We probably don’t need to tell you that real estate investing is a great way to build your personal wealth.
You may have thought about investing in a rental property. But financing it with a traditional mortgage brings challenges that you might not want to deal with.
Even if you haven’t thought about it or don’t have any experience with it, there are easy ways to start investing in real estate with non-conventional financing. It starts with non-traditional rental properties such as Airbnb properties.
Even before the COVID-19 pandemic, Airbnb was rising in popularity among both travelers and hosts. Now, as society regains some normalcy, people are itching to travel and they need accommodations.
Here is your complete guide to Airbnb financing, including the pros of owning an Airbnb property, and why you should use a hard money loan to invest in one right away.
What is Airbnb?
Founded in 2008 as AirBed & Breakfast, Airbnb is a rental service where visitors rent private property from individual hosts for a short amount of time.
What’s your loan scenario?
Airbnb seems to be growing in popularity for those who prefer to stay in an actual house or apartment for a weekend rather than a hotel room.
But unlike a hotel, there is no cleaning staff. The manager of the property is responsible for maintaining the cleanliness and condition of the property. Property managers do get to set their own prices for a night’s stay, however, so an Airbnb has the potential to be a great investment property.
Airbnb Financing with Hard Money Loans
Though there is no official Airbnb loan product, there is plenty of financing available for those who wish to purchase property for that purpose, including hard money loans.
Mortgages for rental properties typically work differently than a traditional loan, they often come with higher down payments and higher interest rates. This is where a hard money loan could come in handy since you may already have an established relationship with a hard money lender and can work out those details yourselves.
A hard money lender will be concerned with the value of your property and not as much about your credit, income, or other strict qualifications that banks typically require. Since traditional lenders often view a second mortgage as riskier, and especially one that will be used as a rental, they’ll likely comb through your finances even closer. Traditional lenders also require long term leases with specific debt coverage ratios. Hard money lenders can underwrite your deal based on the actual rental income you’re receiving on your short term rental – Aribnb property.
Hard money loans offer the flexibility and common sense that can get your property financed quickly so that you can start making money. California hard money lenders such as Marquee Funding Group won’t have as many questions for a borrower about their situation. They examine deals on a case-by-case basis, so documentation requests will vary.
The Pros of Investing in an Airbnb
Investing in an Airbnb property offers assistance and pros that investing in a traditional rental property doesn’t. That’s why it’s a great way to start investing and maybe even get your feet wet to eventually invest in a traditional rental in the future.
Let’s look at some of the top pros of an Airbnb investment.
Charge and Change Your Prices to Your Advantage
The trade-off to consider is between short-term renting, such as with an Airbnb rental, or long-term, as with a traditional rental property. Since you have many guests in and out of your Airbnb, there is potential to make more money. You may want to charge a higher price per night on certain holidays, for example. Banks will not consider your income potential on a short term rental but hard money lenders will.
On the other hand, you could go through slow periods in the travel industry where there is not much demand for your Airbnb. This is where the long-term tenant in a traditional rental property is beneficial. You know you can rely on their payment every month, making it a bit more reliable and sustainable than an Airbnb rental.
In either scenario, it would be worth it for you to look into the average monthly cost of rental units in your area are and what the average cost of a nightly Airbnb rental is, as well as what the average occupancy rate is per year. In a busy city like Los Angeles or New York City, you could end up making much more profit with an Airbnb than with a traditional rental unit.
Let’s look at some numbers. San Franciso, California has the highest Airbnb occupancy rate at a whopping 74.2%, with Denver, Colorado coming in second at 72.2%. The occupancy rate of a city usually means more revenue for you — the property owner.
Potential Airbnb income
- Average Airbnb rate in San Francisco is $160-$180 per night
- 74% (occupancy rate) of 365 days = 270 days
- Let’s say you charge $165 per night. $165 x 270 days = $44,550
Potential Traditional rental income
- Average monthly rent in San Francisco is $2,750
- $2750 x 12 months = $33,000
That’s a difference of $11,550 a year!
Simple, Easy-to-Maintain Properties Can Profit
Another pro to think about is that people use Airbnbs in the same way that they use hotels, meaning it doesn’t necessarily have to be a luxurious vacation property to be a profitable Airbnb.
Visitors use Airbnbs for business or family visits too, so you don’t necessarily have to be located in a buzzing metropolis or offer ocean-front views. Purchasing a simple property, especially if you can get a deal for it, and keeping it well cleaned and maintained could mean a consistent profit for you.
Anybody Can Do It
You don’t need to be an experienced real estate investor to manage an Airbnb property. It would definitely help to have some familiarity with operations but you don’t need to be a high-roller with many properties under your belt.
Even non-extravagant properties can do well on Airbnb if they’re kept clean and in good shape. If you’re willing to clean and do maintenance on the property yourself, you can save on costs and increase your profit.
Additionally, you won’t have to worry about being someone’s landlord or having prior experience with that. Airbnb takes care of running background checks on guests so you won’t have to worry about finding a reliable tenant.
Get More Than What You Paid For It
Like other rental properties, you should see an appreciation in your property’s value. This means that you could quickly pay it off with the funds you collect from visitors in the typical 6-12 month repayment period that hard money loans often have. You can then either continue to rent it out for pure profit or sell it for more than what you paid for it.
Interested in Getting Started?
When you’re ready to look into Airbnb financing, Marquee Funding Group offers the hard money financing you need.
We strive to provide a respectful, smooth experience for borrowers and brokers, and building relationships is important to us. We aim to be as upfront, honest, and open as possible while we work out your deal. Contact our team today to have us review your unique situation. If you already know what you need and are ready to begin, apply now and we will contact you as soon as possible.
Photo by Kelsey Dody on Unsplash