How to Finance a Short-Term Rental: DSCR Loans, Seller Financing, and the Full Cash Picture

The Full Cash Requirement

Most first-time STR investors underestimate what it takes to close, furnish, and float a property through its first 90 days. They model the mortgage. They forget the furnishing. They skip the reserves.

Here's what you actually need ready before you close on a $350k 3BR property:

• Down payment (DSCR, 20-25%): $70,000–$87,500
• Closing costs (2-4%): $7,000–$14,000
• Furnishing: $20,000–$35,000
• Renovation buffer: $5,000–$15,000
• 90-day working capital: $3,000–$6,000
• Total: ~$105,000–$160,000

For banking, we use Baselane to keep STR finances clean and separate — property-specific accounts, automatic expense categorization, and tax-ready reporting.

The Four Financing Paths

1. Conventional Mortgage

Best for primary residence conversions or house-hacking. Lower rates (0.5–1% below DSCR) but requires W-2 income and strict DTI requirements. Read loan terms carefully — some restrict short-term rentals.

2. DSCR Loan

The most common path for pure STR investment. Qualifies on the property's projected rental income, not your personal income. Requires 20–25% down, 680+ credit score, and a DSCR of 1.0–1.25x. Rates run 0.5–1.5% above conventional.

Lenders qualify you on projected STR income — so your comp set analysis matters before you apply. Use StrIQ (code BRENDAN10 for 10% off) to pull actual comparable property data your lender will want to see.

3. Portfolio / Commercial Loan

Best for investors with 2+ properties or properties that don't fit conventional boxes. Rates vary widely (7–10%+). Better for scaling, not starting.

4. Creative Finance

Subject-to: Take over an existing mortgage. Inheriting a 3.5% loan in a 7.5% rate environment is a significant edge. Risk: due-on-sale clause (rare to enforce if payments are current).

Owner financing: Seller holds the note. A seller-financed deal at 5.5% vs. DSCR at 7.5% on a $300k property saves $330/month — that's $3,960/year in additional cash flow on the same property.

The STR Tax Angle

Financing decisions don't exist in isolation from taxes. STR owners who materially participate in their properties may be able to use rental losses to offset W-2 income — a significant planning consideration when choosing how to structure your purchase. See our guide to the STR tax strategy.

The McDonald's Test

If your STR went completely dark for three months — no revenue, full expenses — could you cover it working a McDonald's job? If no, you need more reserves, a less expensive property, or a partner.

Run the Numbers Before You Sign

Financing only makes sense once you know the property pencils. See our STR underwriting guide for the full NOI and cash-on-cash calculation, and our market research guide for how to build your comp set before the lender asks for it.

The Hosted Well Course covers deal underwriting in detail, including how to model a property before you make an offer. 19 lessons, five weeks, free.