Do you desperately want to invest in an Airbnb but think you don’t have the money? Do you feel like you’re missing out on your opportunity to create financial freedom?
If so, you need to listen to Episode 12 of the Host Coach Airbnb Podcast where we unpack 12 different Airbnb funding options - including some pretty non-traditional ones - so you can find the best option to get started as an Airbnb investor.
After listening to this episode you will know more about short-term rental financing than 95% of people on the planet!
Topics discussed in this episode:
- The savings mindset that leads to financial freedom
- 6 traditional funding options for Airbnb properties
- 6 out-of-the box funding options for Airbnbs properties
- How to find owner financing opportunities
Host Coach Airbnb Podcast Episode 12 Show Notes:
Today, we're discussing 12 different Airbnb funding options, including some pretty non-traditional ones, so you can find the best option for you to get started as an Airbnb for you to get started as an Airbnb investor. So let's jump in.
We're excited to start off covering six traditional funding options you can use to purchase an Airbnb property.
6 Traditional Funding Options for Airbnb Investments
The first one's pretty obvious. It's personal savings. Financial freedom comes from establishing the habit of saving. So, one of the best approaches is to create an investment goal for your savings. If you know that you're saving to buy an Airbnb, that's going to help you cut back on frivolous expenses and save more money, instead of buying that purse or getting the new car, Culin's been driving the same truck for 15 years because we know that our savings go to Airbnbs that generate cash flow. That cash flow gives us the freedom to do the things we love with people we love.
Another thing to do is to automate your savings. Create auto deposits to a savings account on paydays. That way you don't even see the money that you're saving and are tempted to spend it. And just knowing that saving this 20k down payment for an Airbnb property can easily yield $2,000 to $4,000 monthly once you list it, is really great motivation.
And we like to tell people to let your investments pay for your lifestyle. Don't fake it and pretend that you have all this money and buy all these fancy things and be reliant on credit cards and stuck. Wait, save, invest, and then use that cash flow to have all the fun trips, fun cars, fun clothes, and things like that.
Friends and Family
The next option is friends and family consider borrowing money from your family or friends for an Airbnb investment. And this isn't just a "Hey, can I have some mone, Mom and dad?" This needs to be something that you're very prepared for. So having market research, listing prices, and having used AirDNA to predict potential cash flow that you could use with this investment is going to help you come across as really professional and legitimate. This way people are going to be more likely to say yes.
Also super important. You can't just ask for money. You also need to tell people what the repayment plan is. Do not just say, "Hey, can I have $20,000 to have an Airbnb and it's going to make all this money?" Yes, it's going to make this money, and X percentage is coming back to you and possibly with interest to make it that much more attractive to your family members.
The next option is a home equity line of credit (HELOC), and this is really how we got started. You might have access to money that you're not thinking about. You might have access to equity within the walls of your home. If you're a homeowner, contact your primary lender and do an analysis. They can do a market survey. They can tell you what you currently owe and let you know if you're qualified for a home equity line of credit.
This allows you to borrow only as much as you might need. So for example, if you have a hundred thousand dollars in equity in your home, you can get a hundred thousand line of credit. But you don't need to actually take that whole a hundred thousand dollars upfront if you need say, $10,000 or $20,000 for a down payment. You can borrow just that amount out of the line of credit. If once you've closed, you need another. Five, $10,000 for decor. You can pull just that amount from the line of credit.
You only pay interest on the portion of the line of credit that you're using. As you get your Airbnb up and flowing, the cashflow can then be used to make those minimum payments to the line of credit. And, as you go a little bit further, the cashflow can be used to make larger payments to pay off that line of credit. Now you're creating good credit. You've had this line of credit, you've paid it off or you've paid it down, and it's available for you. Maybe for your next investment or for further renovations down the road!
That's how we really got started with that line of credit when we started Airbnb investing.
FHA Loans
If you don't have a house, what can you do? So there's FHA loans, which are government backed loan programs for first time home buyers. So if you don't own a home, you're a first time home buyer.
The FHA is the Federal Housing Administration and this is their mortgage loan product. If you've got a decent credit score, 580 or above, and a steady job you can qualify for a loan with a down payment as low as 3.5%. That really reduces the amount of capital that you need to get started investing in an Airbnb property.
One thing with the FHA loan is you should use it as a primary residence for at least a full year to qualify. This year will also give you time to renovate, remodel, and improve the property. People refer to it sometimes as house hacking - live in the house, fix it up, and then get it ready to be an investment property.
VA Loans
Next up are Veterans Affair loans or VA loans. If you or your spouse are active duty or retired military members, you could qualify for a VA loan, which has no down payment required. So again, this is a great way to move forward if you don't have money and you want an Airbnb. If you qualify for a VA loan, you can purchase a property with one to four units under one roof.
We know several investors that have purchased places with two or three dwellings under one roof. They live in one, renovate the other one, get it flowing. Then use the money from that to renovate the third dwelling - and boom, more house hacking all of a sudden. Yeah, it's extra house hacking times three.
It's a really creative and smart way to get started in Airbnb investing.
Second Home Loan
Yet another option is a second home loan. And this may sound like a little bit out there. You may feel like "oh, I just was lucky to get my first home loan." In reality, the bank is waiting for you with open arms!
If you're currently a homeowner, you are in a great position to purchase an Airbnb because banks are used to homeowners coming in for a loan for a getaway house, a cabin, or a cottage. This puts you in the second home buyer category.
To fit this category, the property has to be 50 miles from your primary residence. To be classified correctly, you also need to spend at least 14 nights in the home for it to be in IRS compliance to rent the property for the remainder of the nights of the year. This is super easy to do if you purchase a place you love to visit with your family or friends!
You'll also be at your Airbnb to do owner's eyes inspections, maintenance, and improvements. So that's really not a big hurdle. I would love to spend 14 days in all of our places at one time, but we sprinkle them out throughout the year.
When you go for a third loan for your second Airbnb investment, that would be considered an investment property, and that's going to end up having a higher interest rate, higher credit score requirement, and or a higher down payment. That is really the time to start building a relationship with a mortgage broker and share your investment plans with them so they really understand what your loans are for and what you're building.
6 Nontraditional Funding Options
Jumping into less traditional funding options, it's important to realize that short-term rental investing is relatively new phenomenon. It's not that well known as an investment class like the second homes or multifamily apartment buildings. So this means funding specifically for Airbnb investing can be a little more challenging.
The good news is short-term rental investing is finally being noticed by the financial services industry, and so availability of funding continues to evolve.
Asset-Based Lending
We can start by talking about asset-based lending. This means unlike a traditional mortgage where you as an individual, your income, your earnings stability, and your ratio of monthly debt obligations compared to your earnings is what qualifies you - the individual for the loan. The bank is making the credit decision based on you, personally.
In contrast in an asset-based lending environment, lenders are making their decisions based more on the property's cash flow. Again, think about a multi-family property, if you've heard anything about that. It's not the individual, it's the cash flow coming from the property that is securing the loan.
These loans are often referred to as DSCR or Debt Service Coverage Ratio loans. Can the earnings from the property cover the debt? If you do a quick Google search, you'll find many options. Just search DSCR Loan or Asset Basded Lending. We've used Vizio Financial, Investment One, and KRAM Capital. We've found thesethree to be really Airbnb investor friendly. But if you've got a mortgage broker relationship they're a good place to start.
Owner Financing
Another creative option is owner financing. So owner financing would entail finding someone that owns a property, most likely it's already some sort of long-term investment property.
Often this will be older people. People have owned the property for a while and like the cash flow coming from the property. But over time, if you've been involved in the long-term rental industry, it becomes tedious, dealing with tenants, finding new tenants, updating between tenants. So why would an owner like that want to sell you the property and finance it themselves?
Think about what they want. They want that steady cash flow. They can sell the asset to you, receive that same steady fixed income, of say $2,000 a month, without having to worry about finding new tenants, without having to worry about dealing with tenant questions and problems. And if they don't pay rent. You can have someone in there and they can refuse to pay rent, and that's a nightmare in and of itself.
So, if you can find a property and, it takes a little bit more work, right? Again, if you're an agent, you may already know. People who have investment properties approach those owners with the idea of seller financing. They get the benefit owners are looking for is that steady fixed income without the hassle of dealing with tenants.
When you get a property that you can renovate and repurpose from a long-term rental into a short-term rental, and instead of getting $2,000 a month in rent, you might get $4,000 or $5,000 a month in short-term rental revenues.
One of our very first mentees, Philip, did this! You hear about the mythical owner financing and it's in real estate books. I really didn't buy it, but Philip was just a young, 20 something guy, not a lot of cash in hand, but a whole lot of charisma and grit. And he searched and found a older gentleman in North Carolina and ended up getting him to owner finance him a bungalow. And with no money out of his pocket other than paint, renovations and decor, he ended up having one of the number one Airbnbs in the entire area.
The other interesting part of that story is while there's upfront work it can payout with more than one property. I've got a much older cousin and he's got 10 or 12 properties. So you might do the legwork and find somebody, not just with one property that they're interested in seller financing, but you could find an investor that might have a small portfolio of 8, 10, 12 properties that you could acquire over time. It's an exit strategy for that investor. Everybody wins! We all like when everybody wins.
Partnership
Another non-traditional way to fund an Airbnb purchase is through partnership. What do I mean by this? Some people have money and no time, and some people have time and no money. So if you're in the time and no money state of life you can start researching Airbnb investing. Listen to podcasts like ours, read Airbnb books, and position yourself as an expert
When you have the expertise and time, you are suddenly much more attractive to an investor who has money to spend, but lacks expertise in Airbnb and has no time to learn about them. So, find somebody you know is an investor who has ample funds and approachthem saying, look, I'm an Airbnb expert. Here's my market research. Here's how much money I can make you and I Then come up with a an agreement that dictates who gets what out of the profits.
It's another really fun and interesting way to not be in it by yourself, have a partner and each of you are bringing to the table something that the other person doesn't have. Sometimes the only thing better than one partners is multiple partners. An investment partner, might not want to put up all of the money.
Venture Capital/Raising an Airbnb Fund
And so that brings us to venture capital or raising a small fund. This is how a great majority of multi-family property investment takes place. We did an Airbnb investing podcast episode a couple weeks ago with Tony Cappaert. He is an investor that went from one property to 75 by raising a small investment fund. So instead of just one friend or family member, or one business partner, you can go back to friends and family or high net worth individuals that you know you can put together a pool of investment funds? So a limited partnership, you can consider it venture capital.
The upside here for the investor is that they can put in less money and assume less risk. The risk gets diversified against a couple of other investment partners. The downside is you've got to do a lot of legwork to find more than one investing partner. And, you've got to manage the operations. However, the upside is significantly better revenue potential for multiple investors and less personal risk.
So what Tony said from episode seven, his exact words were that he wanted to diversify his assets across a larger portfolio. He wasn't comfortable spending all of his savings on multiple Airbnb investments. So by creating a fund, he did take on the management component, but he was able to have a much higher return across 75 properties and make money for himself and the fund investors.
Once you have that group of investors and you perform for them, they most likely will be willing to help you go and acquire not just that first short-term investment property, but you can scale faster into multiple properties.
1031 Exchange
Let's talk about 1031 exchange. First of all, what is it? It's named after the IRS 1031 Tax Code, and that allows investors to defer taxes on the sale of an investment property as long as they reinvest the money from that sale into another equivalent investment property. So how does this benefit you?
This is great for investors who already own a property, particularly a long-term rental and want to sell it to get into short-term rentals. One of our good friends, Dan, is the ultimate 1031 investor. There may be people who know someone who's done more, but for me, Dan is our 1031 guy.
Basically, what Dan did was he had a long-term rental. I think he house hacked it. He lived in it, renovated it, put tenants in it, moved to another house and finally sold it. He really wanted a beach house for his family and for rentals. And so when he sold the long-term rental, he took the money from it and used the 1031 to invest that money into a beautiful beach house and didn't get the tax hit.
That worked so well that he used another 1031 to buy another beach house and is planning his third 1031 this year. That will actually put them at six beach houses. So three of the six houses in his rental portfolio are from 1031 exchanges. Hello paying less taxes!
Dan's a real estate agent that started young and followed the advice that was out there, which is reinvest your commissions in property. And he ended up buying some apartments, some condos, different types of properties, and then got his first short-term rental and Dan realized that these four or five long-term rental investment properties that he had could have their capital better deployed into a short-term rental.
So, if you're out there and you've got a couple, apartments, condos, single family homes and are looking at the opportunity of the better returns from a short-term rental property, you can redeploy that capital without the capital gains into an Airbnb property through a 1031 exchange.
Self-Directed IRA
Keeping on this topic of taxes and IRS. The TWELVETH way to fund an Airbnb purchase is through a self-directed IRA. So many of us have been working for years, contributing to a retirement plan, but you may not know that you can utilize the funds in your retirement accounts under certain circumstances. Not every company offers this, but you can always move funds around to self-direct the investments within your retirement account. So you can elect instead of buying a mutual fund or a gold bond to buy an investment property, a short-term rental property with the funds from your retirement account.
To me, the only drawback to this is you don't hear it mentioned until you really dig into it. And this can be a pro for some and a con for others, but the funds, the profits from that investment must stay within the retirement account until you are at the age to make withdrawals. So, if you're looking to build a nest egg, if you're looking to build long-term wealth and accelerate the returns within your retirement accounts, this is a great approach.
If you're looking to generate cashflow, to use on a day-to-day basis, a self-directed IRA is it necessarily your best choice. And for anyone out there who doesn't know what an IRA is, it's an individual retirement account.
So there you have it. You now know about 12 funding options to help you go from dream to reality of cash flowing as an Airbnb investor, whether you qualify for traditional types of loans or need something more out of the box to fit your current situation, you have learned more about short-term rental financing than 95% of people on the planet.
Knowledge is power. Go pursue that loan or loans that can make your Airbnb investing dreams come true. Get started right now. Even if you simply call a bank or fill out an online application. Each step takes you closer to your goal and makes the next step easier!
If you want to start Airbnb investing and simply need to know how to do it, that's what this podcast is for. Keep listening to the Host Coach Show. We're here every week to go over actionable steps to investing so you can get started and create your own financial freedom.