Investing in a vacation rental is an excellent way to accumulate generational wealth from passive income alone. Making this decision is a crucial first step, but many investors have the same basic question: How do I finance a short-term rental? This basic question can be complicated to answer because it depends on your circumstances.
With the help of cutting-edge short-term rental intelligence powered by STR Verifi, a short-term rental calculator that enables you to access data about any property in any market in granular detail to forecast ROI with unprecedented accuracy, and financing through a interest-only DSCR loan, you will be the master of your market, wherever it may be.
At mbanc, we have been helping self-made people like you finance their real estate investing journey and achieve true financial freedom for years. Here’s how to finance your short-term rental.
How Do I Finance a Short-Term Rental?
Investing in real estate is one of the best investments you can make. Rain or shine, few investments offer the security that real estate does. From considering economic conditions to picking the right loan, read on to learn how to finance your short-term rental.
How Do I Know it’s the Right Time to Finance a Short-Term Rental?
Do your due diligence and assess the current economic climate. During the COVID-19 pandemic, the housing market was volatile, to say the least. The 30-year fixed rate mortgage average dropped to 2.6% in December 2020 and jumped to historic highs in 2022 and 2023.
Mortgage rates have begun to rise, which is an advantage when determining how to finance a vacation rental. As rates rise, property prices typically drop. Such is the ebb and flow of United States real estate.
“Assuming rates near their current 6.5% and the economy skirts recession, then national house prices will fall almost 10% peak-to-trough. Most of those declines will happen sooner rather than later. And house prices will fall 20% if there is a typical recession.” – Moody’s Analytics’ Chief Economist Mark Zandi.
Are you more comfortable with a higher mortgage rate or a lower sticker price? The answer, in the end, depends on your situation.
“We know it can feel intimidating, and we see people all the time wait for mortgage rates to drop to capitalize on opportunities. But sometimes rates don’t drop. Time and time again, we’ve seen people regret not locking in at 6.5% after the rates reached 9% or even 12%.” – Desh Weragoda, mbanc CTO.
What’s the First Step in Financing My Vacation Rental?
Planning is the next step for those wondering, How do I finance a short-term rental? Start by defining your investment goals.
Why do you want to invest? What kind of property do you want to invest in? Where do you want to invest? What are you trying to achieve with this investment?
Then determine your risk tolerance, create a business plan, assemble a team, and decide what markets you want to invest in. This requires understanding key metrics and trends to evaluate when choosing a location.
What’s the Best Loan for a Short-Term Rental?
Now is the fun part of getting to the bottom of the question, How do I finance a short-term rental? There are generally two routes for financing: conventional and asset-based loans, like interest-only DSCR loans.
Traditional loans are fairly straightforward. But their lending requirements can be prohibitive. These mortgages typically require considerable paperwork, like pay stubs and W-2s, which can be difficult or a hassle for self-employed entrepreneurs to obtain.
Interest-only DSCR loans require minimal paperwork and are a faster, easier process. With these loans, you qualify through the projected rental income from an investment property, which STR Verifi’s report provides.
“Interest-only DSCR loans are great to combat high rates while capitalizing on low property prices. With these loans, you only pay the interest, not the mortgage, for the first few years while you get your rental property set up, so your property will pay for itself.” – Desh.
What Metrics Matter When Financing Your Vacation Rental?
Metrics are crucial when answering the question, How do I finance a short-term rental? Evaluate metrics like:
- Rental income
- Average daily rate
- Occupancy rate
- Capitalization rate
- Seasonality
- Operating costs
But that is just the beginning. You also have to evaluate the market itself, including what other properties in the area are earning. In the past, understanding what metrics to look at and how to calculate and interpret them required extensive knowledge and experience.
Self-Employed Mortgage Solutions for Real Estate Investing
Investing in a short-term rental can provide the kind of financial freedom the American Dream is built on. At mbanc, our passion is making that dream a reality. Leveraging interest-only DSCR loans with a short-term rental estimator like STR Verifi will make you the master of your market, and as a result, your destiny.