Who wouldn’t want to make more money faster and achieve financial independence sooner rather than later? For many, investing in short-term rentals is the ideal pathway to financial freedom. Becoming a short-term rental owner can offer a lucrative source of almost passive income, helping you break free from the nine-to-five grind. With a history of steady year-on-year growth of around 10%, this is one of the most promising avenues in real estate today. In fact, a recent survey found that 81% of real estate investors are planning for growth in the coming year, highlighting the strong confidence in the short-term rental market's potential.
However, despite the enticing prospects, many potential investors hesitate to take the plunge due to concerns about financing. If you've been wondering how to fund your first short-term rental property, you’re not alone. The good news is that financing doesn't have to be daunting. In this guide, we will cover the best financing options available and help you choose the right path based on your unique circumstances.
The Benefits of Investing in Short-Term Rentals
There are many compelling reasons to invest in short-term rental properties, particularly if you're aiming for financial freedom. Short-term rentals provide numerous benefits, from stable income streams to the opportunity to be part of a booming market.
Financial Freedom
Short-term rentals allow you to generate consistent and substantial income with minimal hands-on involvement. Once your property is up and running, a significant portion of the work can be automated or outsourced, allowing you to earn while focusing on other pursuits.
High Demand and Market Growth Potential
The market for short-term rentals is thriving, with travelers increasingly preferring the personalized experience of a home rental over hotels. Platforms like Airbnb and VRBO have made it easier than ever to connect with potential guests, providing property owners with a golden opportunity to capitalize on this growth.
Flexibility in Ownership and Management
Unlike traditional long-term rentals, short-term rental properties offer flexibility in terms of when and how you lease your space. This flexibility is one of the significant advantages that attracts investors to this business model.
Financing Options for Short-Term Rental Properties
There are several ways to finance a short-term rental property, depending on your financial background, credit score, and investment goals. The key is to identify which financing route works best for your unique situation. Here are the main financing types to consider:
| Type | Description | Pros | Cons |
| Conventional Loans | Conventional loans are a common way to finance investment properties. | Lower interest rates, flexible loan terms, and predictable monthly payments. | Requires a higher down payment and strong credit history. |
| Vacation Home Loans | Vacation home loans are ideal if you plan to use the property personally and rent it out occasionally. | Lower down payment & dual-use as a vacation home and rental. | The property must be owner-occupied part of the year & has stricter qualification requirements. |
| FHA Loans | FHA loans, backed by the government, can help buy a multi-unit property (up to 4 units) | Low down payment & lenient credit requirements, plus multiple unit ownership. | Requires you to live in one unit and pay mortgage insurance premiums (MIP), increasing the overall cost. |
| Home Equity Loans & HELOCs | If you own a home, you can use its equity to finance your STR property through a home equity loan or a HELOC. | Access to cash at lower interest rates and flexibility to draw funds as needed. | The loan is secured by your home, risking it if you default. HELOCs have variable rates, so payments may vary. |
| DSCR Loans (Debt-Service Coverage Ratio Loans) | Tailored for investors buying rental properties. | Easier to qualify for with variable income, as the focus is on rental income. | Higher interest rates & rental income must cover mortgage payments. |
| Portfolio Loans | Loans kept in-house by lenders. | Ideal for investors buying multiple properties or those ineligible for conventional loans. Flexible terms tailored to your needs. | Higher interest rates & fees. |
| Private Loans & Hard Money Loans | Short-term solutions for purchasing & renovating properties, focusing on the property’s value over the borrower’s credit history. | Quick approval for time-sensitive deals. Accessible with a lower credit score. | High interest rates & short repayment periods make them expensive & risky. |
| Seller Financing | The seller finances the purchase & the buyer makes direct payments to the seller. | Customizable terms between buyer & seller, no bank approval needed. | Higher interest rates & possible large balloon payment. |
| Commercial Loans | Ideal for STR properties managed like a business. | Larger loans for bigger properties and real estate investments. | Requires stricter qualifications, higher down payments, & complex paperwork. |
| STR-Specific Financing | Some lenders offer STR loans, using projected income from platforms like Airbnb for approval. | Focused on rental income potential rather than traditional metrics. | Higher interest rates and limited lender options. |
Lenders to Consider for Your STR Investment
Finding the right lender is crucial for a successful short-term rental investment. Here are some options to consider:
Quicken Loans
Quicken Loans offers a straightforward, digital-first loan application process. Their online platform provides efficiency and fast approval times, making it an ideal choice if you're comfortable managing your loan application virtually. However, because Quicken Loans operates entirely online, it may not be ideal for those who prefer in-person guidance.
Nationwide Home Loans Group
Nationwide Home Loans Group is a good choice for those looking to finance the construction of a new short-term rental. Their flexible lending options and availability of staff seven days a week make it easy to access support. However, be mindful of their credit score requirements—they typically look for a minimum of 640.
LendingOne
LendingOne is a lender founded by real estate investors, making them a strong option for those looking to purchase or rehabilitate a rental property. Their nearly instant pre-approvals are advantageous when you need to act quickly on a purchase. They also offer loan programs tailored to renovation projects.
American Heritage Lending & Host Financial
These lenders specialize in short-term rental loans. They understand the market's unique demands and offer products that take into account the projected rental income of your property. This can be very beneficial if your goal is to operate a vacation rental property full-time.
Alternative Ways to Start an STR Without Owning Property
Not everyone is ready to purchase a property outright, and that’s completely fine. There are still alternative ways to get involved in the short-term rental industry without the need for a significant upfront investment.
Subletting a Property
Leasing a property and subletting it as a short-term rental can be an effective way to get started. You will need permission from the landlord, and it’s essential to check your lease agreement and local regulations regarding subletting. Be sure to assess all costs, like utilities, furnishings, and amenities, to determine profitability.
Managing Properties for Owners
Another approach is to manage properties for owners who may want to generate rental income but do not have the time to handle day-to-day operations. By managing short-term rentals for other owners, you can earn income and gain valuable experience without the need to make a major upfront investment.
Key Considerations for Financing an STR
When choosing the right financing, consider the following:
- Interest Rates: Investment properties typically have higher interest rates than primary residences.
- Down Payment: Expect to put down between 15-25%.
- Debt-to-Income Ratio: Lenders will assess your overall financial health.
- Rental Income: Projected rental income can help in qualifying for certain loans, especially DSCR or vacation home loans.
Given the number of financing options available, it’s always advisable to consult with a mortgage broker or financial advisor experienced in short-term rental investments. They can guide you in finding the best financing solution based on your unique financial situation and market conditions.
Conclusion
Investing in short-term rentals can be a rewarding path to financial freedom, but it requires careful consideration of the available financing options. Whether you opt for conventional loans, home equity lines, or niche products like DSCR loans, understanding the pros and cons of each will help you make an informed decision. With the right strategy, you can successfully enter the growing short-term rental market and start generating income from your investments.
