Hard Money Experts

Airbnb Loans for Short-Term Rentals

With 150 million users, Airbnb is by far the most popular short-term rental site in the world— but it’s not just a fun way to vacation— it’s also an incredibly profitable business. The average Airbnb host makes $9,000 a year renting their property—however, most only rent properties part time.

In many cases, full-time Airbnb hosts can make 200-300% of the income they can make when compared to renting a property long-term. However, unless you already fully own a home, you’ll need to finance your Airbnb property, and that isn’t always easy. Banks and conventional lenders often shy away from short-term rentals, citing legal barriers and higher risks.

Fortunately, there are quite a few lenders, particularly hard money lenders, which focus specifically on providing Airbnb loans and financing for other types of short-term rentals, including properties advertised on sites like VRBO and Tripadvisor.

• Loan Term: Up to 30 years

• LTV: 80% LTV

• DSCR: Varies

• Interest Rate: Starting at 3.5%

• Origination Fees: 2-6%

• Credit Score: Generally required for lower-interest loans, with minimum scores of 640-680+. Traditional, high-interest hard money loans with no minimum credit score may also be available.

• Appraisal: Required required prior to funding. 

• Closing Timeline: Some lenders close in as little as 24 hours, while others may take between 3-4 weeks to close.

Pros

• Increased income, sometimes up to 300% of the income derived from long-term rentals

• LTVs up to 80%

• Loans often have fixed-rate terms up to 30 years

• Airbnb loan interest rates are often lower than hard money, sometimes starting at just 3.5%

• No need to evict non-paying tenants

• Regular property maintenance will keep property in better shape, allow issues to be fixed sooner

Cons:

• Relying on a third-party platform for income; hosts can be banned, platforms can be shut down, etc.

• Relying on seasonal and vacation trends instead of local population’s need for housing, can be impacted by health or political events (such as COVID-19 lockdowns)

• Potential for having no exit strategy if Airbnb does not work out

• Costs are significantly higher, and should not be underestimated. Costs often include:

  • Furnishing and decorating cost (+ amenities, if included)

  • Higher insurance requirements and costs

  • Higher property management fees

  • Regular (weekly) maintenance and cleaning costs

  • Potential additional city and state taxes or fees

• Loans for Airbnb properties often require high credit scores (often 680+)

• Interest rates for loans may be high

• Potential for property damage

• May need to refinance if converting the property to a long-term rental

Before considering getting financing for your airbnb, you’ll need to determine if starting your Airbnb business is actually a good idea in the first place. If you’ve already operated an Airbnb in your target area, then you can skip over this section.

1. Find Out if Airbnb is Legal (or Highly Regulated) In Your City

Not all cities allow Airbnb, some cities only allow Airbnb in some circumstances, and some cities have regulations that can make Airbnb properties significantly less profitable. Much of this is a result of pushback by the traditional hospitality industry, but whatever the reason, if there are strict Airbnb rules in your city, you need to know before investing your hard earned money.

For instance, in some cities, an Airbnb host must be a full-time resident renting out part of their property or renting out their entire property for a small amount of the year. Some cities have regulations that cap the length of cap short-term rentals. In addition, many cities have additional Airbnb taxes that can significantly cut into your potential profits.

Plus, you should note that if you rent out your primary residence for too long on Airbnb, you could lose your homestead tax exemption, particularly in states like Florida.

2. Operations, Repair, Maintenence, and Insurance Costs

Airbnb properties and other short-term rentals have significantly higher maintenance costs than long-term rentals, and you need to account for this when estimating how much you might profit from an Airbnb. An Airbnb typically requires a full cleaning after each guest, and this can take anywhere from 45 minutes to several hours, depending on the size of the Airbnb and the cleanliness of your guests. This can cost hundreds of dollars for the largest Airbnb, and could make a big dent in your income.

Certain areas, such as college towns, spring break destinations, and other party hubs attract younger guests who may leave a major mess in your Airbnb, and while you can charge the an additional cleaning fee, this may not cover everything.

Things are also more likely to break when you have so many guests, so budgeting in repair costs is also key. Finally, Airbnb operators need often special insurance, so this is yet another cost to consider when making your choice. Through their optional AirCover insurance program, Airbnb offers hosts “Host Liability Insurance,” which covers liabilities up to $1 million in the case of the accidental injury or death of a guest. They also provide “Host Damage Protection” insurance which covers your property and belongings up to $1 million. Despite this, your current homeowner’s or property insurance company may make it mandatory for you to get additional coverage.

In general, the prepared Airbnb owner looks at lot of different scenarios that could happen and makes a plan for each. For instance, you’ll need to have enough money saved to cover long vacancy periods, particularly in the off-season, particularly if your area is a highly seasonal tourist destination.

Along with paying for repairs, cleaning, and insurance, you will usually need to replace basic amenities, such as soaps, shampoos, or water bottles every time a new guest comes. You may even want to provide additional amenities, like a bottle of wine to make your Airbnb more attractive. Keep these costs in mind as well.

3. Make a Business Plan

Now that you’ve taken all of the factors above into account, it’s time to make a business plan. Calculate how much start-up costs you will need, and make a budget for your Airbnb in various scenarios. One of the best ways to gather the right information to make your plan is to spend a long time on Airbnb itself to check out similar properties in your area to determine how much and for how long they usually rent out for (again, take seasonality into account). Armed with this data, you can make a realistic prediction of your income and expenses. Only once doing this are you really ready to start factoring how exactly you’ll finance the property.

Example 1: Traditional Airbnb Purchase

An Airbnb investor purchases a $400,000 home, putting 20% ($80,000) down, using a $320,000, 80% LTV Airbnb loan with a 5% interest rate and a 30-year term. The investor now has a $1,718 monthly mortgage before taxes and insurance.

By renting out the Airbnb property for $230 a night with a $20 per night cleaning fee for approximately 20 nights per month, the investor can achieve a monthly revenue of approximately $4,800, after the Airbnb host fee of 3%. Cleaning costs equal $150/week or $600/month. Property taxes are set at 1% of the appraised cost, $4,000 per year, or $333 per month. The city where the property is located further requires hosts to pay a 5% tax on revenue, which comes out to $240, month. Property insurance is $100/month.

$4,800 Monthly Revenue -$600 Cleaning Costs -- $333 Property Taxes - $240 Airbnb Taxes - $100 Insurance = $3,527 Net Operating Income (NOI).

$3,527 - $1,718 = $1,809 Cash Flow/Monthly Profit (Annual $21,708)

By renting the property as an Airbnb, the host has maximized their profit. Assuming the Airbnb income is consistent, this has a strong inital cash-on-cash return of more than 27%.

Example 2: Fix and Flip to Airbnb Conversion

In some cases, a fix-and-flix deal can turn into a fix-and-hold situation, utilizing the property as an Airbnb. For example, say an investor wants fix and flip a home currently worth $280,000. They invest $40,000 in repairs and upgrades, leaving the home with a market value of $400,000 (+$80,000). To do this, they get a 70% LTV loan, 12-month, 8%, interest-only loan for $196,000, which will help because the property will not be occupied during the renovation period.

They put down $84,000, plus $40,000 for renovations, for a total investment of $124,000. The interest-only payments on this loan are $1,306, and after 12 months, for a total of $15,620. The investor then refinances into an 80% loan, as described in the example above, and can now rent out the home with the same monthly financials.

However, since the investor has so much equity in their property, that 80% loan of $320,000 now involves a cash-out refinance amount of $124,000, which, coincidentally, was the initial amount they invested into the property.

This deal has an even stronger cash-on-cash return of 140%, considering that all the borrower’s initial capital has been returned to them via the cash-out refinance, with the only outstanding cash invested consisting of the interest-only loan payments.

Example 3: Airbnb to Long-Term Rental Conversion

While most property owners are eager to convert their long-term rental properties to Airbnbs, converting an Airbnb to a long-term also makes sense, in certain situations. This is particularly the case when tourism in an area might be drying up (seasonally or situationally), or if a city or state enacts new legislation, such as higher taxes, or even outright bans, on Airbnbs. Knowing what to do when this time comes is an important exit strategy because you never know what may happen in a specific market.

In the case of an Airbnb to long-term rental conversion, the investor may have to refinance from their Airbnb loan to get a long-term loan elsewhere, such as from a bank, private lender, or hard money lender. This is because the initial loan was underwritten with the Airbnb income in mind. If the property makes significantly more or was expected to make a lot more income as an Airbnb, a lender may not want to continue to extend the loan.

This may be particularly the case if your Airbnb’s business plan was specifically stated in your loan agreement, and you are now staying from it significantly. This may not always be the case, so investors in this position will want to check in with their lender.

Let’s continue with the example from above, except in this scenario, the local market has shifted away from Airbnbs in your local area. Our investor can now only rent out the property 12 nights per month, cleaning costs have shifted to $200/week or $800 per month, and the city’s tax has been extended to 15%.

$3,000 Monthly Revenue -$800 Cleaning Costs -- $333 Property Taxes - $720 Airbnb Taxes - $100 Insurance = $1,074 Net Operating Income (NOI).

Let’s say the investor can rent out the property on a $1,800 per month basis, which is why they’ve decided to switch to long-term rental. In this case, the investor might be forced to refinance, since the $1,800 is barely enough to make their $1,718 monthly mortgage payment.

Even if an investor’s rent exceeds their monthly mortgage payment, some lenders may want a DSCR of at least 1.25x+, which, in this case, would be $2,148 Therefore, the investor might need to take on a lower LTV refinance, which, unless the property has gained significant value, might require cash upfront.

As you can see, there are differences between specialized Airbnb loans and traditional hard money loans. Airbnb loans generally require a better credit score, may require income verification, and usually have much lower rates and longer terms than hard money financing. Many hard money lenders, however, don’t care about credit, income, bankruptcies, or foreclosures, which can be essential for some borrowers. In many cases, hard money lenders will accept Airbnb and short-term rental properties if you ask.

There are two other financing options to consider for Airbnb properties, other than Airbnb loans and private money loans. The first, taking out a HELOC, only applies if you already have a primary residence with significant equity. However, the equity from a HELOC can be used as the down payment for loan on a second home or condo that you plan to Airbnb. If you have enough equity, you may even be able to purchase a second property outright.

The second financing option is getting a small business loan. Small business lenders will generally not want to lend you enough money to purchase a home, but if you already have a property, and need a little extra funding for repairs and upgrades (or things like furniture), a small business loan could help fill the gap.

There are a variety of hard money, private money, and alternative lenders across the country offering loans specifically for Airbnb properties. Some of the most prominent Airbnb lenders currently include:

1. Kram Capital

Atlanta-based Kram Capital offers a wide array of lending options to borrowers, including residential investment loans, commercial real estate loans, multifamily loans, and bridge loans for multiple property types. They also provide SBA 7(a), SBA 504, and USDA real estate loans. As they are not technically a hard money lender, their credit requirements are significantly stricter than many other Airbnb lenders. Kram Capital’s popular Airbnb loan program has terms including:

• Loan Size: $200,000 to $3 million

• LTV: 80% maximum LTV

• Term: 1,2, or 5-year interest-only or 30-year fixed

• Income Verification: Not required

• Credit Requirement: 680 minimum

• Cash-Out Refinance: Available for qualified borrowers

2. Tidal Loans

Texas-based Tidal Loans is one of the most popular hard money lenders in the United States. They offer a wide variety of hard money loan programs, including long-term rental loans, fix-and-flip loans, hard money construction loans, hard money cash-out refinances, transactional financing, multifamily bridge loans, Airbnb loans. Tidal Loans lends in most states, excluding Minnesota, South Dakota,N North Dakota, Vermont, Alabama, California, Oregon, Arizona, Utah, Idaho, and Nevada. Terms for their Airbnb loan program include:

• Loan Size: $75,000 to $2 million for 1-4 unit residential, up to $5 million for 5+ unit multifamily

• LTV: Up to 80% for purchases, 75% maximum for refinances

• DSCR: Requirements vary, calculated as interest-only for interest-only loans

• Interest Rates: Starting at 3.5%

• Loan Term: Up to 30-years fixed-rate, ARMs available

• Credit Score: 640+

• Income Verification: Not required

• Additional Paperwork: Short-term rental compliance permit necessary (if needed in the subject city)

3. Eqinox Home Financial

Tustin, California-based Equinox Home Financial is a major provider of no-income verification home loans. It also has a popular rental property financing program, which allows investors to rent their property out on Airbnb and other short-term rental websites. Some loans are offered at up to 90% LTV, and cash-out refinances may be available on a deal-by-deal basis.

4. Socotra Capital

Socotra Capital is a Nevada-based hard money lender offering several lending options, including fix-and-flip loans, buy-and-hold loans, commercial bridge loans, private lines of credit, and rehab loans. Their popular buy-and-hold loan program can be used for Airbnbs and other short-term rentals. Socotra Capital’s underwriting guidelines focus on equity, not borrower credit, meaning that they accept borrowers with low credit scores, prior bankruptcies, and foreclosures. The company can close loans in as little as four days.

5. Groves Capital

Groves Capital is a California-based mortgage lender specializing in traditional qualified mortgages, like VA and FHA loans, as well as non-QM loans, like short-term rental loans, long-term rental loans, 1099 loans, DSCR loans, and bank statement loans. Their short-term rental loan program’s terms include:

• Loan Size: $75,000 – $2 million

• LTV: 80% maximum LTV

• Term: 5 and 7year ARM and 30-year fixed-rate loans

• Income Verification: Not required, loans based on DSCR

• Property Types: Single-family homes, condos, townhomes, 2-4 unit residential properties.