Short-term rental investing is exploding, with the market expected to grow by double digits across the next five years. You may be planning to get in on the boom and are wondering how to finance an Airbnb.

Securing the right loan can be difficult, however, because lenders view Airbnb properties as riskier investments, and this can make it harder to get a mortgage.

In this article, we’ll lay out some traditional and creative options for financing an Airbnb and help you figure out which one is best for your needs.

What Makes Airbnb Financing Unique?

So you want to know how to finance an Airbnb.

There’s no single way to do it, so your success lies in choosing the option that best fits your investment goals and financial situation, as well as economic and market conditions.

Financing options might be limited because lenders view short-term rentals as riskier investments than long-term rentals or a primary residence. The nature of short-term rentals — letting for one to 30 days, the potential for variable income, and regulatory risks from homeowner associations (HOAs) and governments — also increases the perceived risks.

Finally, there is no specific loan for Airbnbs, and your choices might come with different terms, higher down payments, higher interest rates and different criteria to qualify.

Below are some typical and creative financing options to consider.

Traditional Loan Options for Airbnb Properties

• Conventional investment property loans: This is a common path to financing an Airbnb. However, requirements of 20% to 24% down, a 620-720 credit score, proof of income and six or more months of cash reserves might put a conventional mortgage out of reach for a new investor.
• FHA loans (for house hacking): The Federal Housing Administration (FHA) loan is government-backed, and your down payment may be as low as 3%. However, it’s intended for your primary residence, which means you have to live on the property you’re offering as a short-term rental.
• Second home loans: You can take out a second mortgage to buy your investment property, but you must be aware of several restrictions. You might not be able to rent it out for more than 180 days per year. The property also must be a single-family home, held only by you, and it cannot have professional property management.
• Portfolio loans from small banks or credit unions: Portfolio loans are backed by lenders, so they can offer more flexible terms if you have issues with your credit score, debt-to-income ratio or consistent income. However, they are not offered by every lender and may be subject to higher interest rates.

Lenders offering these traditional financing methods may require higher standards to qualify because they perceive short-term rentals as a higher risk. Alternative options can offer you more flexibility and a lower barrier to entry to short-term rental financing.

Creative Financing Strategies

• DSCR (debt service coverage ratio) loans: DSCR loans depend on your potential rental income, not your personal income. They are designed for real estate investors, especially those with complex finances, to support the growth of their property portfolio.
• HELOCs or cash-out refis: A home equity line of credit (HELOC) or cash-out refinance requires you to hold equity in your home. The HELOC borrows against your equity. With a cash-out, you replace your initial loan with a larger one and use the difference between the two loans.
• Business loans or partnerships: If you run your short-term rental as a business, you can pursue a business loan from a lender or the Small Business Administration (SBA) to buy property, renovate it and pay for operating expenses.
• Seller financing or lease options: The seller in your deal may finance the loan, or you might be able to lease the property with your rent going toward the option to own the property. This can help an investor who needs more flexible terms.

Pursuing an alternative option to finance an Airbnb mortgage requires significant due diligence to know it fits your financial situation and strategy.

Financing Tips for First-Time Airbnb Investors

Here are tips to enhance your chances of approval for an Airbnb loan as a first-time investor:

• Strong credit and reserves: Check your credit score and improve it if it’s low. A good score is necessary to receive favorable loan terms. Lenders also require proof of reserves to cover several months of mortgage payments.
• Demonstrate rental income potential: Prepare a business plan that highlights the location, amenities, property type and other factors that can demonstrate the potential of rental income.
• Use Airbnb projections or data to support your case: Present lenders with data to support rental income projections to help secure your investment property loan.
• Work with lenders who specialize in short-term rentals: Seek out lenders who specialize in short-term rentals, such as those offering private real estate loans, where the emphasis is placed on the property’s investment potential.

Also consider whether you can comfortably afford the mortgage payment. Don’t overleverage yourself and account for market downturns, property damage from tenants or natural disasters.

What Lenders Look For in Short-Term Rental Investments

Understanding the criteria lenders evaluate can improve your chances of getting approved.

• Loan-to-value (LTV) ratios: The LTV ratio is the amount you borrow compared to the value of the property. Investors can typically secure loans with an LTV ratio of 80%, meaning you must put down 20%. A lower LTV often receives a lower interest rate.
• Property location and zoning: Lenders want to see short-term rental properties mostly in tourist areas with high demand. Also, your property must be in an area that allows an Airbnb. 
• Projected income vs. expenses: A lender will prioritize the property’s potential to generate income. DSCR is a crucial ratio that demonstrates a property can generate enough income to cover mortgage payments and operating expenses.
• Borrower experience and Airbnb history (if any): Your experience in real estate or running a short-term rental isn’t necessary, but it can earn you better loan terms, including lowering your interest rate.

Be prepared to bring lots of documentation. A potential lender will want to see identification, bank statements, documents for the property and rental history or projections.

Find Your Short-Term Rental Financing

From a conventional mortgage to FHA, second home or portfolio loans, you have options when thinking about how to finance an Airbnb. However, it’s crucial to match the right financing with your strategy and property. 

You must understand your loan terms, compare lenders and plan for fluctuations in your income. Smart financing can determine the affordability and profitability of your Airbnb.

Frequently Asked Questions