Are you currently looking to buy an investment property and list it on Airbnb but aren’t able to find suitable loan options for it? Did you know there are different Airbnb loans that allow homeowners to finance their investment property at the best rates without paying cash? 

Airbnb is a popular online hospitality platform that allows homeowners to list extra rooms or an entire home for guests. If you are currently on the verge of getting your first investment property, we will walk you through the top 6 popular Airbnb loans that will finance your investment property and help you rent out your space to other guests with ease. Let’s get started.

1. Conventional Loan

The conventional loans are backed by Freddie Mac or Fannie Mae, government-sponsored enterprises(GSEs). These loans are government-backed but not a part of traditional government loan programs such as VA or FHA loans. 

To get an investment property for Airbnb with a conventional loan, you need to offer a high down payment(15-25%) and have a 640+ credit score at a minimum, depending on your down payment. You may also need to have enough cash reserves for at least six months to cover all the vacancies and the monthly costs. 

2. Cash-Out Refinance

Not everybody can afford the exorbitant down payments for an Airbnb. This is why a great alternative is the Cash-Out Refinance, wherein you tap into your home equity and replace your current mortgage with a new one. The new mortgage should be more than the amount you owe, as it will give you the cash you can later invest in the new investment property for Airbnb.

This is typically limited to 80% of your home’s value and closes costs to 2% to 6% of the loan’s amount. You will also need a good credit score of 620 and above to qualify for this scheme.

3. Home Equity Loan

Another common Airbnb loan most renters take is the Home equity loan. Here you potentially get a lump sum of cash and make monthly payments for a more extended period (5 to 30 years) at a specific interest rate. 

This loan is secured by your existing property and takes a second position after your mortgage. This eventually gets risky for the lenders, which explains why the interest rates are usually high compared to cash-out refinance or purchase mortgage options. 

You can borrow up to 85% of your home’s value in less than your mortgage balance. However, it finally depends on your eligibility and how much they are willing to lend you. This Airbnb loan also requires you to have at least a 620+ credit score to qualify for application. 

4. Home equity line of credit (HELOC)

The Home equity line of credit is all about using your home equity as a downpayment for your Airbnb loan. Instead of receiving a lump sum amount here, you basically have access to a credit line.

HELOCs offer loans in two phases: the first period is the draw period, wherein you can borrow against the credit line. This facility usually lasts for 10 years or more, and you have to only pay off the interest-only payments during the tenure. 

Next, after the draw period, the HELOC enters the repayment period, which usually lasts about 15 to 20 years, wherein you must pay back whatever you have borrowed during your repayment period. You can then no longer borrow against your credit line anymore. 

The HELOCs are secured by your home and again take the second position after your mortgage. The interest rates are usually variable, and you may need to pay annual maintenance and membership fees along with a 620+ credit score requirement.

5. Hard money loan

A hard money loan is a perfect choice for short-term loans issued by private lenders backed up by the real estate industry. One big advantage of getting a hard money loan is that the approval processes are way quicker and simpler than your traditional loans. 

Here you do not have to maintain any credit score beforehand. However, the interest rates can be extremely high, with a 30% or higher down payment requirement. You may also have to bear a prepayment penalty if you repay the loan beforehand. The closing costs are high, and it may require at least two appraisals to get the process done.

6. Personal Loan

Last but not least, personal loans have interest rates that are relatively high, with short repayment options. Even worse, you cannot use any other personal loans for a down payment here. Thus, this loan option may be slightly more tricky than usual and hence, is not the most recommended choice if you are getting a house for an Airbnb.

Essential tips for finding the best loan for your Airbnb

There's more to simply choosing a loan and applying for it to finance your Airbnb. Before you finally settle on any of the options mentioned above, here are 5 very crucial aspects you must consider:

• The Airbnb loan rules are variable for different cities. Some cities have stricter rules which you may not be aware of. Some of the loan options may also not be legal in your city. For example, renting out a property for less than 30 days is illegal in New York City. Ensure that you always comply with all the laws in your area before you file for the loan. 

• Always have an appropriate insurance policy such as the Airbnb Host Protection Insurance that can help you with damages and other unforeseen circumstances in the property. You may need to get additional coverage when renting out a property that you need to discuss beforehand with your insurance company.

• Research the average income you can earn from renting out your investment property in that particular area. Compare these numbers to your financing options for the best decision.

• Apart from the cleaning and maintenance, Airbnbs charge you a certain fee of about 3% or above to be a host and rent out your property. This fee is higher for Airbnb Plus and renters with a property in Italy or cities with a “Super Strict Cancellation Policy.”

• If Airbnbs are no longer allowed in your area and the laws change, you may need to convert them into a long-term rental. Analyze whether the financing policies and properties offer you this flexibility. This may also give you a great chance to earn higher in the long run.

Closing Thoughts

There are tons of financing options that can help you rent your place on Airbnb. However, based on your financial condition, whether you have any equity in your current property and other personal preferences, you need to make the final choice. Thus, it's time you start your research. While you check out the above-mentioned loan options, interact with real estate agents, insurance policy agents, and other people to get a better insight into the best deal for your investment property.