4 Ways to Finance the Purchase of an Airbnb Property [from safe to risky]

May 5, 2022 by Adam Hoeksema

If it seems like everyone and their brother has been purchasing properties to list on Airbnb over the last couple of years, it might be because it is true!  In early 2022 there were 2.9 million hosts worldwide with 14,000 new Airbnb hosts joining the platform every month.  With so many friends, family, and acquaintances getting into the Airbnb Host business, I started to get really curious how they were acquiring these properties and how risky the business actually is, so I decided to do some research on different ways to finance the purchase of Airbnb properties and crunch some numbers using our free Airbnb Cash Flow Calculator and our Airbnb Financial Projection Model Template to see just how risky this business might be.   Here is what I found:

How to Fund the Purchase of an Airbnb Property

Of course the safest way to purchase an Airbnb property would be to save cash and buy the property without debt.  Since this is not the approach that most of your friends and family are probably taking, I wanted to focus on different ways to finance the purchase with debt.  I have listed 4 methods in order of what I consider to be the most conservative option to the riskiest option.

  1. Purchase an Airbnb Property with a Fixed Rate Mortgage and 30% Down Payment

The most conservative approach to financing an Airbnb property would be to secure a fixed rate mortgage and have a large down payment of 30% or more that is true equity in the property and not borrowed.  Lenders like Kram Capital offer Airbnb Mortgages up to $5,000,000 with the following parameters. 

a table showcasing how to finance an airbnb property with a fixed rate mortgage

When you see Loan-to-Value up to 75% that means that you can borrow up to 75% of the appraised value of the property.  In other words you would need a 25% down payment.  Since investment properties are considered to be higher risk by lenders, there is typically a higher down payment required than might be required for your personal residence. 

This approach is the safest option, but it also means that you need to be able to save up what could be a substantial down payment. 

Let’s look at some of the riskier options that people may be using to finance their investment properties.  

  1. Use a HELOC on your Primary Residence for a Down Payment on an Airbnb Property

For many Airbnb hosts, a common way to get into the Airbnb game is to take out a second mortgage on your personal residence and use that cash as a down payment to secure a mortgage for your short term rental property.  Since home prices have exploded over the last 18 months, many people have additional equity in their primary residence that they have then taken out through a HELOC (home equity line of credit) in order to purchase an Airbnb property.  

According to Federal Reserve Data, in July 2020 the median sales price of a house in the US was $322,600.  By April 2022, that median price jumped up to $428,700, an increase of nearly 33%.     

chart showing the increase in median home prices sold from 2020 to 2022

So here is what this means.  The median homeowner saw an increase in the equity in their home of roughly $100,000.  They would likely be able to take out a Home Equity Line of Credit for at least 70% of that increase.  In other words, they would have $70,000 in cash available to use as a down payment on an Airbnb property.  With $70,000 available as a down payment, assuming a 30% down payment, you could buy a $233,000 property.  

So although your lenders might allow you to do this if your debt to income ratios are strong enough, you are effectively borrowing your down payment, so rather than having only 70% financed, you can effectively do 100% financing which certainly amplifies your risk. 

You can see with this funding method that it becomes quite easy to buy an Airbnb property when the value of your current primary residence jumps up 33% in a year and a half! 

  1. Leverage Equity in Existing Airbnb Property to Purchase Additional Properties

For individuals who already owned Airbnb properties prior to COVID and the meteoric rise in housing prices, you would be able to leverage the equity in your existing properties by taking out a HELOC or a cash out refinance of the property in order to raise the capital required for a down payment on the next property.  This layers on additional risk because you are leveraging your Airbnb business to grow your Airbnb business.  Leverage gives you less options and less ability to weather an economic storm like we saw with COVID 19 in early 2020.  If travel decreases broadly, you are stuck with more debt and diminished income to service that debt.  

  1. Purchase an Airbnb with an Adjustable Rate Mortgage and HELOC for Down Payment

The most risky form of financing a Airbnb, in my opinion, is using a HELOC for the down payment and then securing an adjustable rate mortgage.  In this video, I describe the financial impact of a 5 year adjustable rate mortgage if interest rates were to return anywhere close to their historic average.  The short of it is that Airbnb hosts that are using this form of financing could be in for a world of pain that would make their Airbnb properties completely unprofitable simply because of interest rate changes. 

Whatever approach you take to finance an Airbnb property, just make sure that your balance sheet remains strong enough to whether a downturn which means you need some equity on that balance sheet, not just leverage debt. You can fill out our Airbnb balance sheet spreadsheet to see where you currently stand.

If you want to learn how to create a financial model for your Airbnb empire and stress test it for things like changes in home values, interest rate changes, occupancy rates, rental rates, etc the check out the demo of our Airbnb financial model template below:

How are you financing your Airbnb property?Let us know here, we would love to hear from you!

About the Author

Adam is the Co-founder of ProjectionHub which helps entrepreneurs create financial projections for potential investors, lenders and internal business planning. Since 2012, over 40,000 entrepreneurs from around the world have used ProjectionHub to help create financial projections.

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