How Can I Finance an Air BNB Rental?

With vacation rentals popping up everywhere through services like Airbnb, VRBO, HomeAway, and more, it’s clear that many people are realizing the financial benefit of owning an investment property and renting it out. Do you want to jump on the bandwagon and purchase a property for short-term rentals? You may have questions about how to finance an Airbnb rental. Let’s talk about it.

1. Start with the loan!

The financing process for an investment property is slightly different than purchasing a primary residence. Talk with your lender about interest rates for investment properties, as they can be slightly higher than primary residence purchases.

  • Conventional loans provide a great option for rental properties (as long as you’re within the conforming loan limits), but the down payment requirements may be closer to 30%.
  • Another option is tapping the value of your current house by using a home equity loan for the money to purchase a second property.
  • You could also use a jumbo loan for an investment property if the home value is above the conforming loan limits.

2. What’s this going to do to your taxes?

If you rent the home out for under 14 days per year, you can keep the rent tax-free. However, if you rent it out more than 14 days per year (which most people do), you’ll need to report all rental income to the IRS. You can deduct rental expenses, but costs need to be allocated between personal and rental use. We know, this is a lot to think about. Get yourself an accountant to determine the exact tax implications specific to your situation.

3. Are you ready for two mortgage payments?

It’s easy to get caught up in the excitement of having the funds for a down payment, but don’t forget that you’ll also be on the hook for another monthly mortgage payment. It may take a few months to get your rental property ready for guests, so you need to make sure you can cover all of your mortgage payments during that time. You may also have months that are slower than others, so you need to make sure you can pay the mortgage if your rental income doesn’t cover it.

Another expense to consider? Furnishing your new place. Don’t expect your guests to bring an air mattress – you’ve got to set your new place up with beds, dishes, couches, TVs, sheets, and more (and probably a Netflix account too).

4. What rules could stand in your way?

Many states and cities have specific licensing requirements for short-term rentals. Often times, you need to apply for and receive a license before you can advertise the property. Check with your local city and state to see what paperwork needs to be complete before you buy.

HOAs are cracking down on short-term rentals in their communities. Some residents don’t appreciate tourists coming in and out, so some HOAs are creating rules to prevent short-term

rentals. If you are looking at purchasing an investment property, see if there’s an HOA and what their rules might be around vacation rentals.

5. Now that you’ve answered those, go out and market, market, market your new place!

With the rise in rentals on Airbnb, VRBO, HomeAway, and more, you’ve got competition. A few things can help you stand out:

  • Great photos – nobody wants to stay in a dark, dingy place. Take fantastic photos (or hire someone to do it for you) and present your place as a fun, clean rental that will take a renter’s vacation to the next level.
  • Do your research – look at other rentals in your area to see what they are charging and price accordingly. Check out seasonal changes in rates too and make sure your price stays competitive.
  • Add an extra touch – help make your guests’ stay memorable by providing small gift baskets, gift cards, or other experiences that will enhance their time away.
  • Get ratings – your potential guests can check out reviews from other customers. People who stay at your house can rate the house and you as a host. Great reviews are essential to maintaining your business, so solicit reviews from guests and make sure to address any critical reviews as soon as possible.

If you’ve got questions about financing an Airbnb, contact us today!