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Thinking about a short-term rental? 8 factors to consider before getting a loan

This is a guest post by LoanBase, a property financing solution for short-term rentals

If you’re looking to finance your short-term rental investment, there are a few things to consider before taking out a loan. In this blog post, we’ll cover everything you need to know to make the best decision for your investment. Whether you’re new to the short-term rental market or a seasoned investor, this post will give you the information you need to make an informed decision about financing your rental property.

Here are a few things to consider before financing your next short-term rental:

1. Your budget

The first thing to consider when deciding whether to finance a short-term rental is how much property you can afford to buy. The amount you can buy depends on the amount you can borrow, and this is dependent on a variety of factors; including your credit score and qualifying income. Before financing your rental property, assess your budget and determine how much you can realistically afford to repay each month.

You’ll also need to consider how much cash you have available for a down payment. Most lenders expect borrowers to contribute part of the purchase price—typically 20% to 25% of the purchase price for investment properties, but sometimes this can be as little as 10%.

2. Your total monthly obligation

When you finance a short-term rental property, you’ll be responsible not only for making your monthly loan payments (with interest and principal) but also for other expenses associated with owning the property. These can include insurance costs, local real estate taxes, and additional fees like homeowners association costs. It is important you take all of these monthly costs into account before making financing decisions.

3. A realistic vacancy rate

Vacancies can vary greatly for residential properties—especially for short-term rentals. The number of occupied nights in a given month fluctuates based on the season, the schedule of local events, the overall economy, and more. Before you finance a short-term rental, make sure you understand the expected vacancy rate for properties in your local market. You may want to speak with local real estate agents or property managers to ensure you have realistic expectations for how often the property will be vacant.

Additionally, once you have a good understanding of your expected occupancy rate, evaluate whether you’ll be able to cover property expenses even in months with high vacancy rates.

4. Startup costs

Running a vacation rental is very different from owning long-term rentals. When you buy a long-term rental, you aren’t expected to furnish or otherwise equip the unit before renting it to tenants. At most, you may need to repair or replace appliances like washer-dryers, dishwashers, or heating, ventilation, and air conditioning (HVAC) systems. With a short-term rental, however, you’ll need to furnish the space in addition to addressing maintenance issues.

Before financing a rental property, consider the costs associated with starting your rental business. This can include purchasing furniture, cookware, and other amenities for the rental, in addition to any expenses related to marketing or advertising the space. Make sure you factor these into your budget before financing a short-term rental investment.

5. Your own intended usage

If you plan to stay at the rental property for a few nights each month, you’ll need to consider the effect this will have on the type of property you buy, your budget, and more. For one, assess whether or not financing a short-term rental is still possible given your plans for personal use of the property. 

Speak with an accountant or tax attorney to understand the implications that using the property could have on your tax liability and your ability to write-off expenses related to the property—as well as how your plans will impact the expected vacancy rate.

6. Local laws and regulations

Short-term rentals are also unique when compared to other types of real estate because of the local laws and restrictions governing their use. These laws vary from city to city and even neighborhood to neighborhood. They can range from special hotel taxes for short-term tenancies to total prohibitions against short-term leases. For that reason, it’s important to understand how these policies may affect your ability to operate and finance a rental property.

7. How you’ll manage the property

Before applying for financing for a short-term rental, consider how you’ll manage the property. Will you hire a property manager or manage the property yourself? Evaluate whether your budget and other monthly obligations will allow for this, and calculate any additional costs associated with management services.

When you apply for a loan on an investment property, your lender will evaluate your experience with managing properties. If you don’t have at least one or two years of managing properties yourself, the lender will require the borrowers to provide the name and contact information of a reputable manager responsible for managing the property and handling leases.

8. Loan underwriting

The last thing to think about before financing a short-term rental property is whether you’re prepared for the loan application and underwriting process. To apply for financing for a short-term rental, you’ll need to complete a formal application and provide certain documents. Application requirements vary by lender, but typically include proof of income, tax returns, individual identification or articles of organization for a business entity, and other financial records. Make sure you have all the necessary paperwork before applying for financing so the process can go smoothly.

The bottom line of financing vacation rentals

Many people think running a short-term rental simply requires buying a property like a normal residence, renting it out, and collecting rent—but often, that’s not the case. For one thing, financing for investment properties is very different from getting a mortgage on an owner-occupied property. Vacancy rates and unexpected maintenance costs can also mean landlords have to cover costs themselves more often than they anticipate.

If you’re thinking of financing a short-term rental property, there are a few things to keep in mind. Carefully consider your total monthly obligations, your overall budget, and ancillary property costs; as well as other items, such as local laws and regulations, property management, and how often you plan to use the property yourself. These are all important factors to consider before taking out a loan to finance your short-term rental property.

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