LOANS FOR AIRBNB VACATION RENTAL PROPERTIES
Airbnb, VRBO and other short-term vacation rental platforms have had a profound impact on desirable rental markets throughout the United States. Yet, despite the vast potential of vacation rentals, lenders still hesitate to make loans on these properties.
But not Socotra! We appreciate people trying to earn a little extra money to help pay the bills and create steady sources of monthly income. This exciting new way of supplementing income with Airbnb rentals is an important source of growth in this economy, and Socotra is the premier lender in the vacation rental market.
High end and vacation rentals are a great asset for anyone looking to save for retirement. Call Socotra Capital today to learn more.
Financing the purchase of vacation real estate can be a challenge.
Lenders typically don’t like making large loans on investment properties. Fannie Mae’s cutoff is $484,350, and most other lenders max out at $624,000. While a would-be homebuyer’s first inclination might be to turn to a bank to make up the difference, most banks don’t like offering a secondary loan on top of a Fannie Mae loan.
Part of the problem is that banks have no reliable source of data for the vacancy rates on a particular piece of property. Also, appraisers and underwriters don’t use short term rental rates when looking at rental properties. This means that homes that are ideal candidates for short-term rental are undervalued with regard to their potential to generate income, and your ability to pay the mortgage is underestimated as well.
Frankly, homebuyers are in something of a catch-22. If they label the second home as not being a source a profit, lenders factor in the cost of mortgage payments on the buyer’s primary home. The result is that few buyers can get their debt-to-income ratio below the target of 43% to 45% necessary to obtain a mortgage. But if they categorize the home as an investment, they’re completely ineligible for a second-home mortgage.
This is where hard money lenders like Socotra Capital can help. We understand the real estate market, and we are confident that Airbnb and VRBO are going to help drive the housing market in popular travel destinations, especially those on the Pacific and Atlantic Coasts, as well as Denver, Phoenix, Las Vegas, Dallas, Salt Lake City, and Lake Tahoe, to name a few. And as the short-term rental market becomes increasingly efficient and utilized, the value of desirable properties will continue to go up.
Real estate investors that target these markets and take advantage of online rental platforms will likely see a handsome profit, thanks to the ability to immediately generate revenue and offset mortgage costs.
How can you finance Airbnb and VRBO investment properties?
Airbnb and VRBO aren’t just having an impact on how travelers find a place to stay. Many people are choosing to buy vacation properties with the express intent of offering them as short-term rentals during popular travel seasons.
We can say from our personal and professional experience that the numbers do add up. In a recent survey of homeowners who rent out their homes on a popular online platform, 70% of respondents said they could pay more than half their mortgage with rental income.
As long as the property is located either near a large body of water and/or in a popular tourist destination—such as Lake Tahoe or San Francisco—it’s very realistic for property owners to pay the entirety of their mortgage with rental revenue.
Owners often do find themselves debating whether long-term or short-term rentals are the best approach. Short-term rentals generally produce more revenue, but are also more expensive to operate than a traditional rental, due to the expense of cleaning, laundering, and restocking toiletries, as well as the necessity of providing furnishings.
In the past, short-term rentals were simply too inefficient to justify the expense. You would have to advertise through a local newspaper or management company, which presented two problems: the advertisement represented yet another expense, and the limited geographic reach of the advertisement meant that you couldn’t reach would-be tourists and obtain bookings. Thus, long-term rental was the only realistic option.
But now, short-term rentals are exploding in popularity, for obvious reasons. For the price of a decent hotel room, travelers can now stay in a full-sized house with a kitchen, multiple bathrooms, patio and backyard, and more. Even properties that wouldn’t necessarily be thought of as appropriate for short-term rental are being converted for short-term use and performing well.
For instance, the owner of a fourplex in the Lake Tahoe area might be able to rent each unit out to locals for $1,000 per month, whereas on Airbnb each unit can fetch $150 to $200 per night. Even factoring in cleaning costs and nights with no occupancy, net income after expenses for short-term rental can be 50% to 100% higher than what would be realized from long-term rental.
As a result, investment property buyers who in the past might have compromised with a smaller vacation home—or a home located in a less attractive area—can instead afford to splurge on incredibly attractive homes with larger mortgages, and still have the opportunity to live at the property for part of the year.
Where Should You Purchase an Airbnb Rental?
If you are contemplating the purchase of an Airbnb, location is a prime consideration. Demand is strongest in highly populated cities that attract plenty of tourists and are home to major companies and universities. Rentals in these cities benefit from their ability to attract both business and recreational travelers, and demand is especially high near convention centers, sports stadiums and major shopping districts.
Presently, the top American Airbnb markets are Los Angeles, New York City, San Francisco, San Diego, Miami and Austin, but there are also plenty of secondary cities with robust Airbnb rental markets.
Another consideration for Airbnb owners is pricing short-term rentals. Airbnbs compete directly with hotels, especially in larger cities, and almost always charge less while still making a respectable profit. In markets where hotel occupancy rates are high, such as Los Angeles, San Francisco and New York City, Airbnbs also have high occupancy rates and can price competitively. In high demand markets, price is less important than reviews in determining occupancy rates.
How Can You Ensure the Success of Your Vacation Rental?
Guest reviews are the single most important factor affecting Airbnb occupancy rates. In San Francisco, where occupancy rates average 44%, surveys have found that additional review accumulated by rentals resulted in a 0.3% increase in occupancy rates. Meanwhile in San Jose, each additional review boosted occupancy rates by 0.5%.
Given the importance of ratings, how can Airbnb owners encourage guests to leave reviews? One approach is to post reviews of your guests as soon as the option becomes available. This increases the odds that guests will return the favor by writing reviews. Another strategy involves being proactive in soliciting reviews. This begins with sending guests a thank-you note after checkout along with a request for a review, sending an additional reminder two weeks later, and following up with a final request before the review option expires 30 days after checkout.
Setting up an Airbnb property requires time and attention to detail. Plan on allocating several hours per week for managing reservations, responding to inquiries and making sure the property is ready for guest arrivals. Services such as Pillow can help you manage the property and Rented.com can help you find a property manager. Owners can further reduce workload and expenses by selling weeks to a property management company. Online businesses such as Guesty and Handy can be hired to provide cleaning services. Owners who work full-time or travel frequently may also want to invest in Lockitron, which can lock and unlock doors via a smartphone app. Lockitron also allows owners to add or delete guests or give guests access for a limited time.
We are a nationwide lender with local roots in rental markets throughout the United States.
The Pros of Renting Airbnb Rentals
The success of Airbnb has many real estate investors considering the purchase of properties that can be listed as short-term rentals. A major appeal of Airbnb models is commissions much lower than traditional rentals. Airbnb typically charges property owners 3% commissions and guests 6 to 12% fees.
Another factor that makes the Airbnb concept appealing is reduced risk for property owners. Guests are rated on the Airbnb site and properties typically suffer less wear and tear due to shorter-term stays. The principal attraction of the Airbnb model, however, is opportunities for outsized returns. Cash returns often exceed 40%. According to the Los Angeles Alliance for a New Economy (LAANE), a LA real estate investor earns more renting a property as an Airbnb for 83 nights per year than could be earned renting it on a monthly basis for a year.
The Cons of Owning an Airbnb Rental
A major challenge to successful Airbnbs is unhappy neighbors, so plan to communicate regularly with your neighbors and make sure their privacy is respected. Choose guests carefully, designate parking areas, and make sure guests understand an applicable HOA rules regarding pools, gyms and other shared amenities.
Unanticipated costs are another challenge. For example, many cities tax short-term rentals. This tax, known as the transient occupancy tax (TOT), varies by city. Los Angeles imposes a 14% transient occupancy tax based on the listing price for stays of less than 30 nights.
Regulations pose the single biggest obstacle for Airbnb owners. Some cities impose minimum rental periods or limits on the number of days per month or year that a property can be rented. There are also city zoning ordinances that limit short-term rentals to specific neighborhoods, prohibit short-term rental homes near other short-term rentals, or limit the number of occupants. Visit the Airbnb site for a list of rental regulations in many major cities. Because rules are determined city-by-city, property owners frequently encounter outdated regulations neither prohibiting nor allowing listings, making it difficult to plan for the long-term. If the property is a townhome or condo, HOA rules and regulations must also be followed. Some HOAs prohibit rentals that are less than 30 days, while others require the owner to furnish tenant information to the management company.
For property owners located near major tourist areas, Airbnbs can provide an attractive return on investment with the added benefit of less risk and expense than a full-time rental. However, like any other real estate investment, success depends on careful planning, due diligence and effective execution.
If you want to get started on the path to profitable investment in vacation rental properties, Socotra Capital is the lender of choice! Contact us today to learn how we can help.