If you’re new to real estate investing, you’ll quickly discover that the two most popular options involve short-term and long-term rental investing. Long-term investing is perfect for people who want the stability that comes with lengthy tenant contracts and predictable income.
On the other hand, short-term rental investing offers ample tax breaks, less wear and tear, and more flexibility. You get to choose when and how often you rent out the property, which gives you greater control over how your investment is used. Let’s dive into short-term rental loans and how they can give a jolt to your investment portfolio.
What Are Short-Term Rental Loans?
Unless you’re flush with cash, you’ll likely need a loan to help you buy an investment property. If you’re interested in renting the property out on a short-term basis, a short-term rental loan is what you need to apply for.
These loans aren’t actually that different from conventional mortgages. Even though you’re renting the property out to tenants who might stay there for a couple of weeks, the repayment term isn’t affected by this.
You can get a short term rental loan with a 30-year repayment term if you expect to hold onto the property for a long time. Longer terms lead to lower mortgage payments, which should give a boost to your cash flow. You can also choose between an adjustable or fixed rate.
The reason why short-term rental loans are their own thing is because the terms can differ slightly when compared to a conventional loan. While some lenders will consider your creditworthiness, most are more interested in the details of the property you’d like to invest in.
If you don’t believe that your income is high enough for this loan, there’s no reason to fret. If your estimated rental cash flow is high enough to cover the loan payments, lenders should be interested.
Pros and Cons of Short-Term Rental Loans
Short-term rental loans have a lot of advantages. Since they’re mainly available through private lenders, the loan requirements are usually less strict. When you apply for this type of loan, you’ll benefit from:
- High scalability based on property value
- Fewer borrower restrictions
- Your main residence won’t be used as collateral
- Fast closing times
The only drawbacks to short-term rental loans are:
- The property must produce adequate cash flow
- Somewhat higher interest rates
Qualifying for a Short-Term Rental Loan
Whether you want to be an Airbnb host or occasionally use the property as a vacation rental, you need to apply for a short-term rental loan. Once you’ve bought the property, you can start renting it out to tenants for anywhere from a few days to a month.
As mentioned earlier, private lenders focus on the value of the property and its cash flow potential. If the property you’re interested in has a great cash flow estimate, you may qualify for a loan even if your credit score or financial situation isn’t the best. Short-term loans are slightly riskier than long-term ones. You can expect the loan’s interest rate to be higher than it would be for other mortgages.
To get a piece of real estate, you need to take advantage of your opportunities quickly. Some investors are all-cash buyers, which means that they can get the deal done almost instantly. To win against the competition, it’s best to avoid the traditional loan process altogether. Short-term rental loans can close fast.
If you choose to apply for a short-term rental loan, there are some basic things you’ll want to show the lender. You can be approved for one of these loans even if you don’t have investing experience. However, experience with successful rental investments can help you qualify for large deals with great terms.
Do you have any other income you’re bringing in? If you have a traditional day job, provide proof to show the lender that you can cover the monthly mortgage payments with ease. While some lenders don’t care about credit scores, having one above 660 can help your case.
It’s also a good idea to show the lender your investment plan and exit strategy. For example, many lenders refinance the properties they invest in to gain cash that they’ll use to add more real estate to their portfolios. If you can make a down payment of 20% or more, your application has a higher chance of being approved. A large down payment tells lenders that you’re a serious investor. It can also help you get a lower interest rate.
What to Expect from Investment Property Loans
Long-term rental loans are mortgages that allow you to purchase investment properties. While these loans are riskier than traditional mortgages, lenders still offer flexible terms. Loan terms range from 10-30 years. A longer term comes with a lower monthly payment, which can be highly beneficial when you’re trying to increase your cash flow.
Before you apply for a long-term rental loan, it’s a good idea to cover all your bases and make sure you meet the financial requirements. For example, you’ll need to make a higher down payment. Whether you buy a multifamily property or a single-family home, most lenders are going to ask for a down payment of at least 20%. If you pay anything below 20%, you might need to purchase mortgage insurance, which can eat into your profits.
You may also need to show proof of rental income, which shouldn’t be too difficult for you to get. Make sure you provide documentation in the form of a rent roll history, existing leases, and tax returns. This level of documentation is only possible if you have already invested in rental properties.
Your lender might ask you to show that you have mortgage reserves in the bank. Depending on the number of properties you currently own, it’s recommended that you have around three to six months of mortgage payments in your account.
If you’ve invested in rental properties before, some long-term rental loan programs require a written explanation of your experience. You can qualify with rental income as well. Even if you’re new to investing, you can provide your lender with estimations of the amount of rental income you’ll earn.
Keep in mind that these loans can have high credit score requirements. Most lenders require a minimum credit score of around 640. Your chances of being approved for the loan will certainly be higher if your credit score is 700 or higher. In fact, this may be a requirement when investing in a multifamily property.
Factors to Consider Before Applying for a Short-Term Rental Loan
Before applying, there are a few more things you need to remember to make sure you get a good deal. Short-term rentals are all about maximizing your cash flow and increasing the value of your portfolio, which is why you need a good loan.
First, make sure you receive an accurate appraisal of the property. Professional appraisers tend to focus on long-term rentals and traditional homes, which could make them less accurate when evaluating short-term properties. If the value is set too high, your odds of approval might drop. Since lenders appoint appraisers, you need to apply with a company that has experience financing these types of rental properties.
When you calculate the property’s profitability for your lender, consider the higher maintenance and turnover costs. While short-term rentals offer many benefits, they can have more turnover. If you have a bad guest or two, your maintenance costs might also increase. These factors can hurt your profitability.
Lastly, review the rental regulations in your area. Some places are stricter about vacation rental properties than others. If you want to rent the home out to tourists or business professionals, make sure it’s allowed by the city. Doing your research before making an offer can help you avoid a major headache.
Short-term rental properties are often in high demand. They’re perfect for investors who live in desirable locations and would like to have more control over who stays in their properties. With a short-term loan in hand, you can buy one of these rentals and start collecting income from tenants immediately. Give us a call today if you’d like to learn more about short-term rental loans or apply for one.
