When it comes to financing an Airbnb investment property, DSCR (Debt Service Coverage Ration) loans can be an excellent option.
But, as with any financial product, there are key nuances to understand and common mistakes to avoid. To help you navigate the process smoothly and confidently, we've pulled together the seven most common mistakes investors make with DSCR loans—and how you can avoid them.
What is a DSCR loan?
A DSCR loan (Debt Service Coverage Ratio loan) is a type of financing tailored for real estate investors, including short-term rental investors.
How a DSCR loan differs from a traditional loan:
Focus on Rental Income
Instead of basing approval on your personal income, the lender evaluates the property’s ability to generate enough income to cover the loan payments. They calculate the Debt Service Coverage Ratio (DSCR) by dividing the property’s net operating income (NOI) by the annual debt obligations (loan payments).
Example: If your short-term rental generates $60,000 annually in net income and your loan payments are $50,000 per year, the DSCR is 1.2 ($60,000 ÷ $50,000). Lenders typically look for a DSCR of 1.0 or higher, meaning the property generates at least enough to cover its loan payments.
Investor-Friendly
These loans are great for investors because they’re based on the asset's performance, not personal income or tax returns. They often allow for more flexibility with multiple properties and complex financial situations.
Short-Term Rentals
Some lenders specifically evaluate income potential using platforms like Rabbu or AirDNA. Others might estimate based on long-term rental income. To find verified partners that do lend on short-term rental income projections, you can find Rabbu lender partners here.
The most common mistakes with DSCR loans:
Miscalculating the DSCR Calculation
When calculating income vs. expenses, some investors fail to account for vacancy periods, maintenance costs, market fluctuation, and more. If your income or expense estimates are off, your DSCR ratio may be improperly inflated.
Overestimating Income
Some investors get overly optimistic when projecting monthly income. Data tools like Rabbu's Airbnb Calculator can help you run the numbers more realistically, but when considering your financing options, analyze the deal like a lender would by using more conservative forecasts. This does not necessarily mean your investment will perform poorly; it just means that even in a low-case scenario, you would be able to meet your loan obligations.
Underestimating Expenses
Airbnb investors sometimes underestimate expenses. To understand which expenses you'll need to consider, you can use this free underwriting spreadsheet and read about how to use it.
Using Unrealistic Interest Rates
The best way to understand the current rate environment is to contact one or more Rabbu Lender Partners. Simply enter in the geographic area you're considering buying a property in, and fill out the rest of the questions. This will help match you with the best lenders for that area. You can choose to reach out to up to three lender partners, depending on your answers.
Overlooking Possible Vacancy Due to Seasonality
Be sure to check if your property is in a seasonal market using Rabbu's Airbnb Calculator so you can properly estimate occupancy during peak and low seasons.
Acting Too Short-Sighted
Focusing only on short-term strategy and neglecting long-term planning can complicate future investments. Make sure to factor in things like market trends, appreciation, future repairs, and possible increases in expenses when opting in to a DSCR loan.
Work with a Rabbu Partner to Guide You
There are a variety of loan options out there that are interesting choices for investors. The key is working with a lender that understands their nuances, gets your situation, and can help you navigate the options to find the one that works for you.
