Capital Fund 1 How To Finance An Airbnb Rental Investment

Operating a rental property has become one of the top opportunities for real estate investors. This is especially true now that many travelers look to Airbnb, Vrbo, Guesty, and FlipKey instead of hotels. A rental property near a popular destination in Arizona, Colorado, or Texas can generate thousands of dollars of revenue every month. In fact, Phoenix and Denver are among the best cities for rental investments.

Unfortunately, Airbnb financing can create challenges. When you know what to expect, you’ll be able to get more favorable terms for your Aribnb loan.

What Is An Airbnb Loan?

There isn’t a specific financing category for Airbnb loans, but Airbnb financing is covered under broader options for rental property investors. The biggest challenge is that qualifying for a traditional mortgage can be difficult for this type of rental property.

Normally, lenders want to see proof of a property’s annualized income before financing a mortgage. At the very least, they might expect the investor to have a lease in place before seeking financing. Banks typically don’t specialize in assessing the value of short-term rental properties.

What Is a Short-Term Rental?

A short-term rental normally involves a furnished property and a rental term of fewer than six months. In many cases, the average rental term will be considerably less than six months. Unlike long-term rentals of houses, condos, or apartments, a short-term rental is typically for vacations, business trips, and other temporary stays.

A short-term rental loan is a popular option for Vrbo, Guesty, FlipKey, or Airbnb financing. These types of loans are great for purchasing any kind of property intended for use as a vacation rental. Whether you’re looking for a condo, duplex, or single-family home, you’ll often be able to close faster and find more flexible terms when you choose a short-term rental loan.

Airbnb Investment: Is It Right For You In 2022?

Before you start looking into Airbnb financing, you’ll have to decide whether this kind of real estate investment is even right for you in the first place. On the one hand, investing in an Airbnb property can help you diversify your portfolio and establish another income stream. On the other hand, there are some unique complications when it comes to this kind of investing. So how do you decide if the juice is worth the squeeze?

The first step is to learn more about how Airbnb investing works. This is the way to better understand what it takes and what you can expect from the process. Once you understand what will happen after you get an Airbnb loan, you can weigh the pros and cons. At this stage, you can identify and weigh different risks and opportunities. From there, you’ll be able to reach an informed decision and ultimately make a successful investment.

Airbnb Investment: How Does It Work?

Anytime you rent out all or part of your property on Airbnb, it can be considered an Airbnb investment. This is true even if you use the property for other purposes for part of the year. One of the big differences here is that you can have many different tenets or guests, even in a short amount of time. Compare this to other types of rental investments where you might have long-term tenants who rent the property for a year or even more at a time.

This begs the question: “Is an Airbnb investment property more or less profitable than a traditional rental investment?” The answer depends on a number of factors because there’s so much that goes into the success or failure of an investment. That said, it’s possible to look at some general trends and see how the average Airbnb investment stacks up against a conventional rental property investment.

For example, the average cost of a one-bedroom apartment in Denver is $1,997 per month as of February 2023, according to RentCafe. That means you can expect to get just under $24,000 from a 12-month lease for a one-bedroom unit in Denver. The prices are similar in many other cities throughout Denver, Arizona, and Texas, such as Phoenix and Austin.

How does this compare to what you can make from Airbnb, though? Data from AirDNA indicates that the average daily rate for short-term rentals in Denver is $180. Assuming 80% occupancy, this would work out to $4,320 per month. Accounting for fees and other factors, AirDNA estimates an average monthly revenue of $3,126, which ends up being more than $37,500 per year.

Of course, your results might vary. The best way to anchor your expectations more accurately is to compare your property (or a property you’re considering) with others in the area. How much do properties like that typically go for on Airbnb, and how many days per month do you think you’ll be able to have renters? On the other hand, what’s the average rent for properties similar to yours?

Finally, it’s worth noting that managing an Airbnb is different from managing a conventional rental property. An Airbnb has to be cleaned and maintained between each guest and might have dozens of different guests and a given year. Also, as an Airbnb host, you’re expected to furnish the property, pay for utilities, and provide amenities such as TV and internet service. Your home insurance might also be more expensive.

Airbnb Investment: Pros and Cons

Now that you’ve wrapped your arms around some of the key differences between Airbnbs and conventional rentals, you’re ready to weigh the pros and cons. Considering the following will help you decide if an Airbnb rental is right for you:

Benefits of Airbnb Investments

  • High potential profits
  • Free advertising from Airbnb
  • No need to find long-term tenants
  • Greater flexibility from short-term renters

Drawbacks of Airbnb Investments

  • High upfront costs (furnishing, decor, etc.)
  • Risk of not filling your property with tenants regularly
  • Higher operating costs and more effort to manage your property

Is It Harder to Get an Airbnb Mortgage?

Because it’s hard to get a traditional mortgage for a short-term rental, the best bet is often to get there in steps. For example, a hard-money loan can help you close on a property. From there, you can transition to a “buy and hold loan,” which is more like a traditional mortgage.

There are multiple pros and cons to consider when choosing a hard money loan instead of a traditional loan like a 30-year mortgage. Airbnb financing will often require a larger down payment, and you can often expect to pay higher interest rates as well. While large down payments and high-interest rates aren’t ideal, they’re often worth it because of the benefits of choosing a hard money loan for your rental property:

  • Close on your property faster. You know a great Airbnb property when you see one. Unfortunately, so do other real estate investors. When you can secure financing quickly, you have a better chance of closing on the property before someone else does.
  • Secure short-term Airbnb financing. You don’t have to stick with your short-term loan for years. Instead, you can use it to get into your Airbnb, Vrbo, or other short-term rental property, then reassess. Once you close on your property and use it to establish a revenue stream, you’ll be able to refinance and get a better interest rate. In other words, you don’t end up paying the high-interest rate for very long.
  • Get more favorable rates over time. A private lender can be more flexible than a bank can. As a result, you have an opportunity to get more favorable rates once you establish a trusting relationship with your favorite hard money lender. If you’ve borrowed money from the same lender in the past, then successfully purchased and operated rental properties, the lender knows that loaning you money isn’t especially risky. This is the kind of trust that gets you the best Airbnb financing to continue growing your real estate portfolio.

Once you secure your short-term financing and get started with your short-term rental investment, you can look into transitioning to a more favorable loan for the long term.

What Kind Of Property Should I Buy For An Airbnb Investment?

To maximize the benefits and reduce the risks of your Airbnb investment, it’s critical to find the right property before pursuing an Airbnb loan. Many short-term renters use Airbnb as vacation homes, but there are other opportunities as well. For example, if you live near an airport, convention center, or thriving commercial area, you might be able to attract people who are traveling for business purposes.

When you know what draws people to an area, you can think about the type of property those people might like to rent for a short stay. If you want to have a large vacation rental, offering a large gathering space for family and friends to spend time together might be important. A functional workspace might be more attractive if you’re thinking about an Airbnb that will appeal to business travelers.

If you’re not sure which type of property will be the most profitable for you, you have two options:

  • Check your local listings to identify common characteristics among the most in-demand properties.
  • Connect with a local realtor with a lot of experience with Airbnb rentals.

Once you know what you want and you find the perfect property, you’re ready to secure your Airbnb financing.

Choose A “Buy and Hold Loan” From Capital Fund 1

While short-term rental loans are certainly one option for Airbnb financing, they aren’t your only choice, especially in the long run. “Buy and hold loans” are ideal for situations when you want to buy, own, and maintain a rental property to create a monthly cash flow. This type of loan is useful when you want to refinance a property out of an existing short-term rental loan.

Buy-and-hold loans can also help you invest in updates or make repairs to your rental property. Some real estate investors start with a short-term rental loan to get their initial Airbnb financing. From there, they can refinance to a buy-and-hold loan with more favorable rates. Alternatively, real estate investors who have established great relationships with private lenders may be able to skip directly to a more favorable Airbnb loan.


Take the First Step Toward the Right Investment Loans From Capital Fund 1

Arizona, Colorado, and Texas are among the best states for real estate investors who want to own short-term rental properties. Capital Fund 1 is the premier private money lender for Airbnb loans in those states. Applying for a hard money loan is normally the first step toward a successful real estate investment, and working with Capital Fund 1 makes it easy. To secure your Airbnb financing, apply for a hard money loan today.

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