Owning a second home is a luxury that many people dream about, but the costs can be intimidating—or flat out prohibitive. However, if you become a host on Airbnb, you may offset the costs of owning a vacation home and even turn a profit. This guide on financing Airbnb properties can help you buy your dream vacation property and make a little money on the side.
Financing an Airbnb Rental Property
There are a few different ways that you can go about financing Airbnb properties. If you already own a house, you may be able to tap into the equity by refinancing your mortgage or taking out a home equity loan. But if you don’t own a home or have enough equity to cover the purchase price of your vacation rental, you can take out a conventional mortgage or a hard money loan instead.
No matter which option you choose, financing your second home may come with stricter requirements than buying your first. Lenders view investment properties as more of a risk, so you’ll need a good credit score and low debt-to-income ratio to qualify. You may also need to put extra money down and show that you have money set aside to pay your mortgage during vacancies. Loans on second homes also tend to have higher interest rates, so you’ll need to factor that into your projected expenses.
Airbnb Loan Programs
If, like most, paying for your rental property out-of-pocket is not an option, here’s a closer look at Airbnb financing options to consider.
Although you can’t use a government-backed mortgage to finance an investment property, you can use a conventional loan. In most cases, a conventional loan would be the best option for financing this type of purchase. However, you’ll need strong finances in order to qualify. Mortgages for second homes typically require credit scores of 640 or higher and down payments of at least 20%. There are a few other strategies that you can use to finance your down payment or the full amount needed to move forward with your purchase. Let’s take a closer look at the additional options.
If you own a home and have some equity built up, you may get a cash-out refinance. It allows you to take out a larger mortgage than what you currently owe on your home (up to a percentage of the equity you have) and receive the difference as a lump sum payment. Ideally, you can use the money to fund the 20% down payment needed for a conventional loan, or if you have enough equity, you may be able to fund the entire purchase.
Home equity loan
Another financing option is a home equity loan or second mortgage. It allows you to borrow up to a portion of the equity in your home (often around 80%) as a lump sum payment and repay it over a fixed term. However, home equity loans typically have higher interest rates than cash-out refinances, which is something to keep in mind.
Hard money loan
Hard money loans are short-term loans that are mainly used to purchase investment properties. They often have higher interest rates and shorter repayment periods than conventional mortgages. But because private lenders offer them instead of traditional banks, they offer faster funding times and greater flexibility in the way a cash purchase would. You may use them to invest in nontraditional properties that banks won’t mortgage, such as tiny homes and yurts.
However, be sure you run the numbers and have the ability to meet the repayment terms. Hard money loans are not ideal for a long-term purchase. If you aren’t planning to pay back the loan within 6-12 months, you’ll most likely end up refinancing into a conventional loan.
As you can conclude from the explanation above, all roads will typically lead back to a conventional loan when financing a short term rental, but there are different ways to approach this ultimate goal.
How To Finance a Second Airbnb Rental
If you are already earning rental income as a traditional landlord or Airbnb host, you can use your rental income to finance another investment property. We offer refinance and conventional mortgage loans that count your rental earnings as qualifying income. Note that you will need to show proof of your rental earnings on your tax returns from the last two years. Airbnb also gives you the option to request a “proof of income” statement to show proof of a steady history of earnings as an Airbnb host.
Airbnb Investment Best Practices
Here are a few things you need to know before you invest in an Airbnb rental property.
- Regulations. In some cities, like New York, it’s against the law to rent out your home or apartment for less than a month. Before you purchase a property, make sure that there aren’t any local regulations that would prevent you from listing it on Airbnb.
- Licensing. Many cities require you to have a business license or rental permit in order to rent out your property.
- Occupancy tax. Many cities also require you to collect occupancy tax from your guests. Airbnb does this automatically for hosts in some locations, but not others. Make sure you understand local tax laws and figure out if Airbnb will collect this fee for you or if you’ll have to do it yourself.
- Income and expenses. Before you invest in a vacation rental, it’s important to calculate your income and expenses to ensure you’ll come out ahead. Look at similar properties on Airbnb to get a feel for how much you can charge and how often you’ll be booked. Then, add up your expenses, including your mortgage payments, maintenance costs, and Airbnb fees, and compare them to your projected income.
Navigating local regulations and figuring out the best, most affordable way to finance your Airbnb rental can be a challenge. As always, we’re here to help answer any questions you have and will guide you through the process. Give us a call or start your online application today.