Real Estate Fearmongering for Clicks

Recently, I came across a video titled “The Catastrophic 2024 Airbnb Bubble Crash.” As someone with 12 short-term rentals in our market, this video caught my attention. I must say, it was painful to sit through the entire 15-minute video. Let’s discuss in two parts.

Short Term Rental Impact

While I acknowledge the oversaturation of short-term rentals (STRs) in many markets, this YouTuber contends that most STR owners are vultures poised to wreck the real estate market. Though a balanced approach to STRs and their impact on cities and neighborhoods is necessary, the media has largely promoted the idea of an impending “AirbnbBust.” This catchy term has resonated with many anticipating a market crash for the past few years, but such a crash has yet to materialize. Instead, cities have enacted laws to severely restrict or ban short-term rentals. For instance, Barcelona recently announced a total ban effective from the end of 2028. Other cities are also implementing strong regulations or outright bans on STRs. In New York City, it has been illegal since September 2023 to rent out an apartment as an STR unless you are registered with the city and present in the apartment during the rental period— a measure aimed at addressing the city’s housing crisis. Berlin banned Airbnb’s and short-term rentals in 2014, reintroducing them under strict regulations in 2018. In many coastal cities in California, STRs are either banned or heavily restricted.

Since its inception in 2007, Airbnb has significantly disrupted the travel industry, offering flexible rental accommodations in cities worldwide with a “live like a local” appeal that hotels couldn’t match. However, recent years have seen a backlash against the brand, which is blamed for driving up housing prices and affecting locals who feel compelled to live next door to unregulated hotels. The key question is: what do we gain and lose without a short-term rental market in travel?

It seems evident that removing short-term rentals from the travel market will lead to higher accommodation prices for tourists. It’s likely that hotels will exploit this situation.

The question remains: does banning or restricting short-term rentals actually reduce housing prices or affect housing stock? A study by Harvard Business Review on the impact of the New York City ban, published earlier this year, concluded that short-term rentals are not the primary contributors to high rents. The study suggests that regulations, rather than outright bans, would better benefit the city and its residents. One clear outcome of the city’s ban has been a surge in hotel room rates, which have reached a record average of $300 per night.

Financing a Short Term Rental

I assist many investors in obtaining DSCR loans for their investment properties through REI Brokers. What is a DSCR? A Debt Service Coverage Ratio (DSCR) loan is a type of real estate financing that prioritizes the property’s cash flow over the borrower’s personal income. It is calculated by dividing the property’s Net Operating Income (NOI) by its total debt service (the amount needed to cover principal and interest payments on the loan). A DSCR greater than 1 indicates that the property generates sufficient income to cover its debt obligations.

The video claims that anyone without a job can obtain one of these loans and that many investors do not inform their insurance carrier of their intention to eventually convert the property into a short-term rental (STR). While technically true, this assertion misses critical details.

Many individuals who convert their primary or vacation homes into STRs often fail to disclose the change of status to their insurance carriers. These are typically not professional investors. They are more impacted if a claim occurs, are highly leveraged, do not fully understand the costs involved, the management requirements, and how to accurately determine their net income. These individuals tend not to disclose to insurance carriers that they are operating an STR. In contrast, most seasoned investors with STRs follow the rules because they understand the risks involved and need to protect their investments.

This YouTuber’s statements contain partial truths and much fiction and conjecture. Here are the facts:

• Most DSCR loans must be deeded into a corporate entity, not in your personal name. Anyone purchasing an STR in their own name will not qualify for a DSCR loan.
• These loans require a DSCR of 1.5 compared to the usual 1.2 for a long-term rental, which sets a higher bar for qualification. The higher 1.5 DSCR requires a greater threshold of net income to reduce the lender’s risk and prevent the STR loan from defaulting.
• Our commercial lenders require at least 12 months of stated income with documentation from platforms like Airbnb and VRBO. This means the property must have been operating as an STR for at least 12 months before a lender will fund it. It’s the same requirements for purchasing or refinancing STR properties.
• Loans are available for 80% LTV of the purchase price and 75% LTV on a cash-out refinance.
• Borrowers must provide a personal financial statement, including bank statements for both personal and corporate accounts, as well as any other investment accounts. Demonstrating income is required. While job verification or a W9 is not required, most of these loans are acquired by full-time real estate investors under their corporate entities. This is our full-time job.
• Borrowers must demonstrate liquidity, including 20% down, closing costs, and at least 6 months of PITI. For a $100K loan, the borrower must show a minimum of $20K cash plus PITI and closing costs, which could total $30K or more.
• Borrowers who cannot demonstrate this requirement will not be financed.
• Credit is always checked, and most of these loans require a FICO score of at least 700 or better to obtain the maximum LTV.

Most DSCR loans are geared towards experienced investors, a crucial detail that this YouTuber overlooked in his video.

Many of this YouTuber’s videos from over a year ago are filled with fearmongering, predicting a future crash that has yet to come. This approach seems to be effective, as some videos have garnered millions of views, generating income and perpetuating the hype. Predicting a crash in the real estate market is as challenging for me as it was for the pundits, experts, and professionals who forecasted one in February 2020 when the pandemic began. Instead, the market experienced the exact opposite effect.

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