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How to Finance an Airbnb Rental

As the “sharing economy” grows, more people are looking at Airbnb as a good way to make some extra money. The online hospitality platform allows homeowners to list extra rooms — or their entire house — for travelers to book by the night.

It’s not hard to see why the company has been successful. Not only are travelers able to find decent lodging for an affordable price, but Airbnb hosts can make a profit through renting unused space in their own home.

The next step these Airbnb entrepreneurs are taking? Buying a property specifically to list on the site. But there’s still the process of financing a future Airbnb rental, which can seem overwhelming. There aren’t necessarily “Airbnb loans,” but there are several valid options that are more suited for these types of rental properties than other forms of financing.

Here’s a guide to making it work.

Special programs for financing an Airbnb property

Airbnb has paired up with Fannie Mae and mortgage lenders Citizens Bank, Quicken Loans and Better Mortgage to help hosts refinance their current mortgages using information about their rental income on the platform. After refinancing, money saved or taken from the equity could potentially be used to buy a new rental property. Your new loan structure could also allow you to rent your property on Airbnb more frequently.

This program is a big deal because not all lenders allow you to count short-term rental income in a mortgage application. If they do, they may not consider this type of income as a major part of the application or can require a longer rental history. Even with this Airbnb program, keep in mind that the exact amount of income that may be considered can vary by each lender.

If you’re considering refinancing your mortgage as an Airbnb host, there are some guidelines to follow. First, the home must be your primary residence and be located in U.S. Other qualifications can vary depending on the lender. However, a borrower’s debt-to-income ratio and credit history usually play an important role when determining possible rates and how much you will need to pay for a down payment.

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Other options for financing an Airbnb rental

If you don’t need a refinanced mortgage, there are other options for purchasing a new property to list on Airbnb. In most cases, lenders would treat the purchase as an investment property.

Mortgage on an investment property

When you apply for a mortgage on an investment property, you may come across some strict requirements. This often includes a bigger down payment, higher credit score (often requiring a minimum between 640 to 700), more cash reserves and a lower loan-to-value ratio.

More information on a mortgage for a second property can be found here.

Owner-occupied investment property

Some Airbnb entrepreneurs might consider buying a multi-unit property like a duplex or apartment building and living in a portion of it and renting out the rest. In this case, an owner-occupied investment property loan might be a good fit.

These loans generally enable you to get a longer mortgage term without as much of a down payment. However, some loans may still ask the borrower to have cash reserves that can reach up to a year. To qualify, a lender will usually look at your employment history and how much you make. Your credit score, which doesn’t necessarily need to be high to qualify, will usually help determine how much you will need to put down.

Find more information on financing an owner-occupied multi-unit property and all qualifications here.

HELOC or home equity loan

People who own a home can potentially use their home equity for a down payment on a new property. Your equity in a home is the difference between the amount of all outstanding mortgages and the market value of the property. Once it’s built up, you can tap that equity in two primary ways.

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The first is a home equity line of credit, also known as a HELOC. This product functions like a credit card, where you have access to a limited amount of money and you pay back with interest what’s been spent. The second is a home equity loan, where you get a lump sum of cash and make monthly payments during a fixed term.

A major selling point with both HELOC and home equity loans are possible lower rates and better terms than other forms of credit. However, there is a huge disadvantage, too. If you don’t make your payments on time, you could lose your primary home.

To see if you’re likely to qualify for a home equity loan or HELOC, you can use this helpful calculator.

Hard money loans

If you search the web for “Airbnb loans,” there’s a good chance you might come across hard money loans. These are short-term loans issued by a private lender, backed by real estate and generally used for investment purposes. A big advantage of hard money loans is the possibility of helping you buy a property traditional loans won’t, such as that treehouse in the woods you had your eye on. Approval can also sometimes be faster. While each lender is different, a borrower’s credit score isn’t usually a huge determining factor with hard money loans. On the downside, interest rates can be high and so can the origination fees. The repayment period is also short, with usually only a year to pay off your loan.

Before you buy an Airbnb property

While many of the financing options are similar to traditional investment properties, there are some special considerations before buying a home you intend to list on Airbnb.

Is Airbnb legal in your city? For obvious reasons, it’s important to know if Airbnb is allowed where you want to buy. Some cities have strict rules for short-term rental properties, including New York City — where it’s illegal to rent out a property for less than 30 days. Be sure to inquire with your own city to learn about any renting regulations or licensing stipulations so you know if and how long you can rent out your property.

Do you need additional insurance? Yes, Airbnb offers its own Host Protection Insurance that can help with damages, but your own home insurance may require you to have additional coverage when renting out a property. It’s best to discuss this with your insurance company to get all the details.

How much will running an Airbnb cost you? Getting an estimate on how much owning your own Airbnb property will cost you is also a smart move. Make sure you consider as many scenarios as possible to be well-prepared, including anything from a long vacancy with zero money coming in, to extensive cleaning services after a tenant leaves. You should also know that Airbnb charges a fee to host. The company’s site says this fee is usually around 3% but can be higher in cities with a “Super Strict cancellation policy.” You can get a better picture on how much Airbnb properties rent for in your area by scoping out local listings.

Final thoughts

An Airbnb rental can be a great way to make some extra money, but it’s something to spend plenty of time thinking about before taking on debt. A successful Airbnb rental involves plenty of effort and money to get started and keep going. Do your homework first to help decide if this is the right option for you.

 

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