A Beginner’s Guide to Financing an Airbnb Short-Term Rental Property

February 5, 2024
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After its launch in 2008, Airbnb quickly changed the game when it comes to short-term rentals. With more than 150 million users and seven million listings around the world, it’s safe to say that Airbnb is an unstoppable force. 

Four million hosts around the world have recognized the power of turning their property into a side (or full-time) hustle, and it’s easy to see why. In North America, hosts made an average of $41,026 each in 2021. 

Financing an Airbnb property can be particularly difficult for those who are just starting out. In this article, we give you a lowdown on how to finance an Airbnb property and start benefiting from the lucrative short-term rental market. 

Can you get a business loan for an Airbnb?

If you plan to turn the property you have an eye on into an Airbnb, you may qualify for a business loan. Getting a business loan for an Airbnb is not so easy, however, as most banks and lenders consider Airbnbs to be a high-risk investment. It’s therefore imperative to have a well-thought-out plan before reaching out to lenders for an Airbnb mortgage loan

Your business plan should contain information such as your expected income and expenses, the average occupancy rate in the area, the money you can contribute to the deal, your credit rating, your financial statements, sources of income and other documents that confirm that you can repay the loan. 

Can You Airbnb with a FHA Loan?

FHA loans are very popular with first-time buyers or those who find it difficult to borrow money from other lenders. They typically have lower down payment requirements and more flexible credit rating requirements. 

However, the FHA has strict guidelines on Airbnb loans and short-term rental properties. The rules clearly state that properties purchased with this type of loan must be used as the primary residence of the borrower for at least one year. The Airbnb model is not accepted under FHA guidelines and would violate the rules. 

If the borrower wants to convert the residence into an Airbnb property, they would have to refinance the mortgage with a non-FHA loan. However, this doesn’t guarantee that the borrower can legally rent the property as an Airbnb, as it all depends on the loan agreement. 

Can you Airbnb a VA loan home?

Veterans who want to use their VA loan benefit may be interested in buying a house and renting it as an Airbnb. However, like FHA loans, VA loans have certain rules and regulations that can prevent individuals from turning the property into an Airbnb. 

The occupancy requirement of the VA is the main hurdle, as it clearly states that the VA will only back home loans that the borrower wants to use as their primary residence for at least 12 months. However, it’s entirely legal for veterans to rent their property as an Airbnb while they are away for deployment after checking with their VA mortgage lender. 

How to get an Airbnb loan 

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Conventional mortgage

Unlike FHA and VA loans, conventional mortgages are not supported by government agencies. Therefore, they have stricter requirements such as a stricter credit rating requirement and a down payment. 

Conventional mortgages are typically repaid over 30 years, but this also depends on lender guidelines. 

Investment property mortgage

An investment property mortgage is one specifically designed for investment properties. This includes Airbnb rentals. 

Unlike other types of loans, investment property mortgages have higher interest rates, require a larger down payment, and have strict qualification procedures. 

Home equity loan

If you already own property, you can borrow against the equity of your home. This type of loan is called a home equity loan and is ideal if you want to buy a second or third property and rent it out as an Airbnb. Home equity loans have a fixed interest rate, while another similar option, home equity loans (HELOCs), has variable interest rates.

Hard money loan

Hard money loans are considered “loans of last resort,” as they’re based on the value of the property used as a guarantee and not on the borrower’s income. As a result, they have very high-interest rates and fees and are typically short-term loans. 

Beyond financing: Understanding the legal requirements of operating an Airbnb

Owning an Airbnb is a lot of responsibility. In addition to financing an Airbnb, it’s also important to obtain all the licenses and permits you may need to operate Airbnb. 

You also need to ensure that you comply with zoning regulations and collect occupancy taxes. Moreover, you need to cover your bases by opting for solid insurance coverage that covers any potential risks and liabilities associated with hosting people at your property. 

In addition, make sure to set clear guidelines to ensure that both you and your guests have a positive experience. These can include having house policies related to smoking, pet ownership, and noise levels. By taking these steps, you’ll be protecting yourself as well as your investment. 

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Financing an Airbnb FAQs

1. What is a FHA loan?

A FHA loan stands for a Federal Housing Administration (FHA) loan and is intended to help borrowers who may have difficulty obtaining a private loan. 

This loan is issued by the government or by agencies approved by the government and typically requires a lower minimum down payment and a looser credit rating requirement.  

2. What is a VA loan?

A VA loan is offered by the U.S. Department of Veterans Affairs program and is available to veterans and their surviving spouses. Like a FHA loan, it’s also backed by the government and issued by private lenders. 

Compared to other types of loans, the requirements are much more generous, as they don’t require downpayment, mortgage insurance and pre-payment penalties. 

3. What is a home equity loan?

Home equity refers to the portion of your property you’ve already paid off. A home equity loan allows you to borrow money by using your home’s current equity as collateral. 

In general, it has a fixed interest rate. The downside of a home equity loan is that the lender can take possession of your home if you don’t manage to repay the loan. 

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