See what mortgage you qualify for
As Airbnb and similar hosting options continue to grow in popularity, you might be considering hosting an Airbnb rental property yourself. Investing in Airbnb properties can be a lucrative option that generates consistent rental income, but it comes with its own set of challenges.
If you’re looking to get in on the Airbnb market or want to expand your existing Airbnb offerings, you’ll likely need some extra financial support. But what financing options are there for Airbnb rentals? While there aren’t Airbnb-specific loan options, you can use other kinds of financing to get the cash you need for your real estate ventures.
We get that it’s intimidating to start investing in Airbnb real estate. That’s why we’ve put together this guide on financing options, complete with factors to consider and tips to help you secure a loan that matches your needs.
How Does Airbnb Work?
There’s a decent chance that you’re already familiar with Airbnb and have likely stayed in one or two as a guest.
Airbnb is an alternative to conventional hotel accommodations. The platform works as an online marketplace that connects hosts with guests. Both parties benefit. Area residents can start a side hustle or even a full-scale business by renting out to travelers and their guests get to enjoy unique accommodations at great rates.
Hosts must meet these requirements for their Airbnb listings:
- Photos and description: Hosts must include photos of the space along with a written description of the space and its amenities.
- Price and availability: Guests looking to rent an Airbnb property will need to know two things: its availability and pricing. This is especially important to detail if availability or pricing changes by season or a guest’s length of stay.
- Costs and fees: You can post your listing for free on Airbnb, but you’ll be subject to a few costs and fees, such as a service fee and a variable service fee, which is the commission paid to Airbnb every time a guest stays at your property.
Be aware that some cities have regulations around Airbnb rentals, taxing and licensing. Review your local laws before committing to purchasing real estate to use as Airbnb rental property.
Can I Get a Loan To Buy an Airbnb?
Lenders don’t typically offer Airbnb-specific financing options for investors looking to buy a property to use as an Airbnb. But there are plenty of loan options you can use to finance your Airbnb, including conventional mortgages, small business loans and refinancing.
If you’re not living on the property or don’t plan to, lenders will likely treat the property as an investment property rather than a primary residence.
Investment property mortgages can come with higher costs and stricter requirements than primary residence loans, especially if you’re renting out multiple units on a single property.
Lenders tend to view loans for investment properties as higher-risk loans that come with a greater chance of default compared to a primary residence loan. In addition, you may have to offer a larger down payment for an investment property mortgage.
Because investment property loans are typically considered higher risk, lenders will likely prefer to work with borrowers who have a stronger financial profile, including higher credit scores and more cash reserves. You might run into some extra challenges if you don’t meet a lender’s preferred borrower profile, but with some extra effort, getting a loan to purchase an investment property to use as an Airbnb can be doable.
What Types of Airbnb Loans Are Available?
Getting into Airbnb rentals or expanding on your rental empire can be expensive, but there’s likely a financing solution that matches your needs.
When you’re considering your loan options, get a clear idea of your finances and make a realistic plan for your Airbnb. As you’re reviewing your finances, consider your:
- Savings for a down payment
- Your cash flow and reserves
- Other sources of income
- Credit score
- Assets or equity
Here are a few financing options you can use to fund your Airbnb ventures:
Conventional mortgage loan
Backed by government-sponsored enterprises Freddie Mac or Fannie Mae, conventional loans are the most common type of mortgage.
If you’re looking for a conventional mortgage loan to finance a short-term rental you won’t be living in, the requirements may be more stringent than if you were purchasing a primary residence. For investment real estate, some lenders may want borrowers to have higher cash reserves, larger down payments and a lower loan-to-value (LTV) ratio.
You can refinance the existing mortgage on your primary residence to cash out some of your home’s equity. You can use the cash from the refinance to put money down on the investment property.
Home equity loan or HELOC
A home equity loan or home equity line of credit (HELOC) lets you tap into your home’s equity and withdraw from it. It’s not quite the same as a cash-out refinance, which swaps out your existing loan for a new loan. With a home equity loan, you’re taking on a second home loan and avoiding the closing costs that come with a cash-out refinance.
However, getting a HELOC on an investment property may be considered higher risk and come with extra challenges, like a higher interest rate, cash reserve requirement and credit score requirement.
Owner-occupied investment property loan
If you want to stay close to your business and potentially qualify for a different type of home loan, consider living in the Airbnb while you rent out the other units or spaces.
Why? If you’re an owner-occupier, you could qualify for owner-occupied financing and potentially take advantage of lower interest rates and better terms.
However, owner-occupied financing has strict requirements. Plus, the loan approval process will probably take longer, and multiunit real estate properties usually need larger loan amounts. You’ll also need to prove that you’re living at the property. This means spending the majority of your time living there and working nearby.
Hard money loan
If you’re ready to go all-in on your Airbnb investment, a hard money loan might be the right option for you. Hard money loans are secured by real property, like real estate.
These loans tend to have quick approval processes but come with stricter requirements. They’re also short-term loans and, as such, sometimes require higher interest rates and larger down payments. Although they typically don’t require higher credit scores, you might have to put more money down and pay higher closing costs.
Small business loan
Small business loans have become more accessible for hosts who operate their Airbnbs as just that – a small business. If you’re paying property management costs or other professional fees to run your Airbnb business, a small business loan might be a good option.
Depending on the lender, small business loans can be difficult to secure and could come with stricter requirements, such as a high credit score.
Private money loan
Consider looking at the folks in your network – family members, friends or even professional acquaintances – to recruit as investors. Because of your established relationship, this option may lead to getting a loan(s) with more flexible terms.
But that closeness can come with costs. Borrowing money can be a tricky subject and may lead to damaged relationships down the road.
What Are the Risks of Renting on Airbnb?
Although renting Airbnbs can be a lucrative business or side hustle, there are a few risks involved, including:
- Funding difficulties: Starting an Airbnb venture can be difficult if you don’t have enough in cash reserves, income or equity.
- Consistent rents: Your property might be subject to peak seasons or sporadic renters, making it hard to generate steady rental income.
- Damage and unruly guests: Your guests may cause significant and expensive damage to your property.
Make Money in Your Sleep With Airbnb
Financing your Airbnb isn’t necessarily a simple task, but getting into the fast-growing rental marketplace is a rewarding way to grow your income. You hopefully get to meet interesting guests who are willing to pay for the opportunity to stay in a safe and comfortable room, home or flying saucer (look it up!). And if your rentals are steady, you might even cover your mortgage.
Looking to make a change?
Whether you want to buy a house, refinance or take cash out, you’re not alone. The experts are just a click away.