Quick Answer
For those who own a house with a mortgage and would like to transition into a short term investment property, you may be asking yourself “Can I Airbnb my house if I have a mortgage?”. If so, you’ll be happy to know that the answer is generally yes!
Although, there are a few things to consider. The first is whether your mortgage allows for this, so make sure to inform your lender and check your agreement. You should also make sure that the property is going to generate enough rental income to be successful as an Airbnb property.
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Can You Airbnb Your House If You Have A Mortgage?
Many landlords who are considering turning their properties into short term rentals on the Airbnb platform will have a mortgage in place and will be wondering if they can Airbnb their house with a mortgage. The short answer is, yes you can Airbnb a house with a mortgage!
However, many mortgage lenders have clauses that restrict or prohibit short term rentals, so it’s important to review your mortgage agreement and local regulations. It’s wise to communicate with mortgage lenders and local authorities to ensure compliance.
For example, some mortgage lenders may prohibit landlords from using a property for commercial purposes, which can include generating an income from Airbnb rental properties. Violating the terms of a residential mortgage can have legal and financial penalties which can lead to a foreclosure on the property by mortgage lenders.
Some mortgages are geared towards an investment property, and some are aimed at funding a primary residence, and this distinction can be the difference when it comes to how they can be used. A residential mortgage for a primary residence is likely to have clauses that prevent it from being used to generate an income, for example rental properties.
Do You Have To Inform Your Mortgage Company?
Keeping your mortgage company informed is a vital part of the process, because transparency is the key to maintaining a good relationship with any mortgage company. If you don’t let them know what you’re going to be doing with the property, this could cause problems down the road, especially if there’s a compliance violation.
By contacting your mortgage company and letting them know about your plans to rent the property out on a vacation rental site like Airbnb, you can make sure to get clarity on any policies and restrictions that the lender may have around this, and address these at the outset. For those who have a mortgage for a primary residence, this is a crucial step, because not all lenders will be open to changing from a primary residence to an Airbnb rental property.
Fostering a relationship with your lender that is based on trust, and responsible business conduct that abides by the agreement, is a good way to create a long-lasting relationship with them, whereby you can use them for more real estate purchases down the road.
Situations Which Could Cause Issues With Your Mortgage Lender
There are a few scenarios that can cause problems with your mortgage lender, so it’s a good idea to take the right steps in the beginning, to try and avoid these.
- Renting without informing the lender: As we mentioned above, it’s important to let your mortgage lender know about your plans to rent a property out using Airbnb. If there is a violation of your mortgage agreement, you should know about it upfront, and this is a good way to find out and keep open lines of communication.
- Defaulting or late mortgage payments: If you decide to put your property on Airbnb, and you intend on using the rental income to cover your monthly mortgage payments, make sure that you have a contingency plan for the months where you may not get any or enough income. Defaulting on your mortgage payments, or paying late, will result in financial penalties and has a negative impact on your credit score. Along with this, defaulting or late mortgage payments will harm your relationship with the lender and can cause irreparable damage.
- Property use changes: Changes in the use of your property without informing your lender can cause problems if your mortgage is geared towards a different usage. For example, if you have a mortgage for a primary residence, you may be in breach of your contract if you change the use of your property to an investment property instead of a primary residence.
Tips For Using Airbnb Rentals To Pay Off Your Mortgage Early
Airbnb rentals can be a successful way to generate rental income and use this to pay off your mortgage, which is a good financial move. Here are a few tips to help you maximize the income you receive from your Airbnb property.
- Price competitively: Make sure that your Airbnb property aligns with similar listings in the area and is comparable with these in terms of price. Pricing your Airbnb as competitively as possible is the key to standing out from the crowd and getting it occupied more often than not. You can also arrange your pricing according to the local demand, seasonality and special events.
- Effective marketing: To get your Airbnb occupied as much as possible, you’ll need to make sure it’s marketed correctly. This means, using the right channels, potentially putting budget towards marketing the property, and offering promotions or discounts for repeat guests, extended stays and so on. Part of marketing the property effectively is using great photographs and an accurate property description on the listing.
- Property upgrades: Sometimes spending a little bit to make improvements on the property can go a long way towards making it more desirable and therefore generating more rental income from the rental property. If there are a few easy repairs or renovations that can be done, do whatever is required to get the property in the best condition for renting, within your budget of course.
- Financial buffer: Maintain a financial buffer for unexpected expenses or periods of low occupancy. This ensures that you can cover your monthly mortgage payments even during challenging times.
- Allocate a portion of income: Set aside a portion of your Airbnb rental income, to use towards your mortgage each month. That way, you can guarantee that you’re using it for the intended purpose, and it doesn’t get used for other purposes. For example, set aside 50% of your rental income for your mortgage each month and stick to this.
Alternate Ways To Fund Airbnb Properties
Funding Airbnb properties can be done using various loan options, and for those who aren’t interested in using a traditional loan, there are a variety of alternative funding options. Choosing the best funding option for you will depend on your individual financial situation, so consider each carefully and then make an informed decision.
DSCR Loans
Debt Service Coverage Ratio loans are based on the property’s ability to service the debt it has incurred, through the income it is receiving. DSCR loans are often provided by private lenders or hard money lenders, who do not need to abide by the same rules and regulations that traditional lenders do, which means they can offer more flexible loan terms and rates.
Airbnb properties with consistent rental income, that can demonstrate a stable cash flow, are good candidates for DSCR loans. DSCR loans can provide a good buffer against financial risks because these loans are based on the property’s ability to generate income, instead of focusing on the borrower’s financial situation.
DSCR (Debt Service Coverage Ratio) is calculated by dividing the property’s net operating income (NOI) by its total debt service (loan payments). A DSCR above 1 indicates positive cash flow.
Home Equity Loans
Using the equity that has been amassed in your current mortgage is another way to fund Airbnb properties. Using a home equity loan, you can tap into this equity and typically get a lower interest rate on the loan that replaces your existing loan.
Home equity is the difference between the current market value of your home and the outstanding mortgage balance. So, to work out the amount of equity you have in your home, you can subtract your existing mortgage balance from the current value of your home. Lenders will usually allow you to borrow a percentage of this.
There are different loan structures available for home equity loans and these vary according to each lender, so you can compare different lenders to find a structure that suits your needs. Make sure to consider seasonal variations, local regulations, and maintenance costs on the property.
Private and hard money lenders
Private lenders or hard money loans often offer faster approval processes and more flexibility than traditional banks. However, they may come with higher interest rates. Neither of these lenders are bound by the regulations of traditional financial institutions, which means that these loans are more flexible.
Private lenders can be anyone, a friend or family member, and are therefore even more flexible on terms and rates. Hard money lenders will have more rules around lending however this also offers a little more structure and can be more beneficial to borrowers.
Either way, private lenders and hard money lenders can provide loans for Airbnb property purchases that are fast and suited to your specific needs. They are also easier to qualify for than traditional loans, and they aren’t based on the borrower’s personal financial situation.
Real Estate Crowdfunding
Using multiple investors to fund your Airbnb property purchase is a worthwhile endeavor. Real estate crowdfunding platforms allow investors to pool their funds and provide the financing you require for your Airbnb property purchase. This means that you can pitch your real estate deal on a real estate crowdfunding website, such as Fundrise, and attract investors.
In your pitch, include a breakdown of the expected rental income and how you plan on mitigating the months where there is no rental income. Each investor will typically own a share of the property proportionate to their investment. Make sure that you understand the terms, projected returns and any other legal aspect of the crowdfunding platform, before you go ahead with this method of funding.
Peer to Peer Lending
Another alternative source of funding for an Airbnb property is peer to peer lending, which involves individuals lending money directly to others. This may offer you more competitive rates than other lending options.
When you are creating a listing on a peer to peer lending platform, it’s important to clearly articulate the purpose of the loan. In other words, you should specify that the funds will be used for the purchase or renovation of an Airbnb property. Then you will need to ensure that the loan terms align with your investment strategy.