If you’re ready to start building wealth through real estate, investing in a short term rental property can be an excellent first step—and it can also give you a convenient place to vacation. Selecting a property in a desirable location increases the chances that your investment will appreciate in value over time. In this guide, we’ll explore several strategies to finance a short term rental property, breaking down the pros and cons of each option. Whether you’re new to investing or expanding your portfolio, understanding how to finance a short term rental property will help you make smart, informed decisions that set you up for long-term success.
Why You Should Invest & Finance A Short Term Rental Property
According to 2022 Travel Trends Forecast from property management firm Evolve (which analyzed responses from 5,000 travelers worldwide), about 86% of travelers worldwide are expected to book a short term rental in 2022.
As we can see from the information above, there is a growing demand for short term rental properties, and this is only expected to continue in the coming years. This is why investing in a short term rental property is such a wise investment decision – you can make sure your property is always in high demand by catering to the needs of travelers.
Furthermore, short term rental properties offer many advantages over traditional long-term rentals. For example, they often provide more flexibility and options when it comes to amenities, which can be a major draw for potential guests. Additionally, short term rentals are typically much easier to manage and maintain than traditional rentals, making them a great choice for busy investors.
Short term rental properties have been around since the 1950s, like bed & breakfasts, etc, and with the rise of short term rental platforms, such as Airbnb & VRBO, their popularity has only increased.
Then the pandemic hit and people started working remotely and realized they could be anywhere, like a relaxing cottage on a beach somewhere. The number of digital nomads in the U.S. has more than doubled over the past couple of years. Remote workers are using short term rentals to work while traveling the country. They realized that this is a great way to get out and see new places while still being able to work.
5 Ways to Finance a Short Term Rental Property
So, you’re convinced now is the time to invest in a short term rental property. Congratulations! Here are some key points to make sure you’ve done your due diligence:
- Down payment for the loan – Usually requirements are usually 20-25% the purchase price of the property.
- Costs to furnish a short term rental or a plan to include exsisting furniture into your offer to purchase
- A plan for managing your rental property – either self or hiring a property mangement company
- You have taken into account all of the expenses of operating a short term rental property & your potential income. Research potential income on AirDNA.
Now you are ready to start researching how to finance your short term rental property that best fits your situation. This list is not comprehensive, but it is a good starting point:
Conventional Bank Loans
Conventional bank loans are a popular way to finance a short term rental property. These loans are offered by banks and other lending institutions, and they usually have low interest rates and flexible terms. This makes them a good option for borrowers who want to finance a short term rental property.
One of the benefits of using a conventional bank loan to finance a short term rental is that the loan is secured by the property itself. This means that the lender has a legal claim to the property in case the borrower fails to repay the loan. This can provide peace of mind to the lender and helps reduce the risk of default.
Another benefit of using a conventional bank loan is that there are many different types of loans available, which gives borrowers flexibility in terms of how they finance their property. There are also many different lenders offering these loans, so borrowers can shop around for the best deal.
However, there are some drawbacks to using conventional bank loans to finance a short term rental property. One is that the interest rates may be higher than those offered by other types of lenders. Additionally, the terms of these loans may be less flexible than those offered by alternative lenders.
Home Equity Line of Credit (HELOC)
A home equity line of credit, or HELOC, is a type of loan that uses the equity in your home as collateral. It allows you to borrow up to a certain amount of money, which you can then use for any purpose you choose. A HELOC can be a great option for financing a short term rental property, as it is relatively easy to qualify for and has relatively low interest rates.
The main downside of a HELOC is that it is a variable rate loan. This means that the interest rate can change over time, which can cause your monthly payments to go up or down. So be sure to read the terms and conditions carefully before signing up for one.
Cash-out Refinance
A cash-out refinance is when you refinance your mortgage and take out a new loan for more than you currently owe. This allows you to take the difference in cash. This is different than a home equity line of credit (HELOC) because a HELOC is a second mortgage that is taken out against the equity in your home, while cash-out refinance is a new mortgage with a higher amount. You can access the money whenever you need it, and you only pay interest on the amount that you actually borrow.
There are a few drawbacks to taking out a cash-out refinance loan. First, it can be difficult to qualify for if you don’t have a lot of equity in your home. Second, you may end up paying more in interest over the life of the loan than if you had just taken out a regular mortgage. Finally, if you decide to sell your home in the future, you will have to pay back the entire amount of the loan, including the principal and interest.
Private Lending
Private lending can be a great way to finance a short term rental property. There are many different private lenders available, so you should research the options to find the best one for you. Private lending can be a great way to get the money you need to buy a property quickly, and it can also be a more affordable option than other methods of financing. Some examples of private lending include family and friends, angel investors, or private investment firms.
Crowdfunding is a growing trend in the real estate industry, and can be a great option to finance a short term rental property. It allows you to raise money from investors online, and can be a great way to finance your project quickly and easily.
Hard money lenders are another option to finance a short term rental property. They typically have faster funding times and can offer you lower interest rates than traditional banks.
Private equity firms are a great option to finance a short term rental property. They typically have more flexible terms and can provide you with the capital you need to get your property up and running.
Seller financing is an underrated option for financing a short-term rental property. If the seller is willing to finance the purchase of the property themselves, it can be a great way to get your project off the ground quickly and with minimal hassle.
Drawbacks on Private Lending
Private lending can be a great way to finance a short term rental property, but there are some potential drawbacks to consider before you borrow money from friends or family.
- First, private lenders may not have as much experience with short-term rentals as traditional banks or lenders. This means they may not be as familiar with the risks and rewards associated with this type of investment.
- Second, private lenders may be less likely to offer you a favorable interest rate than a traditional lender. This could end up costing you more in the long run.
- Third, private lenders may require more paperwork and documentation than a traditional lender. This can be time-consuming and may delay your ability to get the money you need to finance your project.
Ultimately, it’s important to weigh the pros and cons of private lending before you make a decision. If you decide that this is the right option for you, be sure to carefully research the different lenders available to you.
Important Key Notes to Know Before You Finance A Short Term Rental Property
You Must Have An Accurate Real Estate Appraisal
Many appraisers focus on owner-occupied properties and long-term rentals. Banks may send an appraiser who does not know how to accurately calculate short term rents. This may affect your odds of approval.
When you finance a short term rental property, it is important to have an accurate appraisal. Appraisers often only focus on owner-occupied or long term rental properties. They may not have experience in appraising short term rentals, which may affect your odds of loan approval. The best way to mitigate this issue is to look for a lending partner who is experienced with short term rentals.
High Turnovers in Short Term Rental Industry May Reduce Profitability
Short-term rentals are different from long-term rentals. You can’t compare them apples to apples. Just because a short-term rental generates more revenue doesn’t mean it’s more profitable. Vacation rentals have higher turnover and maintenance costs, and they’re also more prone to seasonality.
The high turnover rate in the short term rental industry can reduce your profitability. Short term rentals are different from long term rentals and you can’t compare them apples to apples. Just because a short term rental generates more revenue doesn’t mean it’s more profitable. Short term rentals may be more prone to seasonality, which may lead to higher turnovers & maintenance costs.
When evaluating your investment, it’s important to account for these differences in order to choose a lender who understands the risks associated with short-term rentals.
A Note About Local Short Term Rental Regulations
With the popularity of short term rentals and vacation properties, there has also been an increase in new local regulations. Before investing in a short term rental, make sure you do your research on the property, local zoning, building codes & short term regulation for the town or city the short term rental is located in.
Also, town regulations are always changing. Keep up to date on any new regulations that may be coming up by attending local town/city meetings or getting to know the people involved with these decisions. Generally, if your short term rental is in a popular tourist destination, its more likely the town will be incentivized to keep regulations more favorable towards the short term rental property owners, because this is helps generate revenue for the towns or cities.
Closing Thoughts
Short-term rental properties can be a lucrative investment, but it’s essential to understand both the risks and rewards before you finance a short term rental property. By carefully evaluating the pros and cons of each financing option, you’ll be better prepared to decide if this investment is right for you. Research different lenders to find one who understands the unique challenges that come with short-term rentals, as their expertise can make the process to finance a short term rental property smoother and more successful. Lastly, always stay informed about new local regulations that could impact your investment, so you can protect your property and maximize your returns.
