Can I Use a DSCR loan for Vacation Rental Properties in Colorado?

Can I Use a DSCR loan for Vacation Rental Properties in Colorado?

DSCR or debt service coverage ratio mortgages are valuable real estate financing options for investors. Colorado is a desirable location for many investors thanks to a booming economy, population growth, landlord-friendly policies, and tourism.

Nearly everywhere you look, communities and neighborhoods are growing, and with over 300 sunny days per year, there’s no wonder so many people are attracted to the Rocky Mountain High State.

Regardless if you’re just considering buying a vacation rental in Colorado or hoping to grow your investment portfolio, opting for DSCR loans can streamline your mortgage process without even showing income verification or tax returns. 

How Do DSCR Loans Work?

These loans use the property’s debt service coverage ratio to determine if the funds can be repaid or not. So, how do these loans work? Rather than using the borrower’s personal income for approval, like with a conventional loan, lenders look at the property’s potential to generate rental income or cash flow to determine eligibility.

Approval for the loan is based on the amount of money a property can generate compared to the mortgage cost. This is a lifeline for those investors who have complex tax returns.

Is a DSCR Loan Good for Colorado Vacation Rentals?

Absolutely! Last year, the rental vacancy rate in the state was a low 4.5 percent, making it a desirable option for investors. However, Colorado is an expensive state to purchase real estate, as the average home price is just over $585,000.

The average cost is well above the nation’s $355,000 average sale price, yet the competition is still high and properties go quickly. Condos can be used as short term rentals as well as long as you follow the HOA’s rules for tenants.

This is where a DSCR loan comes into play. These loans give you a huge advantage over conventional mortgages because approval is based on whether or not the property can generate enough income to cover the mortgage payments rather than the borrower’s past credit and income history.

Best Areas to Purchase Vacation Rentals in Colorado

Did you know that Colorado ranks in the top ten states for having the lowest property taxes? And two of the state’s cities made it to the list of the best American cities to live in 2022?

That being said, most investors want to know which areas of Colorado are better for DSCR loans: mountain resorts or large cities.

Large Cities (Denver, Boulder, Fort Collins)

Large cities like Boulder, Denver, and Fort Collins attract many college students and young working professionals, making them the perfect demographic for real estate investing. Boulder is only about thirty minutes outside of Denver and is home to nearly 100,000 people. The average rent price in this city is around $2,400 per month, making it easy to qualify for a DSCR for most properties.

Fort Collins is another great choice because home values have steadily increased over the last several years. However, most investors turn to Denver, as this area features extremely low unemployment rates and higher than normal growth rates.

Furthermore, Denver was recently named as one of the best cities to operate an Airbnb property, with the average daily rental income coming in at $168.

Mountain Resort Areas (Aspen, Beaver Creek, Evergreen)

Mountain resorts such as Beaver Creek, Evergreen, and Aspen also make excellent locations to buy vacation rentals in Colorado because over 12 million visitors flock to the state each year to ski. Since properties in these areas tend to go very fast, securing one as you see them is best.

So, in terms of which mountain resort area is ideal, they are all excellent options for places to secure a DSCR loan for a vacation rental.

Closing Thoughts

At the end of the day, Colorado is home to a massive tourism industry. With nearly $22 billion spent annually by people from around the world, there’s no way a vacation rental in Colorado would sit empty.

This means that your chances of approval for a DSCR loan in Colorado are very high, so don’t wait too long or another investor will snag that property you had your eye on. Contact an experienced mortgage advisor(me) today!

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