How To Fund Your Airbnb Investments
What types of Airbnb investment property loans are available to these fund cash flowing rentals?
Short term rentals are hot. From renting at premiums to vacation users, business travelers and the new generation of digital nomads, there appear to be great profits to be found in this niche. The question is, how do you finance these investments and get started or do more of them?
The Challenges of Funding Airbnb Investment Properties
It can take money to make money. It just doesn’t have to all be your money. It’s great to be able to walk into highly profitable cash flowing investments like short term rentals. Though, where do you get the money to get going or scale what’s working?
Most traditional banks and mortgage lenders still may not be up to date on today’s market. They haven’t adjusted their underwriting guidelines. So, most may not give you credit for the anticipated income from these investments, especially without a long track record of managing them already. That can really stretch your debt to income ratios and disqualify you from conventional loans. If not your DTI, then the additional capital reserves they want you to have.
Even if you have been doing well in this real estate investing niche and has amassed several profitable properties, these banks and lenders can then cut you off for having too many mortgages.
So, what are the alternatives?
Specialized Airbnb Lenders
There are some lenders with loan programs specifically designed to allow credit for the potential income from rents and Airbnb income when buying a home. These may be ideal, especially as a newer investor.
Hard Money Loans
If you are taking on a distressed or out dated property to renovate or improve and furnish as an Airbnb rental, then conventional lenders can be even more of a problem. Many may not approve a loan on the current condition. Unless you’ll also be living in the home and can qualify for a FHA 203k rehab loan. The alternative may be to begin with a hard money loan to make the acquisition easy. These lenders may even include funds to complete your rehab and updating. Then, once you have proven rental performance of a period of six months to a year, you can refinance on a more traditional long term loan at much better rates and payments.
Commercial Mortgage Loans
Commercial mortgage lenders get this strategy and the dynamics much better than traditional banks and residential lenders. They are loaning for investment purposes. Even if this is a condo or single family home.
This can be an ideal source of funds for your investments if you are looking to acquire a whole portfolio of loans, an apartment building, or have many income property assets and want to leverage pent up equity in a bridge style loan to expand.
Blanket mortgages can help simplify financing, by funding multiple assets in one loan and set of paperwork.
The dynamics of the current property market may mean it is more profitable and easier to build new units to rent our Airbnb style than to acquire existing property. Although often rarer, if you qualify, a construction perm loan can help fund building it, and then roll right into a long term fixed rate loan with low payments on completion.
Private money lenders can be incredibly beneficial here. They shouldn’t have the underwriting quirks you’ll encounter with traditional banks. Present your opportunity well, and you can gain access to very flexible funding. Often at far better rates and terms than you’ll find elsewhere.
Personal Loans & Lines of Credit
With a very wide variety of types of units which can be rented on Airbnb, some investors may find the easiest and lowest cost option is just to use a personal loan or line of credit. Business lines of credit and even credit cards may work. This way the property itself, the condition or how you will generate income from it really won’t be an issue.
You may not need to obtain outside financing at all. You may be able to negotiate owner financing with the existing owner. More and more property owners are finding it harder to sell for top dollar quickly. With the ability to generate supersized rents from Airbnb, you can offer them a good price and take over their payments with little out of pocket.
If you mistakenly purchased an investment property in a city or association and then found out you can’t rent it out on Airbnb, then you may also use this strategy to sell your property.