if you just toss up,
you know, like if I put ⁓ my house on Airbnb right now, you know, and then put it up on there, it’s not going to do too hot.
and then I guess regarding what you were kind of talking about for the, ⁓ the boot up period, right?
⁓ When it comes to refinances too, lot of lenders are only going to be able to take 12 months of booking history, which kind of puts you in a pinch, especially if you buy a property, you rehab it with hard money. Let’s say you rehab it for like six months, hard money debts come and do soon, you got to refinance it. Most lenders are going to be like, we can either qualify as long-term rental or you can wait another year and we can do it.
⁓ So what I like to do instead is just qualify using their DNA projections and get a book and then a listing and we’re good. So refinance process is pretty easy. A lot of the time you just gotta find the right lender for it.
Dylan Silver (12:17)
Now, when folks are going to Lender is for fix and flip for short term, right, for the SCR.They have right now, I would say more options than ever before, because you have even traditional mortgage companies that are doing DSCR. Banks are doing DSCR, right? you know, when people are looking at where do I go to, you know, the places that can’t factor in the short term rental income, would they be then qualifying them for less money effectively because they’re only going based off of, you know, what the projected
Tanner Lewis (12:35)
Yep.Dylan Silver (12:55)
Rents would be on a year to year lease.Tanner Lewis (12:58)
Yeah. So a lot of the, there’s a lot of lenders out there that offer both like conventional loans and they also offer like a DSCR product, which is very, there’s a lot of qualified mortgage aspects with, that type of product where it’s like, ⁓ has to be a 1.0 DSCR has to be qualified with long-term rents.Um, so that in and of itself was a lot of restrictions on, for example, max leverage. You know, if I can only have a 1.0 DSCR qualifying as a long-term rental and I’m buying a million dollar property and, you know, Aspen, uh, they’re, not going to be able to get you the leverage that you need going with that more traditional option. Um, a lot of the product differentiation on the market, like, you know, you can, you can offer a QM type DSCR product, but there’s also, uh,
Commercial only lenders like, you know, lot of the big players out there, know, Kiavi, Bizzio, Easy Street, that offer like only investor products that can get away with a little bit more flexible guidelines like negative cash flow. Some offer short-term rentals, you know, for example, stuff like that. So I say probably that’s kind of one of the main factors there.
Dylan Silver (14:12)
Now for folks who are looking at hey, which strategy do I go with? Do I go short-term rental? Do I buy and hold this? Do I go mid-term furnished housing, corporate housing, long-term, right? And then I’ve heard this term like slow flip, right, which is an interesting one. It kind of combines several different exit strategies. What would you advise folks to…to evaluate, you know, when they’re looking at which one is right for me, right, which and the area that they’re investing in, what are the what, what are the hot buttons really that they should be looking at as far as hey, is a short term rental going to be good for me? Is a fix and flip going to be good for me? What would you tell people to look at when they’re when they’re not just underwriting, but also determining what’s right for them?
Tanner Lewis (14:40)
Yeah.Yeah.
Yeah, I think, um, like regardless of the property in the market in order to figure out like, if it is a good strategy for you would be like, how much time do I have short-term rental or even a medium-term rental is going to be a lot more involved than something like a long-term rental where you have a property manager stuff like that. That’s honestly probably like the number one thing, you can always get a property manager. Another one too is, uh, a lot, a lot of people will turn to short-term rentals because of the
And I’m going to butcher this. not a CPA, but the short term rental ⁓ loophole, right? Where you can do a cost segregation of a property, hit that. I think it’s a hundred hours a year minimum for active involvement in real estate. As long as you have bookings, less than seven days. And then you can, you can essentially.
cost, segregate the property and write the bonus depreciation off against your active income. That’s one of the main kind of reasons people turn towards short-term rentals in particular. So, you know, it depends on your tax burden, depends on, you know, the amount of time that you have to spend on it, I’ll say. And then, you know, regarding like underwriting deals, you know, at an individual level, I always suggest looking at the long-term rental income and seeing
Okay, what’s my worst case scenario if I do have to pull this off the market as a short-term rental keep as long-term rental? Like am I break even? How much am I losing? Can I support that? It’s always a good, you know, good strategy to play best and worst case scenarios. And then the same thing, you know, like if you’re going to flip a property, right? You can either, you can wholesale it if you don’t have enough time for, you know, the actual rehab. You can flip it, turn a quick profit.
Um, or you can hold onto it as a burr, know, um, then you can add forth, you know, put it as a Airbnb, what
like to call it, where you rehab a property, hold onto it as a short-term rental, which have become pretty popular recently.
Dylan Silver (17:40)
You know, what I’ve seen ⁓ from being a realtor in Texas is that, you know, people happen to consider other exit strategies, especially if you’re selling a home and it’s sitting for a while. You may have to consider, hey, am I going to put a renter in there and relist the property in a year? What’s that going to mean for my current situation? Am I going to be able to…you know, tie up all loose ends that I have right now in one sense. But in another sense, too, what we’re seeing is that people have to be open to more creative exits. Like you I’ve seen more more buyers interested in making seller finance offers. And, you know, sellers may have to be interested in that, too, if that’s where the market is at. But also rates are coming down. So that’s that’s at least a positive there. You know, your business as a private money lender, are you seeing
more fix and flips now now that rates have been ⁓ dropping and it does seem ⁓ optimistic at least. Are you seeing more fix and flips happening?
Tanner Lewis (18:40)
Mm.I guess so. At least in the investor space, there’s not really, it’s not as cyclical as like the owner occupied space, right? Owner occupied, all these mortgage lenders have big booms when rates come down and busts when rates skyrocket. From what I’ve really seen is like investors don’t really care what the rate is, which is crazy, you know, taking on surface level at least, but it’s…
You know, you see analysis of, I can either buy it now with a higher interest rate and hold onto it for a little bit. Rates come down, I can refi it. Great. Because when rates drop, that demand goes up. When demand comes up, prices go up. So a lot of the time, know, rates coming down creates more demand, which creates higher housing prices.
It’s often better to get in when rates are high and just refinance when rates are low. I guess that accounts for a lot of the stability and investors just keep consistently buying them. And then like hard money rates, roughly on average over the past few years, they’ve come down slightly, but they normally don’t adjust as quickly as like DSCR. DSCR adjusts daily, weekly, whatever. Hard money rates are like maybe once a year, know, stuff like that.
the biggest factor with hard money rates coming down, I guess, you know, across every lender in the space is a lot of lenders are starting to securitize loans ourselves. So like we just closed on our second RTL securitization, RTL is hard money. ⁓ and then that, that brought our cost of capital down pretty significantly, which translates over into us decreasing our average interest rate for hard money from like a
10-9 to like a 8-9 or 9-9 somewhere around there. So that’s the least I’ve been seeing nationally.
Dylan Silver (20:40)
You know, it’s interesting because you brought up an interesting…I actually haven’t heard that one before, but I could see it. certainly with some investors, interest rate agnostic, I’m buying the deal because if I can buy it at the right price, then I can make the interest rate work. And so that’s why they say all the money’s made at the buy. We are coming up on time here though, Tanner. ⁓ Any new projects that you’re working on and then as well, what’s the best way for folks to get in contact with you and your team?
Tanner Lewis (21:09)
Yeah, inof new projects, I have a couple planned for this year, but none are ready to be released at the moment. I guess regarding contact info, just email me at [email protected]. If you want to quote out a deal or want to connect and talk strategy, I can either connect with you or one of my team members.
Dylan Silver (21:32)
Tanner, thank you so much for your time today. Thanks for coming on the show.Tanner Lewis (21:36)
I appreciate it Dylan, thank you for having me.
