Azibo and Turno Partnership

Nuances That Impact Airbnb Cash Flow and Buying Power

Azibo — Fri, 05 Aug 2022 21:52:12 +0000

Short-Term Rental Insurance Is a Must

For short-term rental owners, in particular, landlord insurance is not a fringe benefit — it’s a necessity. The possibility of property damage and injury only increases when multiple people are coming and going from your property. You want to protect your assets and reduce your liability risk.

While securing traditional property insurance may be easy, getting short-term rental insurance is often more challenging — and costly — for a few reasons. Some of these include:

Heightened risk for submitted claims
Higher risk of prolonged vacancy based on seasonality
Increased personal property coverage requirements (considering short-term rentals are typically furnished)

With these added risks, it’s unsurprising that the cost of short-term rental insurance tends to be 20% to 30% higher than other property insurance. That said, it’s a crucial investing strategy to secure short-term rental property insurance to protect your asset and have proof of insurance at closing.

The key to securing cost-effective, short-term rental insurance? Partner with a reliable broker or carrier to find the right coverage at the right price.

A trustworthy partner like Azibo can help you weigh different coverage options, gain insight into state-specific requirements, and make decisions that align with your budget and financial goals. Among the most well-known and reputable short-term rental carriers are CBIZ and Proper Insurance — and an effective partner can help you determine your best fit.

Hosts should also consider creating renter guidelines and house rules to set expectations early on with tenants. This may help mitigate risk, prevent damage, and minimize complaints from neighbors.

Financing a Short-Term Rental May Come With Prepayment Penalties

Maybe you’ve evaluated your budget, calculated anticipated rental income, and set aside more than enough money for a down payment. Everything seems ready to go — until you find out that financing your short-term rental comes with prepayment penalties.

For these properties, in particular, lenders may charge a fee for paying off loans within several years of taking out a loan. Lenders often do this to dissuade borrowers from paying off their mortgage right away or refinancing, since it means less interest income on their end.

It’s important that investors do their research and account for prepayment penalties in advance. For example, if your lender has steeper penalties for prepayments in the first five years, you should know that up front.

You May Be Subject to Licensing Fees or Annual Fee Requirements

Depending on your state and municipality, your short-term rental property may be subject to licensing fees or annual fee requirements. Many hosts don’t factor this into their budget at first.

Be sure to check with the local municipality and state to account for additional fees specific to your short-term rental property. If you have multiple short-term rental properties across different states, consider how licensing fees or annual fee requirements may vary.

Short-Term Rentals Have Their Own Set of Property Ownership Costs

The cost of ownership for a short-term rental property is very different than the cost of ownership for a primary residence. Between property management, vacation platform fees, maintenance, and cleaning costs, short-term rental hosts have many additional expenses — and responsibilities — on their plate. These include:

Property Management and Vacation Platform Fees

Many short-term rental property owners use property managers to handle the day-to-day responsibilities of property ownership, like creating online listings, booking guests, coordinating check-ins, collecting rent, and managing maintenance.

If you’re using a vacation rental management platform like Vacasa or Turnkey, you probably already have property management support. But if you’re using a bookings site like Airbnb or Vrbo, you may want to hire a reputable property manager.

That said, property management fees are much higher for short-term rentals because of the added risk. Keep in mind that platforms like Airbnb, Vacasa, and Vrbo have hosting fees that range from 3-5% of your gross revenue.

Repairs and Maintenance Costs

Similarly, the cost of repairs and maintenance rises significantly for short-term rental properties. As a host, be sure to budget at least twice as much money as you would for long-term rentals. It’s better to be financially prepared in the event of a broken washing machine or window because scenarios like this will happen more often than you expect.

In the same vein, many real estate investors underestimate the cost of utilities. While internet, electricity, gas, and water typically aren’t covered by long-term rental property owners, short-term rental property owners often pay for these expenses — and that means they must budget accordingly.

Cleaning Fees

Finally, a large part of short-term rental maintenance is making sure your property is clean and cared for when tenants arrive. For this reason, it’s important to budget the time and money it’s going to cost you to clean your property before the next tenant arrives.

You might consider a reliable, affordable cleaning service or opt to clean the property yourself. Either way, consider what your time is worth and what you can reasonably charge guests if you include a cleaning fee on top of your nightly rate.

Make the Most Out of Your Short-Term Rental Investment

Futurestay recommends that “in the same way that you wouldn’t want to finance a new car while a home loan is going through, beware of the temptation to use credit to outfit your new property with upgraded furniture and amenities.

Sure, you’ll want to do this before you list, but you’ll really want to take care of this with cash to ensure there are no inconsistencies for your lending officer to find as they work to process your loan.”

The post Nuances That Impact Airbnb Cash Flow and Buying Power appeared first on Turno.

How to Finance a Rental Property: 5 Considerations for Airbnb Hosts

Azibo — Fri, 15 Jul 2022 20:38:16 +0000

What to Know Before Financing a Vacation Rental

Last year was a lucrative year for short-term rental property owners, particularly for those using online marketplaces like Airbnb and Vrbo. According to a recent report from AirDNA, 62% of short-term rental properties were occupied at any given time in 2021, up by 5% from 2020 and 10% from 2019.

This rise in demand meant landlords could charge higher rates for their vacation rental properties — earning an average of 39% more annually compared to pre-pandemic numbers.

There’s never been a better time to invest in a short-term rental property. But first, here are five key factors to consider when preparing to finance a vacation rental property.

1. Review Your Personal Finances With a Professional

Successfully managing a short-term rental property is no small feat — it requires financial literacy and preparation. Whether you’re new to real estate or not, it’s crucial that you seek guidance from a trusted mortgage advisor, financial planner, or CPA before making any decisions.

A financial professional can help you map out an accurate analysis of your finances and, most importantly, provide sound advice about what makes the most sense in the context of your unique financial situation. They might ask: What are your financial goals? Do you currently have any debt? Are you generating a budget surplus or deficit?

This conversation can give you more clarity about your current and future financial situation so you can perform an informed cost-benefit analysis of investing in a vacation rental property.

2. Explore Lenders and Loan Products That Align With Your Financial Needs

Once you have a clear understanding of your finances, you’re better positioned to shop around for loan products that address those unique needs. As Torri Shack, Head of Mortgage Solutions at Azibo, puts it, “The best thing you can do as an investor is to educate yourself on the different types of financing.” Why? “That way, when you get to the table, you will know what you’re talking about and what your options are.”

A good place to start is by considering a conventional lender, like traditional banks or credit unions. Your options will likely be consistent across these financial institutions, so this path offers a good baseline for seeing what’s out there.

Many hosts also choose this route because securing a mortgage loan from a traditional lending institution typically means lower interest rates and fees. That said, hosts should keep in mind that interest rates for investment properties are anywhere from .50% to .75% higher than the rate on their primary residence mortgage because real estate loans are considered “riskier.”

For the same reason, many rental property loans get rejected by banks. As a result, investors turn to alternative lending options, also known as “hard money lenders.” This typically refers to private, online lending companies.

Many of these loans have a different underwriting process, meaning they tend to provide funds at a faster rate but have vastly different requirements depending on the firm. For this reason, hosts need to be extremely cautious about who they trust with their finances.

Do your due diligence and be wary of predatory lenders — some alternative lenders are exploitative and overcharge on interest rates.

3. Identify Your Property Classification: Second Home vs Investment Property

It matters how you classify your short-term rental property. In fact, whether it’s a second home or an investment property largely affects financing options and loan qualification requirements.

Buyers with high credit scores and the ability to pay in cash may qualify to finance their vacation home as a second home. According to the National Association of Realtors, about one-third of investors and buyers pay in cash for their vacation home properties.

When a vacation rental property is classified as your second home, this indicates that you intend to live there for part of the year. The IRS offers a more detailed definition, describing a vacation rental property as a property you live in more than 14 days per year or 10% of the days you rent it out to others. In some cases, lenders may require you to live within a certain proximity of your rental property.

On the flip side, an investment property describes a property that has been purchased with the intent to earn rental income or sell for a profit in the future. Hosts typically go this route when they need rental income to afford the mortgage payment, or to qualify for a loan.

This usually comes with a larger down payment — around 20% — and higher interest rates because lenders see rental income as the main source of loan repayment. This is risky from their perspective, since providing projections about rental income can be difficult and inaccurate.

Nonetheless, lenders do require buyers to provide a lot of supplemental information when applying for a loan, including rental income projections and well-researched estimated vacancy and occupancy rates. This helps instill trust that the property will have a good return on investment.

4. Review Insurance Options and Costs

It doesn’t matter if you’re a seasoned rental property owner or a first-time investor — landlord insurance is absolutely essential.

The possibilities for property damage and injury only increase when multiple people are coming and going from your property during the year. In fact, insurance is generally 20% to 30% higher for short-term rentals than it is for long-term ones because the risks associated with damage are higher.

Beyond that, most mortgage providers require insurance in order for landlords to secure a loan. Even if you own your house outright (for example, if you purchased it in cash without a loan), it’s still a good idea to get landlord insurance and protect yourself against financial loss.

As you prepare to secure financing on a vacation rental property, be sure to shop around for insurance and understand how these costs factor into your budget and overall finances.

If you feel lost, dedicated agents from companies like Azibo can help you get quotes from the market’s most reputable carriers, analyze terms and pricing, and determine the option that works best for you — then work closely with you to adjust coverage and guide you through the purchasing process.

5. Keep Taxes and Maintenance Costs in Mind

Last but certainly not least, there are many other costs to keep in mind when financing a short-term property rental.

From taxes and utilities to repairs and maintenance, things add up quickly. It’s important to be aware of how curveballs like an unexpected leak or weather damage to your roof can set you back hundreds or even thousands of dollars.

In other words? Be prepared for the unexpected.

The post How to Finance a Rental Property: 5 Considerations for Airbnb Hosts appeared first on Turno.

Short-Term Rental Loans: Learn How to Qualify

Azibo — Fri, 15 Jul 2022 19:39:59 +0000

How Easy Is It to Get a Short-Term Rental Loan?

Getting approval for short-term vacation rental loans isn’t always easy. In the eyes of lenders, these properties are risky for multiple reasons.

For one, many hosts depend on a steady stream of income from tenants to pay back their loans. If you can’t find tenants to fill your property on a consistent basis, this could affect your ability to make loan payments in a timely manner.

A short-term rental property is often not your primary residence either. From a lender’s perspective, this is a risk because you have other payments to worry about. In the event of financial hardship, your first priority will likely be payments on your primary residence, rather than your new short-term rental or second home.

Finally, there is the added risk of strangers coming and going from your short-term rental property. The potential for property damage and routine maintenance is higher, which may lead to postponed bookings and less income to pay back your loan. Despite these risks, the tips below can help improve your chances of securing a vacation rental loan.

How to Improve Your Chances of Getting a Short-Term Rental Loan

Getting approval for short-term rental loans is no small feat. Hosts need to be creative — and strategic — to prove their credibility to lenders. Here are a few key considerations for prospective hosts looking to get approval on a short-term rental loan and close faster.

Classify Your Property

First things first, it matters how you classify your vacation rental property. Whether you’re investing in a new short-term rental or a property that counts as a second home has huge implications on loan qualification requirements and financing costs.

New Short-Term Rental Property

Let’s start with a property that hasn’t been used as a short-term rental before.

If the property doesn’t have a history of short- or long-term rental income, you may need to finance it based on your personal purchasing power since lenders won’t know what to expect in terms of future cash flows — and your personal finances will provide the only proof of credibility. Third-party vendors like AirDNA can help provide estimates of future cash flows for rentals.

On the other hand, purchasing a property that’s already a short-term rental with at least one year of income history is one of the best ways to secure a short-term rental property loan. From a lender’s perspective, your borrowing risk is lower because rental income and net operating income history are already established. As a result, it can be used to underwrite a new loan.

What’s more, your interest rates will be lower. Interest on properties without short-term rental history is typically at least one point higher than your average commercial property loan.

If you plan to convert a property into a short-term Airbnb rental, you should also consider the incremental investments you’ll need to make before going to the market. This means accounting for repairs, furnishing, and maintenance — both their costs and their quality.

While there aren’t any specific limitations on transitioning from a second home to an investment property, it’s critical that you notify your current lender and get it approved. For example, some lenders require that the second home be used as a vacation home for a defined period of time, or that the owner’s primary residence is within the vicinity.

One-Unit Property Classified as a Second Home

The other option is buying a one-unit property that you intend to live in for part of the year, or a second home. Many hosts apply to finance their property as a second home because they wanted to enjoy the perks of having a vacation home throughout the year.

And these perks exist in the financing process, too. Usually, financing a second home is slightly more flexible — and cheaper.

Most second home mortgages have more favorable terms than short-term rental loans. You may be eligible for tax deductions on mortgage interest. Additionally, the down payment on a second home may be as low as 10% versus 15% to 20% for an investment property, or even 25% for a multi-unit property.

That said, there’s a much higher bar for both personal credit score and proof that the purchaser can afford their mortgage lending payments.

For this reason, it’s important that hosts have a financial plan to cover costs. If you’re considering applying future rental income to mortgage payments when applying for a loan, you’re generally able to add 75% of the expected rental income.

But there is a caveat: lenders may require borrowers to secure a specialized appraisal company to estimate future rental income. Some lenders may also require proof that the location of the second home is within a certain proximity of your primary residence.

Secure Short-Term Financing via an LLC

Maybe you’re looking to grow your portfolio of short-term rental properties but don’t currently have enough income or personal credit to support a conventional loan. In the eyes of lenders, this means your borrowing risk is high.

In this case, one way to secure financing is to partner with a lender that will underwrite the new loan based on existing assets and cash flow tied to an LLC. Short-term rental loans financed via an LLC structure are typically 1% higher than other loans — but that cost comes with its own set of advantages, including:

The loan is not reported to your personal credit score report
Projected income is tied to the rental portfolio in the LLC rather than your personal income or cash flow
From an underwriter’s perspective, the proof of assets helps de-risk underwriting the loan, which may lead to more favorable terms

Be Realistic About Your Budget

Even with your projected rental income, it’s important to be realistic about how much you can afford upfront before the property is ready for tenants.

For example, real estate investment properties often require larger down payments, and interest rates tend to be higher. Interest rates range from half a point higher to a full point above standard rates. Keep in mind that if you can afford to put down a larger down payment, you may qualify for a better interest rate.

Similarly, it’s important to consider your debt-to-income (DTI) ratio, or how much of your monthly income is paid back to your monthly debt. To calculate this ratio, divide your total monthly debt payments by your gross monthly income.

Many lenders look closely at this measure when you invest in a new short-term property or property that classifies as a second home. Some prefer a maximum DTI of 35%, while others are willing to go as high as 43%. These requirements can vary depending on your personal credit score or the size of your down payment.

Another key budget consideration is whether or not your lender requires cash reserves. In many cases, lenders require 6 months’ worth of cash to go into escrow. If you’re looking to expand your portfolio across multiple rental properties, you need to make sure you have enough reserves for each property.

You don’t want to get into a situation where you haven’t budgeted correctly and can’t afford one of your properties. This won’t help secure approval of short-term rental loans either.

Improve Your Debt-to-Income Ratio

As mentioned above, your DTI ratio is an important part of getting approval for a short-term rental property. A high DTI ratio signals to lenders that you may not be able to take on another money loan, while a low DTI ratio suggests you may be able to take on more debt and make payments on time.

Prospective investors can take steps to improve their DTI ratio and become more favorable to lenders in the following ways:

Minimize revolving debt (across credit card balances and personal loans)
Reduce any unnecessary recurring expenses that are reported to credit bureaus
Avoid opening any new credit accounts (this impacts your credit score and inquiries, and having multiple inquiries does not look favorable to lenders)
Look for opportunities to refinance your existing loans at lower rates
Consolidate your existing loans

Consider Partnering With a Community Bank or Trusted Advisor

Whether you’re a first-time real estate investor or have a growing portfolio of properties, a little help goes a long way.

Community banks and trustworthy advisors like Azibo offer flexibility, support, and a world of possibilities when it comes to financing a short-term rental property and getting approved for a loan. Community banks and local brokers can be especially helpful for hosts who put down a lower down payment, too.

While large banks can be helpful in navigating the financing process, they may not have the same insights into the market or the same interest in making local investments that a community bank or local broker might.

Typically, brokers have access to a more comprehensive suite of short-term rental loans to meet diverse financial needs. Offering end-to-end support in financing, insurance, and more, they can provide a personalized and creative approach to financing, tailored to your unique budget, debt-to-income ratio, credit score, and more.

Be sure to shop around with both traditional banks and local lenders to learn more about the options available.

Don’t Wait Too Long to Get Pre-Approved

Once you’ve evaluated your budget, shopped around for loan products, and partnered with a trustworthy bank or broker, it’s time to get pre-approved.

While it’s important to have everything you need to begin the financing process, don’t wait too long to get pre-approved. Acting quickly will help you stay ahead of any obstacles that may arise prior to closing.

Once you’re pre-approved, you’ll also have a better understanding of how much you can finance as you start looking for your short-term rental property.

Prepare for the Closing Process

This is the exciting part — when your thoughtful financing plan comes to fruition in the closing process. At this point, you’ll need to choose a real estate attorney or closing agent to navigate the final stages.

You’ll also need to invest in short-term rental property insurance to show proof at closing. A reliable partner like Azibo can help you weigh different coverage options and make a decision that aligns with your unique financial situation.

For example, some hosts may opt for a high-deductible plan to save money on the premium upfront. As a result, they’ll have to pay more out of pocket in the event of property damage down the line. Meanwhile, other hosts might consider a low-deductible plan to improve their coverage — in turn paying a steeper cost for premiums.

In the same vein, you want to make sure your property is “free and clear” of anyone else’s debts or encumbrances. This means double-checking that there are no liens on the property and you are able to purchase it. Once you do so, the title insurance company will provide you with title insurance to protect your investment.

From there, you’re ready for the property appraisal phase. In collaboration with your agent, you will do a thorough examination of the property to determine its value, condition, features, and more. This may also include negotiation with the seller if the appraisal comes in low, for example.

After a final walkthrough of the property and completion of the necessary paperwork, you have secured approval for your short-term rental and closed on the property. Now it’s time to begin preparing for tenants.

Preparation Is Your Partner

While securing a short-term rental property differs on a case-by-case basis, it’s easy to underestimate the financial and time investment needed to prepare your property. The bottom line is that it’s always better to be over-prepared than under-prepared — especially when it comes to financing a short-term rental property or buying a second home.

The post Short-Term Rental Loans: Learn How to Qualify appeared first on Turno.