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Airbnb hosting can be a lucrative way to capitalize on your real estate investments. However, actually financing an Airbnb rental can be a Big Deal that requires financial finesse (and a really big loan). Let’s look at the basics – and challenges – of acquiring your first Airbnb loan.
What Is an Airbnb Loan?
Airbnb is an online platform that connects homeowners and travelers looking for a short-term rental. Hosts set their own nightly rates and choose their level of interactivity with their guests. They’re also in charge of managing, cleaning, and repairing the property between visitors. (Or hiring a service to do it for them.) 1
Technically, there’s no such thing as an “Airbnb loan” or “Airbnb mortgage.” However, the top mortgage lendersoffer investor-friendly financing to secure funding for a rental property. Thus, an Airbnb loan is any financing that helps you jumpstart your real estate venture.
Risks of an Airbnb Loan
Bear in mind, however, that investment property loans carry unique risks and challenges.
Generally, lenders believe that if money gets tight, you’ll prioritize your primary residence mortgage over your investment property. (And most of the time, they’d be right.) Additionally, lenders consider short-term rentals riskier than long-term rentals, as business lulls may impact your ability to pay your mortgage.
To compensate for these risks, lenders may: 2
- Charge higher interest rates
- Require a larger down payment
- Set stricter credit and income requirements
- Require you to keep at least 6 months of reserve payments
What Airbnb Financing is Available? Types of Airbnb Loans
The best financing for your new Airbnb venture depends on your financial situation. We’ll cover some of the most popular options.
#1. Conventional Loans
Conventional loans are any mortgages that aren’t part of a government program. Most are backed by Fannie Maeor Freddie Mac, government-sponsored enterprises (GSEs) that help ensure liquidity in the mortgage market. 3
Conventional loans for rental properties usually have stricter requirements than for primary homes. For instance, they may have a down payment minimum of 15-25%, require larger cash reserves, and set lower loan-to-value ratios. Generally, you’ll also need a higher credit score. 2
#2. Owner-Occupied Investment Property Loan
Some investors minimize conventional loan restrictions through owner-occupied investment property loans. (Note that your property will need enough room for you to live there, too.)
You’ll also have to prove that you meet the “owner-occupied” requirements, including: 4
- Signing documents stating you intend to live onsite
- Moving in within 30 days of closing
- Living onsite at least 70% of the year
- Working a maximum of 50 miles from the property
- Using the home as your primary residence for at least one year
Additionally, you may need a credit score as high as the low 700s to qualify.
#3. Home Equity Loan
Home equity loansare secured loans that use your primary residence as collateral. Using your home’s equity, you can borrow a lump sum up to 85% of your home’s value. (Minus the balance of your mortgage.) You can then put the loan toward a down payment on an Airbnb loan. 5
Home equity loans count as “second mortgages,” which means lenders view them as potentially risky investments. As such, you may pay a higher interest rate than on a purchase mortgage or cash-out refinance. You may also have to shop around more, as some lenders don’t offer home equity loans at all.
#4. Home Equity Line of Credit
A home equity line of credit, or HELOC, operates similarly to a credit card if your credit card were backed by your house. They come with two parts: 6
- A draw period, usually up to 10 years, during which you can borrow funds as long as you make interest payments
- A repayment period, usually 10-20 years, during which you repay your loan plus interest
You can use a HELOC to borrow money to put toward a new investment property. However, as a second mortgage, they generally come with higher interest rates and stricter credit score requirements. They’re also riskier for borrowers, as most carry variable interest rates.
And, as with home equity loans, defaulting runs the risk of losing your house in foreclosure.
#5. Cash-Out Refinance
A cash-out refinance allows you to tap your home equity and refinance your mortgage at the same time. Essentially, you refinance your house for more than your current home’s value. The new loan pays off your old loan and hands you the difference in cash. 7
Cash-out refinances can help you buy an investment property without taking out a separate mortgage. However, they can be expensive, with closing costsranging as high as 6%, and you’re generally limited to tapping 80% of your equity.
#6. Work With a Hard Money Lender
A hard money loan is a short-term loan issued by a private or nontraditional lender, such as another investor. They’re usually backed by real estate and used for investment purposes. 8
Hard money loans offer several benefits – and more than a few risks.
For instance, you can use them to finance properties that traditional loans won’t touch, such as treehouses. They also have faster approval times and relaxed (or no) credit score requirements.
On the other hand, your lender can set less favorable conditions, such as higher interest rates, larger down payments and origination fees, and up to two appraisals. Not only that, but repayment periods may be as short as a year – and since they’re backed by your investment, defaulting risks losing your property.
4 Smart Tips to Run a Successful Airbnb Rental Property
Tip #1: Understand the Legal & Regulatory Requirements in Your Area
To combat rising rental and housing prices, many cities and states set specific regulations for short-term rentals. For example, in New York City, it’s often illegal to rent properties for under 30 days. And in Los Angeles, all hosts must register with the city and pay a fee. 9
Before you commit to a real estate investment loan, be sure to review your local laws.
Tip #2: Compare Multiple Offers from Different Lenders
Airbnb loans are still loans, just like any other debt you incur. As such, you’ll want to compare multiple offers to ensure you get the best terms at the best price.
Tip #3: Make Sure You Can Afford the Investment
One of the biggest factors that will determine your success as a host is whether you can afford your investment.
Sure, with consistent tenants, affording your monthly payments will be a breeze. But what if you have a bad month, or two, or three?
Generally, it’s ideal if your regular income can cover your investment property mortgage, too. But if that’s not always possible, be sure to stash away your rental income to tide you through seasonal slumps.
Tip #4: Save Money for Additional Expenses
Aside from your mortgage payment, hosting comes with a range of other expenses, such as:
- Licensing costs
- Maintenance costs
- Cleaning costs
- Note: Airbnb now offers an option to charge cleaning fees to guests to reduce your costs. 10
- Repairs (in the event of guest damage or regular wear and tear)
- Additional property protection insurance
- Note: Airbnb offers AirCover host protection insurance for all hosts. However, you’ll want to check with your regular insurance carrier to see if you need additional coverage. 11
Bear in mind that all these costs dig into your profits. But if you don’t keep your property well-maintained, you risk driving away future tenants.
Can I Get a Mortgage to Buy an Airbnb?
It’s possible to buy an Airbnb with a mortgage. Just remember that you’ll likely have to meet stricter lending requirements. And investment property loan rates tend to be 0.50% to 0.875% higher than regular loan rates. 2
How Do I Buy an Airbnb Property?
Start by shopping around for ideal properties in your target market. Then, you’ll have to secure funding and follow through the regular mortgage shopping process. Once you have the title in hand, you can list it on Airbnb!
What Percentage Does Airbnb Take from Hosts?
Airbnb offers a few fee structures. 12
The most popular charges hosts 3% per transaction, while guests pay up to 14.2% of the booking subtotal. Hosts also have the option to eat the booking cost.
Note that some hosts may pay higher fees, including those with “Airbnb Plus States,” who have “Super Strict cancellation policies,” and in some cities or countries. Airbnb also notes that location-based VATs may apply.
Bottom Line: Airbnb Rental Property Financing
Housing isn’t cheap – and neither is investing in an Airbnb property. Fortunately, you have plenty of options available to finance your foray into real estate investing. The key is finding an option that fits your needs. (And preparing to jump through a few hoops.)