AirDeed
Short Term Rentals and Airbnbs For Sale
Guide To Financing Airbnb Properties
Airbnb and short-term rentals have experienced a boom within the last 5 years and are only going to continue this growth. They provide vacation homeowners and investors the ability to rent out their properties for short stays while setting their own prices and allowing communication with patrons before, during, and after their stays.
Airbnbs and VRBOs aren’t just homes anymore, they are turning into real profitable businesses and a way to build wealth through real estate. Of course, for this to happen, investors need access to capital.
It can seem frustrated when you start researching this type of mortgage. After all, standard government backed mortgage programs aren’t available for new short-term rentals except under unique situations like multi-family properties where the buyer will live in one of the units.
Private Airbnb Mortgages
An Airbnb Mortgage is a type of financing that can be used by an investor to buy a property for the purpose of using it for an Airbnb. While this hasn’t been available in the past, private lenders are starting to pop up and offer loans for short-term rental properties based on projections. Because these programs are riskier for the lender, they have higher interest rates, currently starting above 5%, and require a higher downpayment.
The requirements will vary by private lender but look and include the following:
- FICO Score
- 12+ months of actual short-term rental income or Projected short-term rental income
- DSCR above 1.0
- Up to 80% LTV On Purchase
- Full Recourse
They normally will not include Tax Returns, W2’s, DTI, or personal income when applying for a loan.
What is a FICO Score?
A FICO Score is a three-digit number based on the details in your credit reports from the 3 agencies; Equifax, Experian, and TransUnion. You can think of a FICO Score as an overview of your credit report. It counts how long you’ve had credit, how much credit you have, how much of your available credit is being used, and if you’ve paid on time.
How To Get STR Income Projections?
This is going to be based on what your private lender requires. Some may want a local property management team to write a full projection report as it is the most accurate way to get an estimate. Others however will accept projection reports from AirDNA. AirDNA has a tool called Rentalizer that allows you to enter a property address and get the following for free:
- Annual Revenue
- Average Daily Rate
- Occupancy Rate
What is a DSCR?
The debt-service coverage ratio (DSCR) is a measure of the cash flow available to pay current loan commitments. It is used to analyze individual borrowers and the rental property they are planning to purchase. You can calculate DSCR with the following formula.
What does Full Recourse Mean?
Full recourse is when a debt commitment is owed regardless of the borrower’s personal and financial situation. With full recourse, the lender can take whatever assets it wants to satisfy the borrower’s debt. A full-recourse loan allows the lender the ability to recover all funds it loaned to the borrower. The borrower will not be unable to get out of the loan until it is paid in full.
This is a very important factor when considering taking this path to fund your Airbnb business. Understand the consequences that could come down upon you if the business fails.