How To Finance A Short-term Rental: A Guide For Investors

As the coronavirus pandemic fades and travel rebounds, Americans are going on vacation again. As a result, many property investors are seeking opportunity in the short-term rental market. Investors can get mortgages on properties marketed on Airbnb or VRBO as short-term rentals. Read on to learn how to land an Airbnb loan, or a mortgage on any short-term rental.

What Is a Short Term Rental Loan?

A short-term rental mortgage is a loan backed by a house or condo that’s rented by the day or week. The niche of short-term rental loans has been growing quickly, and a number of lenders are extending mortgages on properties that operate as short-term rentals. Whether your investment property is a Florida beach house, a California condo or professionally managed vacation rental property near a golf course, lake or ski slope, financing is available from a variety of lenders.

How To Finance a Short Term Rental?

Investors have a number of options for financing short-term rentals. If you have a good credit score and strong income, you might be able to qualify for a conventional loan collateralized by your short-term rental. You also might be able to tap the equity in your primary home to invest in a short-term rental. This could involve taking a cash-out refinance, or applying for a home equity loan or a home equity line of credit. A word of warning: Tapping your home equity to fund investments is a risky strategy. Sometimes, it’s a way to build wealth. Other times, this approach can be financially devastating. A final option is a type of specialty mortgage designed specifically for the needs of short-term rental investors. These mortgages can carry higher interest rates and more onerous terms than conventional mortgages, but they can be a savvy way to finance your investment portfolio.

What Types of Short Term Rental Financing are Available?

Short-term rental loans are available in a variety of lengths up to 30 years. Fixed rates and adjustable rates are available. 

DSCR Loan for Airbnb

Debt Service Coverage Ratio (DSCR) mortgages are a common way to finance short-term rental properties. DSCR loans let the borrower qualify for a loan based solely on the cash flow generated from the investment property, not on their personal income. So DSCR lenders don’t look at the borrower’s debt-to-income ratio. DSCR is a ratio that is calculated as the revenue from operations divided by the principal, interest, property taxes and insurance (PITI). Many lenders want the DSCR to be above 1.25 – for instance, a property with $100,000 in annual principal, interest, property taxes and insurance would need annual revenue of at least $125,000 to qualify for a DSCR loan.

How Can I Improve My Chances of Qualifying for a Short Term Rental Loan?

Lenders generally impose loose standards on short-term rental loans – they typically underwrite these loans based on how much revenue the property generates. However, there are some minimum qualifications that borrowers will need to meet. A few tips:

  • Boost your credit score. Short-term rental lenders often cite FICO scores of 640 to 660 as the minimum for investors. If you’re in the market for a short-term rental loan, take the basic steps to boost your credit score. Make all payments promptly, pay down credit card balances to reduce your credit utilization ratio, don’t open new credit accounts and don’t close old accounts.
  • Make sure there are no major problems in your credit history. Lenders generally won’t extend credit if you’ve had a bankruptcy or foreclosure in the past seven years.
  • Have cash for a down payment. Depending on the lender, you could be required to come up with cash totaling 15% to 25% of the loan amount. So make sure you have cash on hand, or find a partner who can help.

How to Write an Operating Statement for a Short Term Rental?

A lender will ask for an operating statement for your short-term rental. The basic information covered on a real estate operating statement includes:

  • Gross rental income
  • Additional income, such as pet fees, cleaning fees and late fees
  • Operating expenses, including property management fees or Airbnb fees, repairs, landscaping, cleaning services, pool or hot tub service and maintenance checks for HVAC and other systems
  • Insurance premiums
  • Property tax payments
  • Mortgage interest
  • Net operating income (NOI)


This is just a partial list. The more thorough your operating statement is, the more comfortable a lender will feel about extending credit.

What Makes Financing Vacation Rentals Different?

Unlike a typical rental property that’s leased for months or years at a time to the same tenant, a short-term rental serves a revolving door of customers who come in for a few days at a time. For the investor, the property isn’t just a piece of real estate but a hospitality business – one that requires nonstop marketing, constant cleaning and sustained attention..

What Are the Risks Specific to Short Term Vacation Rentals?

Short-term vacation rentals can be quite profitable for investors. However, there are a number of potential downsides that you’ll need to keep in mind:

  • Short-term rentals can be hurt by economic downturns. Everyone needs a place to live. But no one needs to go on vacation. The travel industry is notoriously sensitive to economic downturns, so make sure you have some wiggle room built into your business model.
  • Local regulation is still evolving. Airbnb and VRBO exploded much more quickly than local governments were able to respond. Now, though, municipalities are taking a hard look at the trend, especially when short-term rentals turn into rowdy venues for parties that annoy the neighbors. While most towns and cities coexist with short-term rentals, some localities are cracking down.
  • The constant parade of guests means wear and tear. Even if your renters are conscientious and polite, the steady stream of people lugging suitcases in and out of your property will mean more maintenance and repairs. If you get a bad guest or two, the bill will increase.
  • You’ll face no shortage of competition. As the owner of a short-term rental, you’re in a crowded field. Hotel chains have national marketing programs and customer loyalty programs to lure guests. And you’ll vie with other owners of short-term rentals for customers.
  • Seasonality can be a drag. While some places are year-round destinations – Walt Disney World and the Las Vegas Strip come to mind – most owners of short-term rentals have to cope with seasonality. This isn’t a deal killer, but make sure your high-season revenue can keep you afloat through the slow periods.

What Insurance Will I Need As an Airbnb Investor?

Any decision about insurance involves a hard look at your risk tolerance. But some of the coverage decisions will be made for you. Airbnb says it provides its hosts with plentiful coverage. That includes $1 million in liability insurance and $1 million in damage protection. Airbnb also offers coverage for pet damage, unexpected cleaning costs and canceled stays as a result of damage caused by previous guests. As with any insurance, Airbnb’s coverage comes with exclusions, so you’ll need to read the fine print. Meanwhile, if you use your property as collateral for a mortgage, lenders will require you to carry standard property insurance policies that cover fire, liability and theft. If the property is located in an area at risk of floods, hurricanes or earthquakes, you might need additional policies for those hazards. And if you regularly rent the property as an income-producing endeavor, business insurance might be a wise investment.

Frequently Asked Questions (FAQ)

What is a good return on short term rental investment?

The definition of a good return varies from one investor to the next. One owner might be content with 8%, while another might insist on 20%. As a general rule of thumb, you’ll want to make a premium above the return you’d get by just parking your money in cash. After all, owning a short-term rental property involves risk and some investment of time and effort.

How much will running an Airbnb cost?

A variety of costs are involved with owning and operating an Airbnb. The platform collects a fee of about 3% of your rental revenue. Owners also must cover property taxes, insurance, mortgage interest, maintenance, repairs and cleaning fees. The amount of those expenses varies from property to property. Successful investors are able to collect more in rent than they pay in expenses.

Is it convertible to a long-term rental?

That depends on the area where your property is located. If your short-term rental property is located in a large metro area with a strong job market, converting it to a long-term rental should be a straightforward matter of finding a tenant willing to sign a one-year lease. On the other hand, if your property is located in a seasonal beach town or ski resort, long-term rental prospects are less robust. However, the rise of remote work has created new demand for properties outside traditional employment hubs.

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