Photos courtesy zillow.com
By Hank Lydick
In January 2023, I wrote a letter, posted here in the Daily Post, on the #Airbnbust effect, and another letter on the risk of Debt Service Coverage Ratio (DSCR) loans.
Some DSCR loans are known as NONI (“Non Owner No Income”) loans because no proof of income is required for investors who never plan to be a primary resident (live, work or play with neighbors).
Some DSCR loans includes a “step-down” prepayment penalty structure called 5/4/3/2/1. If an STR investor must sell an STR, and pay-off the DSCR loan in year one, then the STR investor must pay a prepayment (5% of Principle Loan Amount) penalty. The penalty steps-down to 4% in year 2, 3% in year 3, 2% in year 4, and 1% in year 5.
Here is an example:
This home, currently, is a huge income source on Airbnb and VRBO… making over $40,000 a year. The seller is a Licensed Broker Associate in Colorado with an inactive status. Seller will pay a 3% commission to any buyers agent who produces an accepted offer and closing.
October 14, 2020 : Sold for $770.000
June 2, 2022 : Listed for $1,100,000
July 27, 2022 : Price Change to $890,000
August 5, 2022 : Price Change to $825,000
October 7, 2022 : Sold for $800,000 (less than 2 years from purchase date)
In October 2020 a 15-year Fixed Mortgage Rate was 2.4%.
In October 2022 a 15-year Fixed Mortgage Rate was 7.0%.
In October 2020, STR#1 private investor could put 10% down, and finance the $693,000 remainder for $16,632 per year.
In October 2022, Buyer could put 10% down, and finance the $720,000 remainder for $50,400 per year.
Why did STR#1 private investor, grossing $40,000 and netting $23,000 after interest expense, sell?
Maybe #Airbnbust?
IF this was a DSCR loan, STR#1 private investor grossed $800,000, but only netted $744,000 ($26,000 below purchase price).
$24,000 (3% commission paid to buyers agent)
$32,000 (4% DSCR “step-down” prepayment penalty)
If this property was purchased (October 2022) in the hope of being an STR, the property might be a negative cash flow. Mortgage rate fees of $50,400 per year are larger than an STR making “over $40,000 a year”.
If #Airbnbust is happening in Pagosa Springs, future STR revenue may become speculative to help pay down the mortgage loan expenses. It will be interesting if the “reset” happening in real estate helps drive more STR private investors to sell at a loss.
Time will tell if more housing inventory becomes available to be used as a primary home (live, work, and play with neighbors).
Hank Lydick currently resides in Austin, Texas… but plans to become a Pagosa Springs resident, soon.
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