Guide to Financing an Airbnb Property

With more than 12 million property listings around the world, Airbnb has become a major housing option for travelers seeking an alternative to hotels. For property owners, meanwhile, Airbnbs have become a lucrative option for generating side hustle income through property investment.

Operating an Airbnb can be a great way to supplement your income, build long-term wealth, and lay a foundation for financial freedom through property ownership. However, most potential Airbnb owners require financing to afford the property purchase and to preserve their cash and liquid assets in the near term.

When it comes to financing, an Airbnb is a much different purchase than a primary residence. Here’s an overview of what to expect when financing an Airbnb property and advice on how to get started with your property search.

Financing an Airbnb vs. a Primary Residence

Aspiring Airbnb owners have many options to finance and afford the purchase of a new property, but the process of securing one of these options is different from the home buying process. 

As a potential Airbnb owner, it’s important to understand the different requirements involved in financing an Airbnb—as well as how these different requirements might affect your purchasing power and your return on investment.

Some key considerations when financing an Airbnb include:

Higher Down Payment Requirements 

Lenders view a rental property purchase much differently than a primary home mortgage. Additionally, the loan programs available to facilitate primary home purchases aren’t an option for Airbnbs and other rentals. Many lenders will want a minimum down payment around 20 percent of the property’s value, although down payment requirements can range from 15-30 percent depending on the lender.

Higher Interest Rates

Unless your Airbnb can qualify as an owner-occupied rental—which may be possible if you purchase a multi-unit property and live in one unit while renting out the others—your mortgage will likely charge a higher interest rate. These rates can vary depending on the market rates at the time of purchase, but in general, a rental property loan may charge interest that is several percentage points higher than an equivalent mortgage for a primary home.

Shorter Repayment Terms 

Though it’s possible to get a 30-year mortgage for a rental property, this length of repayment may be more limited in availability depending on the lender. Check with multiple lenders to find out which repayment term lengths are an option for your property.

Additional Documentation to Prove Property Earning Potential 

In addition to the typical documentation required for a mortgage approval, your lender may also request seller’s disclosures, information about any current leases applicable to the property, and any applicable rent rolls that document the gross revenue earned by the property.

Financing Options for Your Airbnb

As you seek out financing for an Airbnb, you will find that several financing options are available to you. But the home loans and lending programs you may have used in the past may not be an option for a rental property. 

The financing option you choose will also affect the amount of side hustle income you’re able to generate from your property acquisition, so the financing terms offered by a lender have a direct impact on your long-term earning potential.

These financing options include:

• Securing a conventional mortgage. Conventional mortgages are always an option for financing an Airbnb, although the terms offered for a rental property will likely differ from those offered for a primary residence. Still, this is often a cost-effective and accessible financing option for any buyer serious about converting a home into an Airbnb.

• Getting a small business loan. Small business loans are becoming more common for financing Airbnbs, and it can make a lot of sense for buyers who are shouldering a lot of related expenses—such as property management services—alongside the gross revenue generated by the property. The disadvantage of small business loans is that the process of getting approved for one can be far more difficult than the same process for conventional home mortgages.

• Using your home’s equity via cash-out refinance or home equity loan. If you’ve built up a sizable amount of equity in your home, you may be able to use that equity to purchase an Airbnb property outright. A cash-out refinance could offer a backdoor strategy to financing a rental property purchase at the lower rate offered for primary home loans.

Along with these financing options for the property itself, current homeowners may also consider financing the down payment for their investment property by taking out a home equity loan on their primary home. 

The availability of a home equity loan will depend on how much equity exists in your home. The interest rate offered on a home equity loan may also affect the value of this financing option.

Avoiding the Potential Risks of Airbnb Ownership

The financing process is often an important period of time that helps Airbnb owners perform their own due diligence and make sure their property acquisition is going to offer long-term value and progress toward the all-important goal of financial freedom. But this side hustle income can also come with risks if you aren’t careful when choosing both properties and financing options.

Some of the most common risks that can derail your Airbnb experience include:

Poor Financing Options

High interest rates, aggressive repayment terms, and/or high down payment requirements can cut into the value of financing one of these properties. As you do the math to calculate the cost of your mortgage and compare it against the revenue potential of your property, you might determine the financing isn’t favorable enough to create a solid return on investment.

Uncertainty Around Occupancy

If you review the rent rolls and find poor rental figures during off-peak periods, you may re-evaluate the earning potential of an Airbnb and decide you’re better off avoiding this investment.

Unplanned Property Expenses

Owning any home involves additional costs that need to be accounted for. With an Airbnb, though, these costs can up the stakes of property ownership—especially when some of those expenses are related to damage and/or neglect on the part of your tenants. High expenses can compound the problems of low tenancy, quickly creating a nightmare situation for any Airbnb investor.

Tips for Successful Airbnb Financing

As you look ahead to a new stage of life managing an Airbnb, use the following tips to increase the value and ease of buying a property:

• Research the local Airbnb market to estimate your potential earnings. Check out online data aggregation tools and information from local property management companies to make sure your Airbnb is a solid investment. Airbnb also offers its own internal tools to estimate your potential nightly, weekly, and monthly rates, as well as your projected monthly income based on expected occupancy rates.

• Compare financing options from multiple lenders and loan types. As with buying a primary residence, financing opportunities for an Airbnb property can vary widely from one lender to the next. Shop around to make sure you get the best deal possible.

• Account for other expenses (e.g., furnishing, cleaning, maintenance) along with your loan. Running a good Airbnb can be more expensive than keeping up a private residence. These expenses need to be considered when estimating revenues and profit margins.

• Make sure the existing owner can supply you with documentation to support your purchase. If the prior owner of the property used it as a rental, ask for receipts and rent rolls that document this information. More information on the profitability of your Airbnb can be an asset as you seek financing approval.

The right Airbnb investment can turn your side hustle income into a long-term revenue stream that builds financial freedom through rental income and property value appreciation. If you need financing to close the deal, connect with a local lender to explore all of your options.

Looking for more tips and tricks on generating side hustle income? Download our free guide How to Turn Your Side Hustle into a Business today.