Can You Finance an Airbnb Business?
There are several different options for financing an Airbnb business. Keep in mind that it can typically be more challenging to procure funds for an investment property destined to be rented than a property bought as the borrower’s main residence. This is because lenders often consider it to be a riskier investment and in general require a higher cash deposit to secure its financing. From a lender’s point of view, if money runs tight, you’re more likely to continue paying the bills on your main residence and your second home will probably be less of a priority. Short-term rentals are also considered riskier than long-term rentals, as they require more attention to keep the space regularly occupied. A few weeks without guests could create difficulties in paying back the borrowed funds.
Airbnb Financing Options
While launching an Airbnb business can seem like an expensive undertaking, there are viable options available to help you finance your venture. Here are some of the common ways you can fund your new investment.
Mortgage
Taking out a mortgage for your rental property could give you a reliable loan with favorable interest rates. However, qualification may be difficult—you might need to contribute a bigger down payment, have a personal credit score of at least 640 to 700, maintain higher cash reserves, and have a lower loan-to-value ratio.
Home Equity Loan or Line of Credit
A home equity loan, often known as a second mortgage, can provide you with a lump sum of cash that you can then put toward an investment property. The money is repaid on a regular basis with set rates. Home equity lines of credit (HELOCs), meanwhile, work like credit cards—borrowers have access to a certain amount of funds. The funds used must be repaid with interest.
Owner-Occupied Investment Property
If you purchase a multi-unit property and live on-site, you may qualify for better terms, lower interest rates, and funding that otherwise wouldn’t be available. You must meet specific criteria in regards to how much time you live in the space, how soon you must move onto the property after closing, and more, so make sure that you understand all of the requirements beforehand.
Small Business Funding
Consider looking into small business funding options from the U.S. Small Business Administration or through Airbnb partnerships with Fannie Mae, for example, when deciding how to back your Airbnb business. One advantage of small business funding is that the money can be used to fill most business needs you may have, whether that’s buying inventory and equipment or covering day-to-day costs.
Hard Money Loan
Hard money loans are short-term loans from private lenders that are backed by property or assets. If a borrower defaults on the loan, the lender can take possession of the collateral. These loans tend to have easier qualifications as the lender is more interested in the value of the asset or property you’re buying. Hard money loans usually come with higher rates, higher fees, and shorter repayment terms. Borrowers often consider hard money loans after they’ve been denied more traditional forms of financing, or if they’re looking for a quicker route to funding.
Tips for Successfully Financing an Airbnb Business
Financing an Airbnb business doesn’t have to be complicated. Here are some pointers to keep in mind to ensure a smooth funding process:
Understand the investment you’re making. Why are you investing, and what are you hoping to get out of it? Being clear about your objectives will help you to identify what kind of funding to pursue. Shop around and compare offers from different lenders. When considering your financing options, make sure to find the best fit for your needs. Estimate your predicted expenses. You’ll want to consider maintenance costs and any additional insurance you may need. Also consider the time commitment of cleaning, upkeep, and responding to guests if you will be in charge of these tasks or the cost associated with them if you will hire someone else to manage them for you. Cleaning expense has been an important cost item for Aibnb entrepreneurs. Recently, Airbnb added a cleaning fee as a charge for the guests to cover this recurrent cost item. Do your research. Before purchasing a home to use as an Airbnb rental, you’ll want to familiarize yourself with the local laws regarding short-term rentals. Also, check the listings in the area to get a feel for their vacancy rates and price points.
