So you’ve decided to invest in an AirBnB-type property? Read below to learn how to finance your vacation rental.
But first, some background on why your choice to invest in a vacation rental may be the wisest choice you ever make!
In case you hadn’t noticed, 2020 was a very strange year. COVID-19 hit, many businesses had to close their doors, and people tended to stay home, work from home if they could, and put off going on any vacations at all.
30-year mortgage interest rates also dipped under three percent for the first time ever and stayed there. Only very recently have they begun to inch up, but rates are still at their historic lows.
AirBnb also IPOd.
As 2020 came to an end, with the pandemic winding down, short-term vacation rentals, via AirBnB and VRBO, began to take off. More and more people didn’t want to spend time in big city hotels or condos. What they wanted was a way to “get away from it all” (and be in relative isolation) in a short-term rental unit (like a single-family residence), where they could feel safer from contracting the virus.
You can use the rental income you gain to pay your mortgage, and if you play your cards right, you can earn a profit over the course of a year.
Never has there been a better time to invest in a short-term rental. The “STR” (short-term rental) market is HOT and shows no signs of slowing down.
So NOW is the time to purchase a vacation home away from home. And don’t forget, you can stay in your vacation rental “on the house” when it’s not occupied by paying “tenants.”
How do you purchase a short-term rental and, more appropriately for this article, how do you finance it?
First and foremost, you need to have a goal. Why are you considering buying a vacation rental for the purpose of renting it out on a short-term basis?
What do your finances look like? How is your credit score? Can you make a sufficient down payment? Will you need investors or multiple lenders?
Once you have answers to these questions, you can move onto consideration of financing options.
What types of short-term rental loans are available?
There are four basic types of loans to consider when it comes to financing your short-term vacation rental.
This is your typical loan you’d get at a bank.
- Lowest rates
- More familiarity with how they work
- Little to no restriction on property type or location
- Requires great credit and/or high income for best rates
- Very difficult to scale due to Debt-to-Income (DTI) ratios getting worse the more properties you own
These types of loans consider the income-producing capabilities of the property rather than the borrower’s income or credit scores.
Check this calculator to see how much an actual vacation rental property could earn.
- Uses property’s income rather than borrower’s income or credit score
- Faster closing & reduced documentation compared to a traditional loan
- Can scale
- Higher rates than traditional or conventional loans
- Down payments are higher than with a bank loan
- Can have greater restrictions on property type and/or location
This is probably the best option for most investors, as you can scale it quite easily. We know investors who have purchased several properties in 2020 and 2021 for the sole purpose of acquiring short-term vacation rentals.
The cashflow you can get from these investments are pretty substantial.
Hard money loan
These types of loans are secured by the property itself. They are usually funded by individuals and companies rather than banks.
- Rapid approval process with very little documentation
- No personal or property income needed
- Higher interest rates & fees
- Very short-term lending periods so you’ll need to refinance sooner rather than later
“Alternative” or “creative” financing
Two other methods of financing your short-term vacation rental are:
- HELOC (or Home Equity Line of Credit)
- Cash-out Refinancing of an existing loan
It is suggested to use these last two loan options as last resorts, as they don’t offer any of the Pros above but come with a lot of Cons, primarily in that you cannot scale a HELOC across more than one rental, for example.
If you’re ready to make the plunge into the short-term vacation rental business, click here to set up a brief meeting to discuss your options. No obligation. Just clear, sound information.