How to Finance Your Airbnb Investment or Vacation Rental Purchase
Jan 16, 2019 January 16, 2019
Airbnb has taken the world by storm, and it’s no news that vacation rental investments have become a great source of extra income for many. In fact, this platform focused on short-term vacation rentals worldwide has been growing steadily, and Airbnb managed to rake in $2.6 billion in revenue in 2017, providing an average of $924 monthly for hosts with Airbnb rental properties. There are even people who can now afford to live simply from income generated through Airbnb rentals and vacation rental investments in general.
So, how do you go about financing a property for your Airbnb rental business so you can cash in on some of this growth? A lot depends on the property that you select. If you’re buying a condominium for this purpose, you’ll have to look at the condo association’s regulations regarding short-term rentals in order to determine what rental investment financing options you should focus on.
Your down payment, financial profile, credit score, and the type of use you will declare for your loan will typically determine your interest rate, which may range between 3-12%. Depending on the price of the investment property you’re considering, as well as your financial circumstances, you may even be able to secure a line of credit using an existing property as collateral and use that to put a down payment on your Airbnb condo.
If your condominium of choice is located in a building that allows short-term rentals for less than 30 days, your only likely option will be to go with an investor or private loan. If the building requires a minimum 30-day rental period or more, you’ll have more options, but then you may be looking more at targeting seasonal rentals on sites like vrbo.com or homeaway.com since the average Airbnb rental is only 4 days long.
Below we’ve outlined some of the most common financing options for those who want to get started with Airbnb.
One option, of course, is to follow the traditional and well-traveled route of seeking a conventional loan from an established lending institution, and there are hundreds of possibilities if you want to go this route, including large national banks such as Bank of America, Wells Fargo, and Chase, as well as smaller regional banks and credit unions. These lenders generally offer a variety of services in addition to providing investment property loans. While there is a certain security in trusting an established major brand, using a local bank means they may have more familiarity with the rental market in your area. When seeking a loan of this type, you may choose from a conforming or non-conforming mortgage.
Conforming Mortgage: A conforming mortgage refers to a conventional home mortgage that is eligible for sale and delivery to government-backed agencies such as the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). These loans typically offer the most competitive rates and the longest possible mortgage terms, which translates into more affordable monthly mortgage payments.
With a conforming mortgage, you may put down as little as 20% in order to qualify for a mortgage (if you were to declare the property as your primary residence, you can get as low as 5% down, or possibly even less). These loans are available to individuals only, not businesses. Conforming mortgage loans are available from large national banks, as well as lenders that only work with real estate investors, and even online mortgage providers offer them.
These loans are only available for condos in buildings that require 30-day+ minimum rentals, and typically for borrowers who have fewer than four mortgages. Loan amount limits apply, and these are determined by the The Federal Housing Finance Agency (FHFA) and change from year to year.
Non-conforming mortgage: A non-conforming mortgage is one that does not meet the criteria to qualify for conventional funding and typically cannot be sold to Fannie Mae or Freddie Mac. The reasons for disqualification may include: the amount of the loan exceeds conventional loan limits, the purpose of the loan is for an unorthodox reason, the applicant has insufficient credit, or the collateral backing the loan is not sufficient. If you or the investment property you are buying into don’t qualify for a conforming loan, you may consider this type of loan.
Home Equity Loan or Secured Line of Credit to Buy Your Vacation Rental Investment
Photo credit: www.LendingMemo.com
Depending on the price of the property you seek for your Airbnb investment, and whether or not you already own property, it may be possible to take out an equity loan or secured line of credit, also known as a second mortgage, using your existing property as collateral. Depending on the value of your existing property, and factors such as your debt-to-equity ratio, you may borrow just enough to cover a good down payment, in which case you would finance the remaining balance by means of a conventional or other type of loan; or if the cost of your Airbnb property is low enough, you may be able to borrow the entire amount you need to purchase the property.
Investor Loans for Your Airbnb Rental Property
Investor-only lenders lend exclusively to businesses or individuals that invest in residential properties where the sole purpose of the purchase is short-term rental investment. The application process for this type of loan may be somewhat quicker and easier than a conventional mortgage, and your chances of approval may be somewhat higher, but the approval depends also on the financial projections of the property in terms of rental income, etc. You also may be able to cross-collateralize your loan, meaning you can use other assets as collateral for your purchase.
This may be the best type of loan to consider if you’re looking at a property that allows rentals for less than 30 days.
You can typically put down 25%-35% of the property cost. Investor loans, however, typically have higher interest rates than conventional loans.
To learn more about local investor lenders in the South Florida area, contact Condo Black Book at (786) 930-4220 or drop us a line at contact@CondoBlackBook.com and we will be happy to make some recommendations.
Small Business Loans for Investment Properties
Another possible option is a small business loan, which you may use to either finance the property purchase or the ancillary costs associated with running an Airbnb business, such as furnishings and insurance. These types of loans vary widely, but for a small business loan, you definitely have to be registered as a business entity, and these loans may be somewhat harder to obtain, as lenders prefer businesses who have an established track record. Interest rates for small business loans are set by the Small Business Administration (SBA). Currently, maximum interest rates allowable on small business loans range from about 5.04% to 5.25%, depending on the terms and amount of the loan.
Private Hard-Money Lenders for Vacation Rental Investments
A private hard-money loan from an individual or institution that is not a conventional mortgage lender is typically a last resort option as these loans will normally require a higher down payment, and typically also come with higher interest rates than conventional or investor loans. A private hard-money loan may be a good choice for you if you’re not eligible for other types of funding and if you have a good chunk of money to put down as a down payment. Typically, these types of private loans require a down payment of 40-60%.
If you have questions about financing for an Airbnb investment, feel free to give us a call at Condo Black Book at (786) 930-4220 or drop us a line at contact@CondoBlackBook.com to speak with a real estate specialist who can connect you with possible lenders.