The other day, I posted about #Airbnbust, and the risk of Debt Service Coverage Ration (DSCR) loans.
Some DSCR loans are advertised as NONI (“Non Owner No Income”) loans because no proof of income is required for investors who never plan to be an owner (live, work or play with neighbors), and occupy the property as a primary residence.
DSCR loans are alarming longtime observers of the real estate market. In a weak economy, STR investors who qualified based on rental income alone are likely to default at a rate 300% higher than individuals with conventional mortgages.
I hope Pagosa realtors are not encouraging young starry-eyed inexperienced STR investors to ‘make it happen, quit your job, retire, make the move to the mountains, work for yourself, and live off the passive income streams that STR units can provide’. I hope that the majority of the estimated 1,000 STR units created in Archuleta County during the last decade were paid for with substantial cash down-payments, and financed with conventional home mortgages.
A standard DSCR loan includes a ‘step-down’ prepayment penalty structure called ‘5/4/3/2/1’. If an STR investor must sell an STR unit, and pay-off the DSCR loan in year one, then the STR investor must pay a prepayment penalty — 5% of principle loan amount.
The penalty steps down to 4% in year 2, 3% in year 3, 2% in year 4, and 1% in year 5.
I hope we don’t have 100 illegal STR units — 10% of the STRs in Archuleta County. Approximately 25% of STRs in New York City are estimated to be illegal.
I hope 25 STR units (2.5% because of #Airbnbust) are not forced onto the MLS as inventory For Sale.
If a $500,000 Pagosa Lakes home was converted into an STR unit during 2020 – 2022, and the STR unit must be sold in 2023, then the DCSR prepayment penalty is about $25,000 per STR unit sold.
If STR units are sold at distressed prices, commissions are paid to Realtors, and the new MLS inventory might improve Workforce Housing availability. The real estate market needs a “reset”, but unfortunately when DSCR loans are involved in a recession market — things don’t always turn out well for young starry-eyed, inexperienced STR investors.
The five scariest numbers for a young starry-eyed inexperienced STR investors might turn out to be 5/4/3/2/1.
Hank Lydick
Austin, TX (now)
Pagosa Springs, CO (soon)
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