What’s up with NONI Loans and Short-Term Rentals?


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If history tends to repeat itself, you might wonder whether it’s round two for the mortgage industry and the underwriting of risky loans – specifically, for short-term rental properties. It’s easy to get into a short-term rental with a loan that’s based on future rental income. It’s not a new concept for real estate investors, but it’s now becoming very popular for short-term rental investing as a way to pay for more expensive properties. On the other hand, it’s possible to cover that expense with the expected income. But, what happens to that loan if, let’s say, we have a recession and demand dries up for expensive short-term rentals?

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Non-Owner, No Income Loans

You may already know a bit about these loans. They are commonly known as NONI loans which stands for Non-Owner, No Income and are based on the future income of a property, and not on the borrower’s paycheck. When a lender underwrites this kind of loan, they approve an amount for the purchase of the property that is proportional to future income. According to Realty411, it’s typical to get up to a 75% LTV on loans up to $3.5 million. Borrowers don’t need to show any income or employment, and they can be first-time investors because qualification is based on the expected cash flow from the property. (1)

Those are a few of the basics for a NONI loan. You might also hear them called “debt service coverage ratio” loans, but NONI has a nicer tone. It also means grandmother in Italian. One lender, called “The Lender,” is capitalizing on that with an image of a grey-haired woman wearing heart-shaped glasses and flashing a peace sign. (2) What’s not to like about that?

The ad says: “Our NONI likes Airbnb. The NONI program allows borrowers to use income from vacation rentals, like Airbnb and VRBO… Results without the B.S.” So granny will get you a loan for your short-term rental business. Thanks granny!

Just to be perfectly clear about NONI loans, they are very common loans for real estate investors. And the real estate investing mortgage market has been booming, but it’s unclear how much of that boom is due to short-term rental NONI loans.

Loans Based on Projected Rental Income

According to Inside Mortgage Finance, lenders issued almost $10 billion in loans to investors last year. That’s eight times as much as they did in 2018. Most of those investors qualified for the loans based on projected rental income. Although there’s no way of knowing how many were borrowing money for short-term rentals, it appears those numbers are growing.

Bloomberg says that rating companies have noticed more mortgages for properties without a lease or for properties with leases that are less than 90 days. “The Lender” told Bloomberg that it expects 60% of its rental-based loans for this year will qualify because of short-term rental income. (3)

As it stands, the default rate is usually higher for NONI loans. One analyst says that borrowers who qualify for these loans are three times as likely to default as those with conventional loans. And with an unsteady economy, and the idea of a potential slowdown in the short-term rental market, that could put those borrowers at a higher risk, especially if they are inexperienced.

“The Starry-Eyed Inexperienced Investor”

As former assistant director at the U.S. Consumer Financial Protection Bureau, Patty McCoy, told B;oomberg: “The influx of the starry-eyed inexperienced investor is artificially boosting demand and causing the rental market to be overheated.” She says: “This whole class of loan and, in particular, some of these underwriting practices are a sign of market euphoria. That rarely turns out well.”

Although some analysts see a parallel here with subprime mortgages that were approved with little or no income documentation, lenders say they underwrite these loans with great care. For one, borrowers must have exemplary credit, and lenders often require experience in the short-term rental market, or at least some amount of experience as a landlord.

Some lenders may have tougher requirements than the ones I previously mentioned. For example, Viseo Co-Founder, Jeff Ball, says that borrowers often need a 30% down payment and at least six months of funds in reserve to pay the mortgage. He says the loans that his companies underwrite perform extremely well. He says: “People with good credit have good credit because they have a history of paying their obligations in good times and bad times.”

But he also acknowledges that in the event of a recession, and a cut back on travel, there could be trouble. He says: “It’s an interesting question.”

Will There be a Short-Term Rental Downturn?

Consumers are still whole right now. They saved money during the pandemic, and are now itching to get away. Many of them can also work remotely so a typically shorter vacation can be turned into a longer one. That puts money into the pockets of short-term property owners, and helps to pay for those NONI loans, but there’s also another issue that STR investors need to keep in mind.

The need for long-term housing is putting more and more pressure on short-term operators. It’s something that is impacting the housing market here in the U.S. and around the world. There’s a headline in the news right now, about the housing shortage in Brisbane, Australia, and a warning that short-term operators will be slapped with a huge additional fee. Like many places, Brisbane has seen a huge surge in short-term rentals. There are cities in Southern California tourist destination hot spots that have stopped issuing new licenses. Many long-term residents also want the ones in operation to be phased out. It’s a wildcard that could spoil the best of your short-term rental plans!

The best advice is to do your homework and make sure you know what’s happening with demand and regulations. As you’ve heard me say before, real estate is the best way to build wealth, and there are many ways you can do that. But, you need to do your due diligence. You can find out more about how to invest safely by joining our network at newsforinvestors.com. It’s free to join, and get your questions answered. While you are there, you can also check for links on this topic in the show notes for this episode.

And please remember to hit the subscribe button, and leave a review!

Thanks for listening. I'm Kathy Fettke.


1 -https://realty411.com/the-non-owner-no-income-noni-loan-solution/

2 -https://retail.thelender.com/

3 -https://www.bloomberg.com/news/features/2022-06-14/airbnb-rentals-turn-into-real-estate-goldmines-with-easy-money-mortgages

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