Conventional loans might work for when you purchase a primary residence, but short term rental loans are a whole different ball game. As such, one of the best options is to apply for a loan product that was specifically designed for the short-term rental market.
From Airbnb loans to short term rental loans to DSCR loans, short-term rental financing goes by numerous different names. Whether your goal is to buy a new vacation rental property, renovate a property in your STR real estate portfolio, or grow your collection of properties, you’ll want to do your due diligence before you sign on any dotted line.
Here’s a quick overview of the main financing options that you can consider, along with lenders that you can approach.
Not all properties qualify for short-term rental loans. For example, some loan programs might exclude more unconventional property types like log cabins.
Aside from the type of property, the purpose for which it will be used will also play a determining factor. For example, if you plan on staying at the property yourself, even if it’s only for a few weeks per year, your short-term rental financing application will most likely be rejected.
These are basically the two main factors that will have an impact on your loan application.
A short-term rental loan (or simply STR loan) refers to financing options created specifically for real estate investors and their unique situation. Sometimes they’re also called an Airbnb loan. There’s usually no difference between the two and the term STR loan might be preferred if the plan is to rent out the property on multiple online platforms instead of Airbnb exclusively.
With this type of loan, investors can buy a property with the sole purpose of renting it out on a short-term basis. This means that it’s generally used for purchasing a second property. In the case of serious real estate investors, it can be to finance a third, fourth, or even fifth property.
Compared to a more conventional loan such as a mortgage loan, it can be more difficult to get approved for an STR loan. There’s also a good chance that you’ll need to pay a larger down payment and/or higher interest rates to help mitigate the increased risk involved.
The following are three of the main options that you can explore:
A hard money loan is granted by a private lender and can be a viable option if you have your heart set on an unconventional property type. Approval is generally faster than other financing options and your credit score won’t carry that much weight. That being said, the down payment and interest rates are usually higher and you’ll be required to repay the amount in a shorter time (typically between one to three years).
DSCR loans are short for debt service coverage ratio. What makes it ideal for STR real estate investment is that it uses the monthly rental income potential of the property to evaluate your ability to repay the loan.
A conventional bank loan is still on the table and the lower interest rate can make it an attractive option. Going this route can make sense if your goal is only to buy a single short-term rental property and your personal income is high enough to support an extra mortgage.
KRAM Capital offers a short-term rental loan program for up to $3 million. As they focus on STR real estate investment, they have the knowledge, experience, and access to local rent data to evaluate the potential of a property and can close fast which is key for this type of investment.
They know that short-term rental properties come in all shapes and sizes and extend their financing to various property types including condos, duplexes, townhomes, and single-family homes. While they can finance basically any type of short-term rental property, it can’t be used as a second home or for an arbitrage project.
Their services are also not available in all US states. For example, states like Idaho, Nevada, and Vermont are excluded.
Their loan terms are also flexible with interest rates starting at 4.5%, but there are a few minimum requirements. The minimum loan amount is $200,000. While proof of monthly income isn’t a requirement, you’ll need a credit score of at least 680 and be able to pay a down payment of at least 20%.
Included in Visio Lending’s offering is DSR loans. It’s similar to a commercial real estate mortgage and can be used for vacation or short-term rentals.
What makes it an attractive option is that it’s underwritten based on vacation rental income instead of your assets or income. As such, personal income statements and tax returns aren’t a requirement.
Also, they’re willing to extend their loans to corporate entities, helping you to protect your own personal assets. If you opt for a conventional loan, you’ll need to use your individual name which can come with more risk.
Plus, if you’re thinking about starting a corporate entity, they’re open towards the idea of financing multiple vacation rentals. In this case, you can cash-out refinance a vacation rental to buy additional properties.
Easy Street Capital is another leading lender that offers short-term rental financing (aka Airbnb loans). Similarly to Visio Lending, they also form part of DSCR loans (but unlike some DSCR loans it’s not restricted just to long-term rentals). This means that if the property is currently being used as an Airbnb or vacation rental on another site, you can use this income to qualify for the loan. If there’s no such documented income, they’ll use data projections from reliable sources like AirDNA to predict the income potential.
However, one major difference between these two that could potentially be a deal-breaker is the loan-to-value (LTV). Visio Lending’s LTV is up to 80%, but Easy Street Capital caps it at 65% for rural properties.
While they lend in states that KRAM Capital excludes, their interest rates are higher. Rates start at 6.75%. That said, the minimum credit score required is 620, which is slightly lower.
If you’re interested in applying for a hard money loan, you can check out Tidal Loans. As hard money loans are processed quickly, this can be an answer to immediate repair needs or that renovation project that you’ve delayed for too long.
Tidal Loans require no tax returns or proof of income, helping to simplify the application process further. After you’ve completed an application form, their team will analyze the application and can even close it the next business day after you’ve submitted the necessary docs.
That said, the interest rates are very high and can be anything between 10% and 15%. They also only cover the vacation rental market in select cities in Texas.
You’ll need more than a loan to set yourself up for success in this industry. Cash reserves are also essential.
Running a short-term rental business involves a number of recurring expenses. Then, there’s also the unforeseen costs…
While you’re busy crunching the numbers, also plan for these. Ensure that you’ll have adequate cash flow to furnish your property (and replace items when needed) as well as maintain it. A property can be a great investment, but only if you maintain it.
Then, to keep you protected from any potential liability, you can also consider setting up an LLC. As mentioned, many of these vacation rental loans cater towards corporate entities. This isn’t possible when you take out a conventional loan, one more reason why you have to do your due diligence when creating your investment strategy.
Vacation rental properties not only need a cash injection, but also loads of time. Whether you’re a first-time investor or boast a number of investment properties, vacation rental software like iGMS can be another smart investment. It can save many hours that you can reinvest into growing your vacation rental business. iGMS can help in more ways than one to ensure your newly acquired vacation home remains in tip-top shape:
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