Short-Term Rental Financing: Why You Need A Different Approach

STR financing

By The Hospitable Team

“A lot of short-term rental investors try to get financing by going through the more traditional route first, spin their wheels for two to three months, and say: ‘You know what, we can’t do this anymore.’ Then they come to us.”

That’s how Daniel Christopher and Adam Windham put it when we asked them how hosts and property managers should approach financing their short-term rentals. 

As co-founders of Host Financial, a leading lender and capital advisory service specifically for the short-term rentals space, they started their business to offer sector-specific funding after finding the space was sorely lacking in options.

With more than three and a half years of experience with Host Financial (and decades of short-term rental and real estate development experience between them), they know that investing in a short-term rental business is a big move, and it can feel overwhelming to know where to start.

Even the most confident entrepreneur, host, or property manager can feel doubt begin to creep in when faced with financing options, limitations, deals, and loans.

That’s why, with expert insight from Daniel and Adam, we explain:

  • Why now is a great time to invest in short-term rentals
  • The financing options available to short-term rental hosts
  • The limitations of traditional financing options
  • Why loans for short-term rentals are different and how they work

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Why now is a great time to invest in short-term rentals

01_Man looking at vacation map

It’s clear: Now is a great time to be investing in short-term rentals. 

  • 86% of travelers worldwide were planning to book a short-term rental in 2022, according to the 2022 Travel Trends Forecast from property management firm Evolve (which analyzed responses from 5,000 travelers worldwide). 
  • The industry is expected to grow 10% per year by 2025, reaching a value of $20 billion. 
  • User penetration is 17.2% in 2022 and is expected to hit 18.2% by 2026, according to Statista, meaning almost 20% of travelers worldwide will have used a short-term rental by next year.

Not only that, but income is growing, with estimates suggesting that short-term rental income makes up about 24% of the average owner’s income.

Daniel and Adam have also observed some key trends in the industry.

Increased demand

It’s music to hosts’ ears: demand is continuing to grow, and is expected to soar over summer 2022 and beyond—especially in the US where guests can drive to rural and relaxing destinations easily, in contrast to the rising international cost of fuel and flights.

“Summer bookings on Airbnb have just gone through the roof, and they say they need over a  million more hosts to meet demand,” says Adam. “That pent-up demand after the Covid lockdowns is pretty strong and sustained. So demand will remain very high..”

Even hotels are moving into the sector, with Marriott International’s version of short-term rentals, Homes & Villas by Marriott, now including 25,000 homes globally.

Remote working and longer stays

02_Remote worker woman working from bed

Another major trend is for people working remotely looking for longer stays. 

Research by AirDNA shows that before the pandemic, 80% of short-term rentals were for one week or less. After it, only 30% of reservations were less than seven days, with 33% of guests able to book short-term rentals and work due to more remote working policies.

“The work-from-anywhere crowd is adding extra demand for these types of short-term rentals,” says Daniel. “Someone who wants to take two months away and work will prefer to have a house rather than a hotel room. Demand for that is very strong and increasing.”

Financing rentals: Find a good investment deal

03_AirDNA calculator screenshot

Financing your short-term rental venture starts with finding a good deal and being sure you’re raising capital for a profitable property. 

Don’t miss this checklist of investment success factors before moving on to finding funding: 

✔ Ensuring you’ve found a great location

✔ Familiarizing yourself with the existing market and demand in the area

✔ Defining your ideal guests

✔ Discovering the true revenue potential of the property.

The short-term rental market analysis tool from AirDNA can help you do this, alongside your other market research. It uses data to estimate where investing will get the best ROI. It analyzes insight across revenue potential, supply, seasonality, RevPAR, and gives you an AirDNA score to predict future demand.

What financing options are available to short-term rental hosts?

Once you’ve found a great investment deal, you’re now ready to investigate financing solutions. 

  • Private loan: A loan from any private source, such as a private investor, family, or friends. 
  • Pension loan: A way to borrow money from your personal retirement fund (if you have one), depending on its terms. In the US, 401(K)s allow you to take out up to 50%, and any interest repaid goes back into your account.
  • Conventional bank loan: The same as a mortgage for your primary home, but for a second or third property. These are typically underwritten based on your personal debt to income ratio. 
  • Commercial rental-specific loan: Similar to a regular mortgage loan, but it is underwritten based on the actual or projected income of the property. Also commonly referred to as a Debt Service Coverage Ratio, or DSCR loan.

However, despite the range of options, traditional financing for short-term rentals—beyond perhaps the very first property investment—has serious limitations. 

Companies such as Host Financial understand this. They offer financing options that are specifically designed for short-term rentals, plus industry-specific advice, too. 

“We deal with the full range of clients from people looking to buy their first investment property right up to experienced investors who might have raised millions of dollars as well as venture capital-backed firms,” Daniel explains. 

“With beginners, we help them to navigate the financing process, and provide them with resources to set them up for success.”

What are the limitations of traditional financing options?

Host Financial was created precisely because the founders discovered there was barely any help available for short-term rental investors to find asset-based financing tailored to their needs.

Firstly, it’s difficult to qualify for traditional financing.

Anyone who has been through a mortgage process, even for their main home, will know it’s no walk in the garden, with traditional banks requiring a huge amount of detailed information about you and your finances, with no guarantee of approval.

“Entrepreneurs and self-employed people notoriously have a problem qualifying for conventional financing for their primary home, let alone trying to acquire an investment property,” says Adam. “It’s an incredibly arduous process to go through. They pick apart every charge, every bank statement.”

Add that to the issue of mortgage rates for second homes and investment properties being much higher than primary home mortgages, and it’s easy to see why traditional loans might not be your best option.

Secondly, it’s tough to scale with traditional financing.

04_Sold sign being put up

Even if you’re successful with a mortgage or loan for your first few short-term rentals, the same route may not work if you’re looking to master growth strategies and scale.

“If you have a really high income, maybe you’re a doctor or lawyer with two incomes, you might be able to acquire your first, second, or even your third investment home via that conventional route,” says Daniel. 

“But eventually you’re going to hit a borrowing maximum, and you’re definitely not going to be able to scale to a very large portfolio with that type of financing method.”

Ultimately, that’s because conventional mortgages are qualified based on the income of the individual borrower, rather than looking at the income of the specific property. .

Loans designed specifically for short-term rental properties

That’s why Host Financial exists. It’s specifically designed to make financing as easy as possible for short-term rental investors, and sidesteps the limitations of traditional bank options and conventional financing routes.

05_Host Financial website screenshot

Here’s how.

A different approach to lending

Rather than going through the conventional financing route, where your personal finances are scrutinized, Host Financial goes down the asset-based lending approach. 

This approach uses the actual or projected future income of the property, rather than the individual borrower’s income, to decide if the property qualifies.

“Basically, it means that the loan is being underwritten and qualified with the income of the property itself,” explains Adam. “So how much cash flow the property generates, is what we use to underwrite and qualify the loan.”

The company looks at the property’s fixed expenses such as the property, taxes, insurance premiums, and HOA fees (if applicable). It also looks at the strength of the short-term rental market where the property is located, and compares it against your property’s actual or projected annual short-term rental income. 

That’s why finding a great investment opportunity, and investigating its score via platforms such as AirDNA, is so crucial because the AirDNA score is a major metric that Host Financial uses to analyze your income potential, especially in areas that might have less history to go on.

“The level of documentation that [traditional] underwriters require when you’re trying to qualify based on your personal income, is far greater than with an asset-based loan. There is also a larger degree of subjectivity on whether or not the underwriter will approve the loan, even with the greater documentation. It leaves borrowers in a place that they never really know if they are going to get approved because the underwriter may decide at the last minute that they are not comfortable approving the loan …” says Adam, tailing off exasperatedly to show the sheer extent of the issue. 

“Whereas, for asset-based loans, we are only focused on whether the income of the property is sufficiently high enough to cover the cost of the financing and the fixed expenses of the property,” he says. 

“It’s all about the income of the property, and with tools such as AirDNA, we know what the expected income of the property will be at the beginning of the process, and since so many of the underwriting factors are known in the beginning, there is far less uncertainty around whether the loan will be approved or not.”

Advice for hosts and property managers, as well as finance

Host Financial also uses its decades-worth of investment and financial experience to offer advice to people entering the sector. 

This can be invaluable for inexperienced investors who wouldn’t get such specific tips from a regular bank.

Adam explains: “Having been one of the first and only companies to specifically focus on short-term rental financing, we’ve seen it all and done it all, and seen how the industry and capital markets have evolved over time with how they treat short-term rentals. And we leverage that experience to help our client structure their deals for the highest possible degree of success.  

“Another major question we get all the time is ‘You see a lot of deals, what’s a good market right now?’ So we’ll offer that type of advice as well.”

A quick approval process with a high success rate 

The fact that Host Financial’s process is based on the actual or projected income of the property, along with a wide variety of other detailed metrics that are known in advance, means it has a high success rate, and moves from initial inquiry to preliminary approval in hours, rather than weeks. Final closing is also much faster than more conventional financing options. 

Financing a short-term rental-specific loan starts with an introductory call, explains Daniel, where the team will offer any useful advice or direction. After that, approval can be super-fast. 

“Assuming someone has a property that they’re interested in actually obtaining terms for, we have a submission portal, and it’s very quick,” says Dan.

The applicant enters all the specifics of the property, including address, estimated income and taxes, and the form even has a link to AirDNA to help would-be investors to calculate with more accuracy.

“The submission form gathers all the property-specific information that we need, in order to quote terms,” says Daniel, “And we’ve built software that allows us to turn around a pre-approval letter, usually within about an hour or less.”

Applicants then receive a call to address any questions, and if investors wish to proceed, they sign everything needed for the underwriting process, and this can take a matter of days. The entire process can be done in 30-45 days, Dan says.

He estimates that 95% of deals that go into the underwriting process close successfully. 

It’s an expert in its niche 

Host Financial is so efficient partly because they truly specialize in their field, and work only with investors looking for short-term rental-specific loans. That’s it.  

“If someone wanted to buy their primary home, they couldn’t work through us,” says Daniel. “We don’t deal with any of that consumer lending. We’re solely focused on investors, and even more so, on the short-term rental market niche.”

This expertise offers short-term rental investors peace of mind that they’re getting the best advice and a deal that’s carefully tailored to their financial needs.

06_Host Financial process

Financing short-term rentals: Where niche is next-level

Ultimately, in today’s growing market, now is a fantastic time to invest in short-term rentals, and finding a good investment deal is the first step to sourcing financing that will work for you.

But rather than going down the traditional route, choosing a company such as Host Financial is a quick and reliable way to sidestep traditional banks for expert advice and approval in days.

And once you’ve got a great financial loan for your short-term rental, you can remember why you wanted to start hosting in the first place: To give guests great stays that maximize both profit and enjoyment.

Of course, Hospitable.com can help with this, as its tools span excellent guest communication, task management, staff coordination, automated messaging, and direct booking capabilities, for building solid brand loyalty. 

A great investment opportunity + specifically-designed finance + an excellent management tool = successful short-term rentals! Now that’s some finance that really adds up.

Your whole STR business in one convenient window.

Automate communication, manage channels, sync calendars, push pricing updates, notify your team, and much more!
Start now with a 14-day free trial.
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