The average price for short-term rental properties in the United States is between about $430,000 and $510,000 according to data shared by Optimal Blue and Forbes. Whichever end of the spectrum you are looking to buy at, it is a lot of money. This means that aspiring real estate investors will probably have to seek financing options like Airbnb loans.
That said, with remote work increasing in popularity, applying for a loan to buy a vacation rental property can make sound financial sense. In addition to traditional leisure travelers, big groups, and families, you now also have a new group of travelers that you can welcome at your vacation rental property.
To find out how Airbnb loans work and learn what the main pros and cons of alternative financing options are, continue reading.
Airbnb loans are a type of financing created specifically for rental property investors that real estate investors can use to buy a property to rent out on a platform like Airbnb.
The process and terms and conditions will typically be different from a mortgage for a primary residence, and you will likely have to pay a bigger down payment and face higher interest rates.
The main difference between an Airbnb loan and a more conventional loan like a mortgage loan is that an Airbnb loan is typically used to buy a second property like an Airbnb property. On the other hand, a mortgage loan is awarded to buy a property that will serve as the primary residence of the borrower. Airbnb loans are classified as investment property loans rather than a home equity loan.
It is generally more difficult to get an Airbnb loan than a mortgage loan. The main reason for this is that there are more risks involved when managing an investment property like a vacation rental. Even more so if it will be your second property and you won’t live on-site.
For example, if your occupancy levels drop, your cash flow will be impacted which could put you at risk of missing a monthly loan payment on your Airbnb property. There is also the possibility that renters can damage your investment property and impact your rental income.
Also, if you do not have a proven record of managing vacation rentals, you will also most likely find it more challenging to apply successfully for a loan. Banks will be hesitant to award a loan for an investment property to someone who seemingly has no experience in managing an Airbnb property business of this kind. This could mean a less stable rental income.
Before you apply for an Airbnb loan for short-term rentals, you will need to make sure that you have all your ducks in a row. Ensure that you have your finances ready and that you have put in place a well-thought-out plan for your new Airbnb property investment. The answers that you will need to have are:
If you do not qualify for an Airbnb loan, rest assured that it is not necessarily the end of the road for you. There are several other options available and, as a matter of fact, some options do not require hosts to buy a property at all.
A home equity loan (also referred to as a second mortgage) can give you a lump sum of money that is based on the amount of equity in your main home. You will then need to make monthly payments over the course of a set term.
A home equity line of credit (or simply called HELOC) is similar to home equity loans. Though, instead of getting a lump sum cash amount, you will be able to access a line of credit that you can then use as a down payment.
With this option, Airbnb hosts can use their proof of income from Airbnb and other rental property platforms to refinance their application. This way, it will essentially replace a current mortgage with a new one.
Hard money loans are a type of short-term loan that is granted by a private lender and is usually awarded for investments.
A personal loan refers to money that you borrow from a bank for a set repayment period. It can be used for various purposes.
If you have your eye on a property with multiple units, you can apply for this type of loan. The condition is that you will have to live on the premises. In other words, the property should be considered your main residence.
While very few will have enough cash savings at hand to buy a short-term rental property, it remains a viable option for some. Alternatively, you can at least use your cash savings for a larger down payment. Be careful with your down payment amount as you may need to keep the interest rate and personal loans in the future in mind.
If you do not necessarily have your heart set on buying a specific property but simply want to enter the short-term rental industry, you can consider the rental arbitrage approach.
With this method, you will rent out a property with the purpose of subletting it via a vacation rental platform for more than the sum of your rent and other expenses needed to run this type of business.
At the end of the day, the answer is actually pretty straightforward — the best Airbnb financing method depends on your unique situation and the type of property you wish to buy.
The best way to go about choosing an option that’s best for you is to weigh up the pros and cons of each to see which financing option you’re most comfortable with.
It depends on the lender. Many lenders do not take into account rental income generated via an existing property, while some do. So, you can find a lender that has created small business loans aimed at Airbnb owners.
In fact, Airbnb has partnered with names like Fannie Mae to make an Airbnb business loan more accessible for investors looking to enter the real estate market. So, better keep those bank statements on hand.
It depends, but it is unlikely that you will be able to use a Federal Housing Administration loan (an FHA loan) to finance a short-term rental.
The reason for this is that this type of loan is aimed at single occupancy and primary residences.
What you possibly can do is apply for refinancing. In this case, you will have to refinance your loan as a non-FHA loan and possibly stick to nothing shorter than 30-day stays.
Your unique situation will determine which place will be the best option for financing your Airbnb property.
Generally speaking, if you plan on buying small property, it would make more sense to target your local bank instead of a big investor first.
To help you identify the best place to get Airbnb financing, you will also need to phone a few investors.
Buying a new property in the right Airbnb market alone won’t ensure profitability. To maximize earnings and the most from their property purchase, an Airbnb host must focus on the following:
Just like with any other type of business, advertising is key to the success of your Airbnb business.
Not only does it help to ensure that your Airbnb rentals are visible to your target audience, but it also helps to build a reputable vacation rental brand.
Property management is a time-consuming task, but by investing in vacation rental software, you can save many hours per week that you can rather devote to income-generating activities like marketing or looking for your next short-term rental property investment.
A software solution like iGMS can, for example, help with:
Successful Airbnb property owners know that they need to revisit their pricing continuously so that it meets demand. By using a dynamic pricing strategy, you can ensure that your rental properties fulfill their potential and help you to meet your goals so that you can cover your monthly mortgage payments.
However, changing the nightly rate and other fees so that they remain in line with current market fluctuations needs to happen in real-time for optimal effect. So, the best approach is to invest in pricing tools like DPGO, Wheelhouse, PriceLabs, or Beyond that can change it for you automatically.
The profitability of your Airbnb business will depend on a number of factors including the market and local short-term rental regulations.
On average, it can take up to three years for a short-term rental business to become profitable. While this is only an estimate, it is very unlikely that you will see a return in revenue right away. That said, by working hard consistently, owning an Airbnb investment can be profitable.
In addition to your mortgage payments, there are a number of other additional costs involved in running vacation rental properties that you will need to keep in mind. These include:
About the Author
Callan Riddles is the Content and Social Media Specialist at iGMS. Callan has a passion for finding new ways to help vacation rental businesses thrive. In her free time, she loves to travel, read, and experience all the new things that life has to offer.
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