Short-term rentals are breaking the appraisal playbook. Lenders can’t afford to ignore it

Short-term rentals (STRs) have evolved from a niche investment strategy into a durable, institutionalized asset class. What hasn’t evolved at the same pace is how many lenders and valuation teams approach STR income risk. As investors become more sophisticated and debt service coverage ratio (DSCR) lending continues to grow, the appraisal has moved from a back-office requirement to a central risk-control mechanism, especially for income-driven loans.

I lead a private lending division and have invested personally in STRs for years, and I’ve seen this disconnect play out repeatedly. STR income does not behave like traditional rental income; yet, it is often evaluated using tools and assumptions designed for long-term leases. When nightly pricing, seasonality, operational intensity and regulatory exposure enter the equation, the old appraisal playbook starts to break down.

Why STR and DSCR loans force lenders to rethink underwriting

At its core, DSCR lending asks a simple question: can the property carry its own debt? Many lenders require a DSCR of at least 1.1, meaning $1,100 in income for every $1,000 in expenses. But rising taxes, insurance and operating costs can quickly break that math if income assumptions are misaligned.

Unlike long-term rentals, which rely on relatively stable market rent, STR performance is driven by fluctuating occupancy, dynamic pricing and active management decisions. When operated well, STRs can outperform traditional rentals, but only if income is analyzed through a lens that accounts for seasonality, demand drivers and operating complexity.

This is why experienced STR investors often focus less on today’s interest rate and more on tomorrow’s cash flow. Many will accept higher rates if the income is durable, the assumptions are realistic and the appraisal reflects real-world performance rather than theoretical rent. Remember, we date the rate but marry the asset. This becomes more true when we use the asset for certain tax advantages.

STRs aren’t rentals; they’re operating businesses

An STR is best understood as a hospitality business operating inside a residential structure. Revenue is shaped by seasonality, local tourism patterns, events, management strategy, cleaning turnover, platform performance and regulatory constraints. A mountain cabin, beach condo and urban townhouse may share similar square footage, but their income profiles can be radically different.

These realities cannot be captured using tools designed for long-term rental housing — and this is where appraisal risk often enters the picture and lenders run into trouble.

Why Appraisal Form 1007 doesn’t work for STR lending

Appraisal Form 1007 was designed solely for the purpose of estimating long-term monthly market rent. It assumes stable occupancy and income driven primarily by the real estate itself. STR income, by contrast, is driven by business.

Nightly pricing strategies, seasonal demand fluctuations, event-driven spikes, marketing effectiveness, guest reviews, competition, management fees, cleaning costs and local regulations all influence STR income, and none of these variables can be accurately developed or reported within Form 1007.

Fannie Mae policy leaders have been explicit on this point: Form 1007 is not designed to support short-term rental income. When appraisers are asked to contort or repurpose the form for STR analysis, they are encouraged to decline the assignment because doing so would result in a misleading appraisal. State appraisal boards have reinforced this position through enforcement actions and formal guidance to appraisers and AMCs alike.

Even in private lending and non-QM channels, the purpose of an appraisal form remains unchanged. Using Form 1007 for STR income introduces compliance risk and often distorts DSCR calculations, producing artificially low ratios that fail to reflect actual operating performance.

What competent STR appraisers do instead

Experienced STR appraisers rely on a clearly labeled narrative addendum — often titled “Short-Term Rental Projected Income Analysis.” This format enables the development of income using STR-specific data, including market-supported occupancy rates, seasonal pricing patterns, comparable STR performance and transparent expense assumptions.

Consistency doesn’t come from forcing STR income into incompatible forms. It stems from clear engagement expectations and valuation methodologies that align with how these properties truly operate.

How lenders can reduce STR appraisal risk

The risk in STR and DSCR lending tends to concentrate in predictable areas. Lenders can materially reduce exposure by clearly stating in engagement letters that STR income will be analyzed through a narrative addendum rather than Form 1007, stress-testing income assumptions for seasonality and occupancy volatility, and partnering with appraisers who demonstrate real experience in STR markets and non-QM lending.

The appraisal should function as a risk-management tool, not a procedural checkbox. And while the valuation of the asset is essential by a qualified appraiser, the STR income may have alternative sources.

Why UAD 3.6 raises the stakes

UAD 3.6 will retire legacy appraisal forms, including Form 1007, and replace them with standardized data structures. Narrative addenda will remain essential for supporting STR income, making early preparation and clearer lender guidance more important than ever.

With over 2.5 million STRs and a market cap expected to hit $81.6 billion by 2033, STRs are big business and need to be valued correctly, both for the asset and the income. Lenders who continue to rely on outdated workflows risk falling behind — operationally, competitively, and from a compliance standpoint.

The bottom line

Short-term rentals are not the same as long-term rentals, and pretending otherwise creates unnecessary risk. Appraisal Form 1007 cannot — and should not — be used to support STR income. Lenders who modernize their valuation approach, deepen STR fluency and treat the appraisal as a strategic asset will be best positioned to succeed as DSCR and investor lending continue to scale.

The reality of switching the narrative is not only more accurate, but in most instances, it will help increase deal production for STRs. Lenders who adapt are poised to corner this lucrative market.

Michael Tedesco is executive vice president of private lending at Class Valuation
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners. To contact the editor responsible for this piece: [email protected].