Buy Your First Airbnb – Part 1 Secure Financing

Buy Your First Airbnb – Part 1 Secure Financing

Senior Loan Officer
Brian Decker
Published on December 15, 2021

Buy Your First Airbnb – Part 1 Secure Financing

If you are like most people you probably ask yourself, "How do I buy Airbnb properties? Where do I even start??" Listen, I get asked these questions a lot, so I want to break it down for you into four parts. My goal is to make it simple and walk you through every step. Most loan officers have no experience in buying rental properties. If you were to go to the average lender, they wouldn’t have a clue what’s going on in the investment market right now.

However, because my team and I have personal experience investing in our own Airbnb properties and other investment properties, we know exactly how to help investors like you. We've set our standard so much higher than the industry to ensure when you come to us about getting pre-approved for an investment property because there are very unique things that come into play, and we will be with you each step of the way.

Here are my four steps:

  1. Securing your financing.
  2. Finding your market.
  3. Finding deals within that market.
  4. Analyzing your property.

Let's start with step one. Step one is the most important part if you’re looking to buy your very own investment property like Airbnb two, three, and four don't even exist until we complete step one.

Ok, step one: you need to start by securing financing for your first Airbnb property. Without financing, you won’t be able to do anything.

Determine How You’re Buying the Property

There are two main ways that you could use the property that you’re buying. Here's what I mean by that:

The first option, you could buy this property as a second home that you use for a vacation home and then rent it out as an Airbnb on the side, when you aren't using it.

The second option, you could buy the property strictly as an investment property. You have no plans to use that property for yourself. You are going to buy it for the sole purpose of turning it into an Airbnb, (and maybe you use it a couple of days a year).

You might be wondering, "Why does this matter?" Well, it's crucial to understand there are two separate types of financing and the kind of financing you'll need is based on how you will be using the property.

Choose the Appropriate Financing Option

Two financing options correlate with the two property options that we just talked about:

  1. Second-home financing
    1. Acquire it as a second home with a 10% down payment
  1. Investment home financing
    1. Acquire it as an investment, with a 20% down payment

Each kind of financing has pros and cons. Let's break those down so you can determine which one is best for you.

Second Home Financing

If you’re planning to use the property as a second home, you can take advantage of a lower down payment (usually around 10%). This kind of financing also comes with lower interest rates.

However, with this kind of financing, you can’t use any of the prospective rental income that you make through the property to help you make payments. This means that you would have to be able to pay the monthly payments by yourself, with your current cash flow.

Another important thing when considering that payment, you also have to calculate your debt-to-income ratio. To qualify for this kind of financing, you need to have a debt-to-income ratio under 50%, meaning if you have a $10,000 pretax monthly income, up to $5,000 of it can be used to pay your monthly expenses that will show up on your credit (which will include this new mortgage payment). So, you need to be able to pay for the additional property while keeping that ratio under the maximum.

Frankly. this is not the case for the majority of people out there. Only about 15-20% of my clients qualify to buy their home with Second Home Financing. Fortunately, there's a fantastic option for the other majority:

Investment Home Financing

The second way to finance is Investment Home Financing. If you’re planning to use the property as an investment, you’ll need to put more money down, 20%. If you decide to have more than five investment mortgages running at once, you’ll need to start putting 25% down on each subsequent property.

Investment property loans tend to have interest rates at about 0.5% higher than other mortgage loans. However, the benefit is that you can use your rental income to help qualify for the loan.

How do we know how much to give you credit for on rent? We do this by getting an appraisal of the property that you’re buying. The appraiser is going to let you know how much the property would rent for in a long-term renting situation. Then, you can add up to 75% of projected rents, which can help with keeping your debt-to-income ratio under 50% so that you can qualify for the loan and get the money you need to finance the property.

Keep in mind that you cannot use potential Airbnb income to qualify for the loan. Your potential income from Airbnb is too unpredictable to get an accurate number.

Making the Best Financing Choice for You

Most people are going to need to use the second option: investment home financing. Unless you have an incredible amount of income and only a few expenses, you aren’t likely to reach the debt-to-income ratio that you need to qualify for the loan that you need.

You may have a higher down payment and a slightly higher interest rate, but you also get to use the potential income on the property to qualify. Most people see this as an acceptable trade-off.

Example of Financing Options

Let’s say that you want to buy a property that’s going to cost $550,000. And, you have an income of $10,000 per month before taxes with $3,500 per month in regular expenses.

Let’s look at how this scenario would look with each financing option.

Example With Second Home Financing

If you were to finance this property as a second home, you would need to put down 10%. With that in mind, you would end up with a monthly payment of about $2,700. (We calculated this with national property tax rates and an APR of about 3.1-5%.)

Because you’re using second home financing, you have to be able to afford this monthly payment in your budget without using rental income. This is because you should be able to pay for it as a second home rather than an investment property (because this is the kind of financing you chose).

With your new monthly payment and your regular expenses, you’d be spending $6,200 per month which is greater than a 50% debt-to-income ratio. At a $10,000 per month income, you need to keep your spending under $5,000 per month. In this example, you’re $1,200 over.

However, if you made more per month (such as $14,000 per month), you’d be able to afford this property with second home financing.

Example With Investment Home Financing

With this same example, you’d have to put 20% down on the property. With this in mind, your monthly payment would be about $2,500 per month (with an APR of 3.5-3.6%).

In this example, your total monthly budget can’t be more than $5,000 per month (50% of $10,000). With this new payment, you’re going to be able to use the rental income to qualify for the loan.

Let’s say that the appraisal comes out at $3,000 per month. You can add that to your $10,000 per month income to make $13,000 per month income.

Now, you can spend 50% of $13,000 ($6,500) which is less than your monthly expenses ($3,500), and the monthly payment ($2,500), which is $6,000 together.

Choosing the Right Lender

So, I know this is a lot of information. But rest assured, we walk clients through this daily and can help you do the same. This is the difference between a mortgage lender that specializes in Airbnb properties and investment properties vs. just your average online lender. It's so important that you work with a lender who can help you evaluate both financing options, they know how to use the proper rental comps to determine how much you would qualify for, and a lot of banks won't even allow you to use the rental income unless you've been a landlord or owned other properties for at least two years. These are not overlays we have on our conventional loans at Modern Lending. If you are interested in buying an Airbnb, investment property, or vacation home property, reach out to us so you understand all of the options available to you. Not only will we help you maximize what you qualify for, the clients that do work with us, get that "extra secret sauce". We will share what markets we personally invest in and all of our loan officers own investment properties. We've done it all and can help you do the same.

Looking for Your Airbnb Loan

I hope this was helpful. Next up, I'll teach out how to determine which market to invest in.

If you’re looking to get your Airbnb loan, apply with us today.

Our team has experience in investment loans, and we can help you get the best deal for your circumstances.

Get started today so that you can start making the income you deserve.

Senior Loan Officer
Brian Decker Senior Loan Officer
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