Financing decides the price range you can shop in, whether you can hold title in an entity, and how many properties you can own before the structure has to change. It is the third decision in the sequence, after the tax position and the participation structure, and before the market. This is where it stood in 2022, which was the year cheap money ended and the phase-down clock started.
What 2022 changed
2022 split into two halves. The first looked like 2021: strong demand, rising rates, aggressive competition for inventory. The second was defined by the fastest rise in borrowing costs in decades, which changed what a property had to earn to work.
Revenue held up better than most expected while the cost of capital rose underneath it. Deals underwritten in the spring frequently did not pencil by the autumn on the same purchase price.
Rates rose sharply through the year as the Federal Reserve tightened, and the cost of financing a purchase in December was very different from March.
How it works
Financing decides the price range you can shop in, whether you can hold title in an entity, and how many properties you can own before the structure has to change. It is the third decision in the sequence, after the tax position and the participation structure, and before the market.
- Conventional investment financing is cheapest, requires personal title and a cooperating debt-to-income ratio, and is commonly capped around ten financed properties.
- DSCR loans qualify on the property's income rather than the borrower's ratio, permit entity ownership, and price roughly one to two points above conventional.
- How a DSCR lender credits short-term rental income is the single largest variable in whether a deal is financeable: a market estimate, the trailing twelve months, or a long-term rent schedule.
- Most DSCR products carry a prepayment penalty stepping down across three to five years, which is negotiable against rate.
What that meant in 2022 specifically
Revenue held up better than most expected while the cost of capital rose underneath it. Deals underwritten in the spring frequently did not pencil by the autumn on the same purchase price.
Supply caught up in several markets during 2022. The properties that struggled were the ones bought at 2021 prices on the assumption that 2021 occupancy would persist.
The discipline that mattered in 2022 was stress testing against a higher rate and a normalised occupancy at the same time, rather than one or the other.
Where it goes wrong
The failure modes are consistent across years, which is itself useful information: they are not caused by the market cycle, so a different year does not protect you from them.
- Finding a property and then discovering the lender uses a long-term rent schedule.
- Treating a lender approval as validation of the deal. The lender is protected at roughly 75% of value with a foreclosure remedy; the buyer is not.
- Ignoring reserve requirements at closing, which are real capital and belong in the entry cost.
What a buyer should have done in 2022
The discipline that mattered in 2022 was stress testing against a higher rate and a normalised occupancy at the same time, rather than one or the other.
The underwriting discipline does not change with the year. Twelve individual monthly revenue figures from a comparable set you assembled, a complete expense stack including reserves, and a stress test at 75% of projection that still covers debt service.
We screen roughly a thousand deals a week and eliminate about 98% of them. That ratio has held across every year on this site, through the boom, the correction and the stabilisation, because it is a function of how listings are selected rather than of the market.
What generalises, and what does not
Reading a year in isolation is the most common analytical error in this business. 2022 had its own conditions, and someone who learned the wrong lesson from it carried that lesson into a market that no longer rewarded it.
What generalises is the mechanics above. The definitions, the tests, the sequence and the failure modes are the same in every year on this site, which is why they are worth learning properly once rather than relearning each cycle.
What does not generalise is the environment: the cost of capital, the depth of supply, the bonus depreciation percentage, and the regulatory posture of a given jurisdiction. Those change, sometimes abruptly, and a model that treats them as fixed is a model that was only ever right about one year.
The practical consequence is to build the analysis so the environment is an input rather than an assumption. A property that only works at one interest rate, one occupancy level and one tax treatment is not an investment thesis, it is a bet that nothing moves.
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Frequently asked questions
What was different about financing a short-term rental in 2022?
2022 split into two halves. The first looked like 2021: strong demand, rising rates, aggressive competition for inventory. The second was defined by the fastest rise in borrowing costs in decades, which changed what a property had to earn to work.
What was the main risk in 2022?
Supply caught up in several markets during 2022. The properties that struggled were the ones bought at 2021 prices on the assumption that 2021 occupancy would persist.
What were financing conditions like in 2022?
Rates rose sharply through the year as the Federal Reserve tightened, and the cost of financing a purchase in December was very different from March.