STR Investor Glossary
Plain-English definitions of DSCR, LLC, bonus depreciation, cost segregation, and other terms short-term rental investors encounter when financing or documenting their properties.
AirDNA
A third-party data service that aggregates short-term rental market data and produces projected revenue estimates for specific properties. Many DSCR lenders accept AirDNA reports as the basis for STR income calculation on new acquisitions. Not all lenders accept AirDNA, and those that do may apply adjustment factors to the projected revenue.
ATR (Ability to Repay)
A consumer lending regulation under Dodd-Frank that requires lenders to make a reasonable, good-faith determination that a borrower can repay a mortgage. ATR applies to consumer mortgages. Business-purpose loans are generally exempt under Reg Z §1026.3(a).
Articles of Organization
The founding document filed with a state to legally establish an LLC. Required by DSCR lenders when the LLC is the borrowing entity. Must typically be accompanied by an operating agreement and EIN.
Bonus Depreciation (IRC §168(k))
A tax provision that allows certain property to be deducted at an accelerated rate in the year it is placed in service, rather than over its standard MACRS useful life. The One Big Beautiful Budget Act (OBBBA, signed July 2025) restored 100% bonus depreciation for qualified property placed in service after January 19, 2025. Whether your property and tax situation can benefit requires CPA determination—STR Advisors does not provide tax advice.
Business-Purpose Loan
A mortgage originated for the purpose of investing in income-producing real estate, rather than for personal, family, or household use. Business-purpose loans are generally exempt from consumer lending regulations under Regulation Z §1026.3(a), which is what allows DSCR underwriting (no personal income verification). Also called a commercial or investment property loan.
Cost Segregation
An engineering-based tax strategy in which a property’s components are reclassified from real property (depreciated over 27.5 or 39 years) to personal property or land improvements (depreciated over 5, 7, or 15 years under MACRS). This reclassification may accelerate depreciation deductions. A licensed engineer must perform the study; a CPA must analyze the tax implications. STR Advisors does not perform studies or assign classifications.
Cash-Out Refinance
A refinance that results in the borrower receiving cash proceeds in excess of the amount needed to pay off the existing mortgage. Used by investors to access equity from appreciated properties to fund additional acquisitions or improvements. Maximum LTV and cash-out amounts are lender-specific.
Credit Score (DSCR context)
DSCR programs do not require personal income documentation but still evaluate the borrower’s or entity member’s creditworthiness. Minimum credit score requirements vary by lender and program, often ranging from 620 to 680 or higher. A higher credit score typically improves rate and LTV options.
DSCR (Debt Service Coverage Ratio)
The ratio of a property’s monthly rental income to its monthly debt service (PITIA). A DSCR of 1.0 means the property’s income exactly covers its payment. Most DSCR lenders require a ratio at or above a threshold—often 1.0 to 1.25—though thresholds and income calculation methods vary by lender. A DSCR above the threshold does not guarantee loan approval.
Depreciation
The process of deducting the cost of a capital asset over its useful life. For residential rental property, the standard MACRS depreciation period is 27.5 years. For commercial real property, it’s 39 years. Certain components reclassified through cost segregation may qualify for shorter periods (5, 7, or 15 years) and potentially bonus depreciation.
DTI (Debt-to-Income Ratio)
A conventional lending metric that compares a borrower’s total monthly debt obligations to their gross monthly income. Conventional mortgages require DTI analysis. DSCR loans generally do not, because the qualification is based on property income rather than personal income.
Due-on-Sale Clause
A mortgage provision that gives the lender the right to demand immediate repayment of the loan if the property is transferred to a new owner without the lender’s consent. A quit-claim deed transferring property to an LLC may technically trigger this clause on an existing personal mortgage. A DSCR refinance that originates the loan directly in the LLC avoids this issue.
EIN (Employer Identification Number)
A federal tax ID number assigned by the IRS to a business entity (including LLCs). Required by DSCR lenders when the borrowing entity is an LLC or other business. Free to obtain from irs.gov.
IRC §168(k) — See “Bonus Depreciation”
The Internal Revenue Code provision governing bonus depreciation. Restored to 100% by the OBBBA for qualifying property placed in service after January 19, 2025.
IRC §469 — Passive Activity Rules
Tax rules that limit the deductibility of losses from passive activities (including most rental activities) against ordinary income. Under the STR exception, if the average rental period is 7 days or fewer and the owner meets material participation standards, the property may not be treated as a rental activity subject to §469. This is a complex determination requiring CPA analysis of specific facts.
LLC (Limited Liability Company)
A business entity that provides liability separation between the entity’s obligations and the owner’s personal assets. STR investors often use LLCs to hold investment properties. DSCR loans can be originated directly in an LLC, which avoids the need to transfer title after closing. LLCs are formed at the state level; their tax treatment and liability protection vary by state and circumstances. Consult an attorney before forming.
LTV (Loan-to-Value Ratio)
The ratio of the loan amount to the property’s appraised value or purchase price (whichever is lower on a purchase). A $300,000 loan on a $400,000 property is 75% LTV. DSCR programs typically have maximum LTV limits that vary by loan type, property type, DSCR, and credit score.
MACRS (Modified Accelerated Cost Recovery System)
The depreciation system used for U.S. federal income tax purposes for most tangible property. Under MACRS, residential rental property has a 27.5-year recovery period; commercial real property has 39 years; personal property classes include 5-year and 7-year categories; land improvements are typically 15-year property. Cost segregation reclassifies components from longer lives to shorter ones.
Managing Member
The member of an LLC authorized to manage the entity and sign documents on its behalf. DSCR lenders typically require the operating agreement to clearly identify who has authority to execute loan documents. This is a common sticking point that delays closings when operating agreements are vague.
Material Participation
IRS standards for determining whether a taxpayer materially participates in a business or activity. Relevant to the IRC §469 STR exception—meeting the STR exception to passive activity rules requires both an average stay of 7 days or fewer AND material participation by the taxpayer. Material participation tests are defined in the Treasury regulations and require CPA analysis.
Non-QM Loan
A mortgage that does not conform to the Consumer Financial Protection Bureau’s Qualified Mortgage (QM) standards. DSCR loans are a common type of non-QM product because they don’t use the debt-to-income test required by QM. Business-purpose DSCR loans are often exempt from consumer lending regulations entirely—not just “non-QM” in the consumer lending sense.
NMLS (Nationwide Multistate Licensing System)
The licensing system for mortgage industry participants in the United States. NMLS numbers identify licensed mortgage brokers, loan originators, and companies. Business-purpose lenders and brokers may or may not be subject to NMLS licensing depending on state law. [LICENSED COMPANY NAME] NMLS# [NMLS NUMBER].
OBBBA (One Big Beautiful Budget Act)
Federal legislation signed in July 2025 that, among other provisions, restored 100% bonus depreciation under IRC §168(k) for qualified property placed in service after January 19, 2025. Reversed the annual phase-down that had reduced bonus depreciation from 100% (pre-2023) to 60% in 2024. Consult a CPA for applicability to your specific property and situation.
Operating Agreement
The governing document of an LLC that establishes ownership percentages, management authority, voting rights, and other operational rules. Required by most DSCR lenders as part of the loan application package for entity-borrower deals. Should be drafted or reviewed by an attorney, not downloaded from a generic template.
PITIA
Principal, Interest, Taxes, Insurance, and Association dues (HOA). The standard calculation of total monthly housing expense used by lenders to calculate DSCR. Some lenders calculate PITIA including all components; others use PITI without HOA. Confirm the exact formula used by your lender.
Passive Activity
Under IRC §469, most rental activities are treated as passive—meaning losses from the activity can generally only offset passive income, not ordinary income. The STR exception (average stay ≤7 days + material participation) may allow the activity to be treated differently. CPA determination is required.
Quit-Claim Deed
A legal instrument that transfers one party’s ownership interest in real property to another party without warranty of title. Often used to move property from personal name to an LLC. Important: a quit-claim deed does not affect the existing mortgage—it may trigger a due-on-sale clause. Consult a real estate attorney before executing a quit-claim on a mortgaged property.
Rate-Term Refinance
A refinance in which the borrower pays off an existing loan and takes out a new loan, typically to obtain a better rate or different terms, without taking cash out. For STR investors, a rate-term refi from a personal mortgage into a DSCR LLC loan is a common transaction.
Regulation Z (Reg Z §1026.3(a))
The federal consumer lending regulation implementing the Truth in Lending Act. Section 1026.3(a) generally exempts business-purpose transactions from consumer lending requirements, including ATR/QM rules. This is the legal basis that allows DSCR loans to skip personal income verification. Borrowers should consult legal counsel regarding the applicability of these exemptions to their specific transactions.
Reserves
Post-closing liquid assets required by lenders to demonstrate the borrower can service the debt in the event of income disruption. DSCR lenders typically require a certain number of months of PITI in reserves after closing. Reserve requirements vary by lender and loan amount.
Schedule E
The IRS tax form used to report supplemental income and losses from rental real estate, partnerships, S-corporations, and certain trusts. Most long-term rental income appears on Schedule E. STR income may also appear here or on Schedule C depending on the level of services provided and how the activity is classified.
STR (Short-Term Rental)
A property rented for short periods—typically days to weeks—through platforms such as Airbnb or Vrbo. STR properties may be subject to different tax treatment, lending guidelines, and local regulations than long-term rentals. The average rental period is a key factor in determining tax treatment under IRC §469.
Title Insurance
Insurance protecting the lender (and optionally the buyer) against defects in title to real property. Required by DSCR lenders. An LLC taking title to property for the first time will need a new title insurance policy.