let’s talk: FINANCING AN AIRBNB
Recently, the NY crew and myself have been looking into AirBnBs…something pretty foreign to us as a group! We think we have a target area narrowed down but what I am personally struggling with is determining the proper financing. So naturally, I started to do some digging.
So, as we do, let’s talk Real Estate, let’s talk FINANCING AN AIRBNB…
While AirBnBs seem to be REAL money makers, they are typically harder to fund, due to their short term nature. In fact, when you google “AirBnB Loans”, they aren’t even really a thing. BUT, just because they are harder to fund, does not it mean they are impossible to fund. After all, have you seen how many AirBnBs are out there?! People are KILLING it and utilizing financing to do so.
Here are ways people are recommending you fund your AirBnB ventures.
(1) Conventional Loan
A conventional loan is a non-goverment backed loan used for borrowers with good credit scores and the ability to pay higher down payment percentages. They are the most popular form of financing for home purchases.
Where can I get one? National or local bank
Interest Rate? Depends on the current market climate but lower than commercial financing
Requirements? Higher down payment, lower DTI, higher credit score and based off your PERSONAL credit and income history but can be done in your LLCs name
Pros? Low interest rate
Cons? Appear on your credit report and most people are only allowed to have 10 mortgages to their name
(2) Home Equity Line of Credit
If you already own a property, you might consider pulling out a home equity line of credit to purchase your AirBnB!
Where can I get one? Your mortgage lender
Interest Rate? Depends on the current market climate but typically lower than commercial financing
Requirements? Good payment history
Pros? Low interest rate, borrow only what you need, flexible repayment options
Cons? You could lose your primary residence if you do not keep up with your HELOC payments, cannot HELOC an investment or rental property
(3) Small Business Loan
Where can I get one? National or local bank
Interest Rate? TBD, depends on your business history
Requirements? Good payment history, revenue history, must be registered as a business entity
Pros? You have funding!
Cons? Hard to secure if you are a new entity as they are based on your business history
(4) Hard Money Loan
Hard money lenders are non-bank, private, asset based lenders.
Where can I get one? Hard Money Lender (there are a ton out there)
Interest Rate? HIGH
Requirements? Down payment, cash reserves
Pros? Asset based, QUICK approval and funding process, can be used to purchase properties that traditional lenders may not lend on i.e. uninhabitable properties that you want to flip, a boat, a tree house, etc
Cons? Short term, high interest rate, high fees
(5) Portfolio Loanns
Lenders that keep your loan in house vs selling them to outside institutions. They reward experienced investors with lower rates and have more flexibility.
Where can I get one? Portfolio Lender (LendingOne and Visio are both portfolio lenders, but you can call small local banks to find out if they also do portfolio loans)
Interest Rate? Competitive and depend on your investing experience
Pros? There are not any restrictions on the number of exisitng mortgages, they do not appear on your personal credit report, flexibility in underwriting process and terms, typically faster funding than conventional lenders
Cons? Higher interest rate and fees when compared to conventional loans
I am going to be honest with you, none of these lending options really intrigue me aside from portfolio lenders or a small business loan. I am a liability worrywart and strive to keep my business and personal finances VERY separate, ruling me out of a few of the options listed above. I also have zero interest in using hard money because they are so dang EXPENSIVE and has a short repayment period. My goal would be to find a small local lender that would allow us to use commercial financing to fund this venture (goal: commercial mortgage, 5 year balloon, 25 year amort, ~5% interest rate -TBD IF THIS IS POSSIBLE) so I will keep you posted on our journey but I am curious… does anyone on here have any AirBnBs?! What tools did you use to finance your properties?!
Happy Wednesday! & Stay Healthy!
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