How to Finance a Vacation Rental Investment Property

There are a lot of different mortgages out there. Unfortunately, not many of them are geared towards vacation rental investing. In this article, let’s review possible ways to finance a vacation rental or Airbnb by getting a mortgage. Please note this is not legal advice and you should consult with a lawyer and/or tax professional. Mortgage fraud is serious business and you shouldn’t dabble in it!

For residential properties, there are 3 major types of “conforming” loans. Primary mortgages, for your primary residence where you live. Investment loans, when you plan to rent out the property (traditionally to a long term tenant), or a second home loan for your vacation property.

These loans are “conforming” in the sense that it’s easy for the mortgage company to sell the loan afterwards to Fannie Mae or Freddie Mac as long as the loan confirms to a strict set of guidelines. Then the mortgage company gets their money back (plus some profit) and they can re-lend it again without bearing the risk of the default on your loan.

So how can you finance a vacation rental investment? First off, you can’t get a primary mortgage if you intend to use it as an investment property. You have to intend to live in it  for at least a year, otherwise you’re committing mortgage fraud potentially.

You could get an investment loan. The interest rate will be a bit higher, but the bigger issue is that the bank might not count the expected income from a short term rental against your “debt to income ratio” (DTI).  Most lenders live in a world where rental income means a 12-month lease from a tenant.

What most people do is get a second home loan. While in the past some lenders would not allow you to rent out your second home, Fannie and Freddie have made it clear that getting short term rental income from vacation properties is fine, with some qualifications.

However, many lenders won’t count that expected short term rental income to help you quality for the loan. That’s the key thing to understand because it has implications.

So based on your income, you have to be able to afford the property as if the income from the property was zero. As you can imagine, you can typically only qualify for a mortgage on one or two properties (if any) before your debt to income ratio looks really high. I’ve heard that some lenders will count short-term rental income towards your DTI, but the one we’ve used in the past doesn’t. Additionally you are limited on the number of second home loans you’re able to take. For example you can’t have two in the same area.

So a good way to start vacation rental investing  is to qualify for a mortgage as a second home. To do that, you need a relatively high income. If you want to continue to purchase properties, you’d need to find a lender that will “count” short-term rental income. We haven’t really looked into finding that kind of lender, but that would be our next step if we further expanded our portfolio.

That’s a rough overview of the “conforming” loans category. But you can also get a non-conforming “portfolio” loan where the lender doesn’t intend to resell it to Fannie or Freddie and instead hold on to it (or maybe sell it to another lender). In this case the lender can make whatever rules and guidelines they want.

In this world, there are some lenders that will give mortgages for vacation rentals. They may even underwrite it based on the expected income from the property, not your income. That how commercial lenders for large projects and apartment buildings look at the world  One of those lenders that I have heard of is Host Financial, but there seem to be others out there. However, note that their interest rate will likely be 2-3% higher than for a conventional loan and you may have to put down 25%. Another one I’ve heard of is RNC Capital.

So in short, to get a mortgage for a vacation rental or an Airbnb the most likely option is qualifying as a second home. If you can find a lender that will count the vacation rental income towards your DTI even better. If you’re willing and able to pay “commercial” terms on your mortgage, there are probably lenders out there that can be of service, for a price.