Why are Traditional Mortgage Models Struggling with Short-Term Rentals (STRs)

15 years ago, if you walked into a bank and you asked for a mortgage to buy and then rent out, they’d think it funny and laugh you out. Probably, they’d laugh so hard they’d be gasping for air. Well, perhaps not THAT dramatic, but you get the point.

Back then, ‘rental investing’ basically meant that you’d find a tenant, then sign a lease, and then go collect rent every month. It's simple and boring, but that's what banks love.

Banks love anything boring because that (usually) means it’s predictable. And ‘predictable’ is safe.

The short-term rentals came to the scene and changed things around. What happened is that investors suddenly realized they could make A LOT more money if they rented property by the day/week instead of by the month/year. The downside here was that when someone looked at your income, the graph would look a bit like a heartbeat monitor – full of spikes and dips.

Regardless of the new earning potential, because of that chaotic income sheet, banks still remain in the past when it comes to investors asking for a mortgage. This has to do with the banks looking for a level of certainty that you’ll be able to pay them back each month.

If your earnings are erratic, that means there’s little to no certainty (regardless of potential).

That’s the biggest downside of STR income – it’s hard to get a mortgage to buy property that you’re going to rent out.

The income is… lumpy. And well, that scares bankers.

So, what happens when an investment that's predicted to perform well meets a system that wasn't built for it?

Why Traditional Loans Aren't Ideal for STR Income

In order to understand why traditional mortgages and short-term rentals don't really like each other, you have to understand how a lender thinks.

Here’s a quick example to illustrate this:

Just imagine an accountant who really hates (REALLY HATES) surprises. That’s the banker here. You’re the one who’s potentially causing that surprise.

And in the accountant's mind, they’d rather go with something more predictable/safe.

When someone applies for a conventional loan/mortgage, the lender/banker wants to see two things:

• Steady income on your end.
• A low enough debt-to-income ratio.

The bank will look at your salary, your taxes, your W-2s, etc. They’re looking to see whether there’s (enough) money being deposited into your account every month. If everything checks out, you’re good to go.

The property itself – the one you’re trying to buy – doesn't matter nearly as much as you and your personal income do.

And, as you can imagine, that mindset doesn't work very well for STRs.

The income front that doesn't show like a paycheck is unpredictable.

Your rental could be fully booked for two months and then sit empty for the next three. The fact that it's so unpredictable is risky in the eyes of lenders, no matter the strength of your annual numbers.

The result is that they reject good deals and see properties that attract income like crazy as shaky. Because they're not boring and predictable, they're a liability. And that's the real issue here.

It's not that STRs are bad investments – they're not – it's that the mortgage system simply doesn't work for them.

Long-Term vs. Short-Term Rentals – What Lenders ACTUALLY Compare

Here are a couple of things lenders will analyze, and also the reasons why STRs don't look at them as a ‘safe’ opportunity to them.

Consistency vs Earning Potential

Long-term rent is predictable.

You know you're getting that money every month, and so does the bank. This is easy to forecast and, while there's always some risk present, it's not nearly as high as with STRs. One month they're booked, the other vacant. The earning potential is higher in general, and the banks know that very well, but they won't look at your best month.

They'll look at the worst one.

STRs have a disadvantage right from the start because banks will rather choose boring and predictable than exciting and uncertain, even though the latter can earn more money.

Simple Structure vs Operational Complexity

When you have a long-term rental, you might as well forget about it and just collect the checks.

But short-term rentals need constant attention because you're adjusting the prices here, managing bookings there, coordinating cleaners, and dealing with guests all the time. And the more moving parts there are, the higher the number of things that can go wrong.

The bank sees that and immediately thinks it's risky.

Fixed Documentation vs Performance-Based Data

If you plan on having a long-term lease, you hand over the lease, some bank statements, and you're done.

Simple, clean, banks love it.

But for STRs, it’s much more complicated.

Think about it – you need to dig through platform data, historical trends, seasonal projections, and it's all harder to verify and MUCH easier to manipulate (opening all kinds of fraud). Basically, it’s an added risk that banks don’t really want to take on.

If the bank can't point to a fixed number and say 'that there is income', they get nervous.

Plus, there's no universal standard for evaluating how SRTs perform, so every bank sort of makes up their own standard on the go.

On top of all this, you also need to think of state-specific rules.

Here's a quick example of this:

DSCR financing for Massachusetts Airbnbs and STRs has stricter rental rules and more stable markets. That means the income is easier to predict, but it's often capped. Then there's Texas, which is more flexible, and the income potential is higher, but higher property taxes and insurance can lower your margins.

The point? Balance.

More precisely, the balance between income and risk changes by state, so that's another factor to think about.

Conclusion

You can't blame bankers for being cautious because their main job is to protect their money.

If it were your money, you’d also look at some level of certainty that you’ll get your money back, right? Banks can't pretend that short-term leases are the same thing as long-term ones, but that doesn't mean that either is a bad investment.

The thing is, STRs are growing, so banks really don't have a choice but to adjust their financing models or they'll lose business.