In the era of “be your own boss,” investments like Airbnb offer quite the appeal. Both lucrative and exciting, Airbnb is a journey that you should embark on if you’re considering purchasing a vacation home. The question that lingers for many is: how?
Having an Airbnb is a great idea, but it can also be a costly one. If you don’t have the available means to buying a rental property outright, we’ve compiled a list of Airbnb financing options that are perfect for you and your business.
There are a plethora of options available for Airbnb loans. Once you’ve secured your loan and set up your brand new short-term rental, you’ll be ready to get your property on the market with Airbnb management software too. After all, an Airbnb listing isn’t complete without a great website!
Any financial investment, especially an Airbnb purchase, shouldn’t be navigated blindly. Owning an Airbnb property will be a significant change in your life, especially for your wallet. By getting your finances in place and planning out your investment, you’ll put yourself in the best position possible for comfortably paying off your property.
Before you apply for any loan, get an idea of how much money you’re bringing to the table. How much money can you comfortably put down? Do you have any other sources of income that you can use to pay down your Airbnb loan? How good is your credit score? Follow the top tips for financing and apply them to your own situation. Doing your homework is the most crucial step to buying a rental property.
Find the right Airbnb loan for you
If you’re worried about how to finance an Airbnb, you can rest easy knowing that there are many loan options available. Even potential owners with lower credit scores or a small deposit can get a perfect loan to suit their needs with a little bit of patience.
Contrary to popular belief, there’s an assortment of options available beyond a traditional loan. Fortunately, with the rising interest in purchasing an Airbnb, more options have become available. Read through to find the best one for you and your upcoming business.
1. Airbnb Business Loan
Many owners treat their Airbnb property as a small business and in a lot of cases, it is! Between property management and cleaning, for some people, their Airbnb property is a business and should be treated as such. Lenders have started to realize this and have created options available for these hosts.
Small business loans used to be reserved for local restaurants and town shops, but now Airbnb owners can use this option. Airbnb has paired with some of the major names in the loan business, like Fannie Mae and Better Mortgage, to make this option a little easier for those looking to buy an Airbnb. Do further research beforehand to make sure that this option is possible for you. Although they offer business loans for short-term rentals, some companies are strict about location (for example, Fannie Mae and Freddie Mac have tight rules for high-rent vacation areas).
2. Owner-Occupied Investment Property Loan
Keep your friends close and your business closer! If you want to keep a close eye on your Airbnb property, consider buying a multi-unit property and living in one of the spaces. Not only will this allow you to manage your property with ease, but you might also get a better loan for it.
Some loans aren’t available for absentee owners, so being an owner occupant is an excellent loophole to this obstacle. If you apply for a multifamily mortgage loan, you can benefit from a potentially lower interest rate and better terms, as this would be considered your primary residence.
The pros of using an owner-occupied investment property loan far outweigh the cons, but there are still some requirements to keep in mind before making the jump:
Live in the property for at least 70% of the year
Work a maximum of 50 miles from the property
Sign documents stating that you intend to live in the property that you are financing
Move into the home within 30 days of the closing
Remain in the home for at least one full calendar year
Reap the many great benefits of an owner-occupied loan if you think it’s a good option for you and your business.
3. Airbnb Mortgage Loan
If you think you’ll be remotely managing your property, then the owner-occupied loan isn’t an excellent option for you. Don’t fret! There are still plenty more options available that don’t require you to live next to your guests.
Traditional Mortgage Loan
If you fit the mold of a conventional buyer, then this loan might be for you. The average profile for this type of loan would be a decent credit score, a 20% down payment, and a long-term time frame to pay it off.
Most people opt for this type of loan for their first home purchase, so if you’re familiar with this option, you might want to consider it for your Airbnb too. Conventional in nature, you can have a good idea of what to expect with this financing.
Home Equity Loan
If your current home has a high market value, this might be something you want to consider. A home equity loan borrows from your home equity as a lump sum payment for your second mortgage. The interest rate for this option might be higher than a conventional mortgage, so keep that in mind when exploring this option.
4. Multi-Unit Loan
Why purchase one Airbnb when you can have multiple? If you’re looking to apply for a multi-unit loan, make sure that you’re the right candidate first. The process of getting approved for a multi-unit loan is a lot more rigorous than traditional loans.
Investors want to make sure that your Airbnb will produce a steady cash flow and they expect you to prove that before the property purchase. By coming with a solid business plan and a high credit score, you demonstrate that you’re a great choice for this type of loan. You can download our free Airbnb business plan by filling in the following form!
Being that this loan size will be more substantial than maybe a single-unit loan, be prepared for this to take some time. Loans that require a more considerable investment might have a longer timeline to approval. Use the time wisely while you wait by mapping out a post-purchase plan or start to prepare your vacation rental software for monitoring multiple properties.
5. Hard money loan
If you’re ready to jumpstart your Airbnb purchase immediately, this might be the best option for you. Hard money loans typically have a rapid turnaround. The approval process takes significantly less time than traditional loan options, but it does have steeper requirements.
Because these types of loans are short-term, the conditions will be a bit different from long-term loans. The interest rates tend to be higher, and the amount of money you’ll need to put down is also higher.
This option is best for those who want to break into the Airbnb market immediately and have the funds to pay it back in the near future. Otherwise, the high-interest rates might not make the investment worth it in the long run.
Maybe you’re thinking about adding a guest cottage or tiny home to your existing property. If you already have a primary residence that you’re paying down but want to start an Airbnb business that branches off of that, you could consider refinancing your existing mortgage.
The refinancing option is great for those looking for a smaller commitment. It’s not as difficult of a process since it’s building off your current mortgage. The refinancing option basically means you’re trading your old home loan for a new one. It’ll give you the funds to expand on your primary property to start your Airbnb business.
7. Private money loans
The gig economy is picking up and many people are aware of this shift. The movement is becoming so popular that even non-investors are looking to break into the business. If you have people in your own circle that might be interested in undergoing this venture with you, then the private money loan might be a good path to follow.
As implied by the name, private money loans come from a private source of funding. This might be a friend, family member, or old business partner. Because the funding is outside the realm of traditional investment, the terms and conditions vary. Your interest rate, time frame and down payment depend entirely on the lender, just like a conventional loan, but with more flexibility and variability.
Private money loans don’t have to follow any guidelines regarding credit score or terms, so if you have the community to back this, you might find the private money loan to be an attractive option.
Make the most of your Airbnb investment
Your business doesn’t start and end at the point of sale. There’s plenty of work to do before your Airbnb purchase and then thereafter. After you’ve applied for an Airbnb loan, you can start to plan out your business while you wait!
Market your property
If you’ve chosen a place, you’ve probably already done some research on the surrounding area. It’s important to get acclimated with the community, not only so you can stay in good graces with the neighbors but also to get a feel for your market!
Once your Airbnb business is up and running, you can boast the restaurants and community recommendations on your website to make your property that much more enticing to potential guests. This is something you can get started on before your property goes live. The more you prep your website before your property is ready to rent, the less work you’ll have to do later.
You’ll have plenty of marketing to do for your Airbnb, such as SEO for your website, advertising your Airbnb on social media, and targeting the right guests, but you don’t have to get overwhelmed. Get started on what you can before you begin accepting guests so you can space out what you have to do and focus entirely on your clients when the time comes.
Streamline processes with an Airbnb Management Software
On the surface, renting out an Airbnb looks relatively easy. Prep the space, pop it into Airbnb, then let the money flow. If only it were that easy! Purchasing an Airbnb is exciting, but there’s also a lot of moving pieces. To make the process a little easier and maximize your profits, use an Airbnb management software. With this, you’ll be able to automate property management tasks, streamline guest communication, and automatically sync bookings and other calendars.
The focus of your business needs to be on your guests, not the booking details. Using a management system will make your Airbnb purchase a lot smoother.
Airbnb frequently asked questions
Buying a vacation rental property comes with a lot of questions and buying an Airbnb entails a whole lot more. Not only are you purchasing a new home, but you’re also buying a property that’s intended to be rented out, which can get complicated. We’ve got your top questions answered.
Can I do Airbnb with an FHA loan?
The short answer is maybe, but probably not. The FHA loan, or Federal Housing Administration loan, is intended for primary residency and single occupancy. With that said, there are always exceptions.
If you already purchased your home under an FHA loan and are planning to follow the refinance option mentioned above, this is still possible and legal. Your existing FHA loan would need to be refinanced under a non-FHA loan option.
FHA is particular about the loan not being used for short-term rental purposes under 30 days. With the new movement towards remote working, you could hypothetically rent your Airbnb for a minimum of a 30-day stay, but it still poses a risk. FHA has rules against “Transient Use,” so read the fine print to make sure you wouldn’t break any rules.
If you’re purchasing a home as a first-time home buyer and have Airbnb in the back of your mind, this could work for you down the line. Enjoy your home as a primary residency and when you’re ready, refinance that home with non-FHA options.
How much does it cost to start an Airbnb?
Much like the last question, the answer is: it depends! Any property investment is going to cost you a chunk of change in the initial phase. Between interior design updates, launching a website, and some of the unseen expenses, you’ll find that the costs add up.
It’s essential to account for all of these potential payments before requesting a loan. If you’re buying a fixer-upper, for example, be ready for a lot of extra repairs that should be factored into your loan total.
There are expenses associated with the maintenance of your property as well. Property management, cleaning services, and utilities are all ongoing costs that you need to keep in mind when deciding what monthly payment you can afford.
Of course, your Airbnb will bring in income, but be prepared for the cost of vacancy when you’re starting out and during the low season.
You might find that, after establishing your business on Airbnb, you’re ready to make the switch to a fully independent site of your own. Like any major booking agency, Airbnb comes with its own taxes and fees that ultimately come out of your profits. Find out how much Airbnb is costing you and decide if your new property purchase is better suited to have its own direct booking channel.
How much money do you need to put down for an Airbnb loan?
Again, the answer isn’t that easy, but it is possible to get an idea of what your down payment will look like. There are a couple of factors to consider when calculating the sum of your down payment.
The biggest one, of course, is how much money you have to put down. If you can comfortably put down 30%, do it! The bigger the down payment, the less you’ll have to pay off later and the better your chances are at getting a lower interest rate.
How good is your credit? If you appear like a trustworthy borrower, you might not have to put down such a high amount. Prove to lenders that your loan is a sturdy one by paying off any past due bills, put any lines of credit in your name, or check to see if there’s anything else holding you back from a higher credit score.
Your budget will also largely determine how much you have to put down. Even if you’re only planning to put down 20%, a million-dollar mansion and a modest farmhouse are going to have different implications. Buy what you can comfortably afford and make the down payment that’s right for you.
Where’s the best place to get Airbnb lending?
The best place to get Airbnb lending will depend on your situation. If you’re planning to buy a small hotel with multiple units, you might need to go with a larger investor. If you’re buying in your same residential area and are only planning to make a small-scale investment, maybe a local bank would give you the best rates.
The best thing you can do is appraise your options and discover which lending is right for you. Don’t be afraid to call around to see which option fits your needs.
Is an Airbnb investment worth it?
Yes! As mentioned, Airbnb is going to cost you upfront, but the payout can be huge. You’re creating profit out of nothing and some folks are so successful in the business that this becomes their sole source of income. Sounds great, right?
After deciding to buy an Airbnb, you have to figure out how you’re going to pay for it. Houses aren’t cheap, but they’re not impossible to finance either. There are many options out there regardless of your budget, location, and circumstances.
The important thing is that you take the time to find your perfect option, so your investment is a wise one. Once your finances are settled you can start the fun part, like coming up with a catchy property name or decorating the space to wow your guests!
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