Renting out a place on Airbnb can be a lucrative business, although financing the initial investment may seem daunting. To help you better understand financing an Airbnb business, we’ll cover key financing options, tips to help you finance your business successfully, and answers to frequently asked questions regarding running an Airbnb business.
Keep reading as we discuss how to fund an Airbnb business
Can You Fund an Airbnb Business?
Before we get into the steps on how to fund an Airbnb business, it is important to note that there are several options for financing an Airbnb business. Keep in mind that raising funds for an investment property intended to be rented out can typically be more challenging than a home purchased as the borrower’s primary residence. This is because lenders often view it as a riskier investment and generally require a higher cash deposit to secure financing.
From a lender’s point of view, when money gets tight, you’re more likely to keep paying your primary residence’s bills, and your second home is likely to be less of a priority. Short term rentals are also considered riskier than long term rentals as they require more attention to keep the space occupied on a regular basis. A few weeks without guests can create difficulties in repaying the borrowed money.
When evaluating your financing options, consider your risk tolerance, financial standing, credit history, and what your goals are for your Airbnb.
How to Fund an Airbnb Business
If you want to be more successful with your next Airbnb investments, you can follow the points highlighted below on the available financing options for Airbnb and tips for financing it successfully.
Airbnb Financing Options
While starting an Airbnb business can seem like an expensive venture, there are viable options available to help you fund your venture. Here are some common ways you can finance your new investment.
1. Mortgage
Taking out a mortgage for your rental home can provide you with a reliable loan with favorable interest rates. However, qualifying can be difficult: You may need to contribute a larger down payment, have a personal credit score of at least 640 to 700, hold higher cash reserves, and have a lower loan-to-value ratio.
Note: Airbnb recently partnered with Fannie Mae, among others, to make it easier for landlords to transfer their mortgage. The money from the refinancing can be used for investments in rental housing.
2. Equity loan or line of credit
A home equity loan, also known as a second mortgage, can give you a good sum of money that you can then spend on an investment property. The money is paid back regularly with fixed rates. Home equity lines of credit (HELOCs), meanwhile, work like credit cards: borrowers can access a certain amount of funds. The funds used must be repaid with interest.
3. Small business financing
For example, consider looking at small business financing options from the US Small Business Administration or through Airbnb partnerships with Fannie Mae as you decide how to support your Airbnb business. One benefit of small business financing is that the money can be used to meet most business needs, whether it’s buying inventory and equipment or covering day-to-day expenses.
4. Property investments
If you buy a multi-unit property and live locally, you may qualify for better terms, lower interest rates, and financing that would otherwise not be available. You will need to meet specific criteria regarding how long you will live in the space, how soon you will need to move into the property after hours, and more, so be sure to understand all the requirements ahead of time.
5. Hard money loan
Hard money loans are short-term loans from private lenders that are backed by real estate or assets. If a borrower defaults on the loan, the lender can take possession of the collateral. These loans generally have easier qualifications as the lender is more interested in the value of the asset or property you are buying.
Hard money loans usually have higher rates, higher costs and shorter repayment terms. Borrowers often consider hard money loans after being denied more traditional forms of financing, or when looking for a faster path to financing.
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Tips for Financing an Airbnb Business Successfully
Financing an Airbnb business doesn’t have to be complicated. Here are some tips to keep in mind to ensure a smooth financing process:
- Understand the investment you are making. Why do you invest and what do you hope to get out of it? Being clear about your goals will help you determine what type of financing you want to pursue.
- Look around and compare offers from different lenders. When considering your financing options, make sure you find the best solution for your needs.
- Estimate your predicted expenses. Take maintenance costs and any additional insurance into account. Also consider the time spent cleaning, maintaining, and responding to guests if you are responsible for these tasks or the costs involved if you hire someone else to manage them for you. Cleaning costs have been an important expense for Aibnb entrepreneurs. Recently, Airbnb added a cleaning fee as a guest fee to cover this recurring expense.
- Do your research. Before buying a home to use as an Airbnb rental, familiarize yourself with local laws regarding short-term rentals. Also, check out the listings in the area to get an idea of their vacancy rates and price points.
Frequently Asked Questions (FAQs)
Here are some of the questions that most entrepreneurs who want to venture into the Airbnb business ask.
How does Airbnb work?
Airbnb is an online platform where hosts can list their spaces and guests can find accommodation, often in host families. The site is known for its unique options – offering castle dwellings, tree houses and small houses, among many other choices. Airbnb also offers in-person or online experiences, often hosted by a local, that are specific to a particular area.
When did Airbnb go public?
Airbnb went public on December 10, 2020 with the ticker symbol ‘ABNB’. On opening day, the company’s public offering price was $68 per share.
What percentage does Airbnb take from hosts?
Airbnb offers a number of hosting service fee structures. These include options for hosts and guests to pay a service fee as well as a host-only fee where the full service fee is deducted from the host’s payout. Splitting the service fee with the guest is the most common option, with most hosts paying a 3% fee and a guest paying less than 14.2% of the booking subtotal. However, in certain situations, rates may increase.
How do you become an Airbnb host?
To become an Airbnb host, sign up on the company’s website and create an ad for your space. Then add some basic information, a description and photos of the rental. When you’re available to host, you’ll need to set your house rules and set your prices. Airbnb provides detailed resources on its website to assist with the hosting process.
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Final Thoughts
Like with other businesses, you need a well-structured business plan to guide you on the right path; otherwise, you may end up with a big loss. The same applies to the Airbnb business, it may be risky but with the right business plan, you should be successful in the business.
