Financing Options and Strategies for Short Term Rentals

Daniel Patton

Daniel St Jean: You’ve been around for a long time. I'm always in the top 5 or 10% of all the mortgage people in the country. You guys are extremely successful and you also have a division called BM Select which is a division specifically focused on real estate investors. Daniel Patton, I only have one question for you. 

How does a bank view an application for an Airbnb? And what are the main differences between Airbnb and a regular rental when it comes to mortgage application?

Daniel Patton: Excellent, Daniel, thank you very much. It's like we plan this because that was going to be my question posed to the audience because you're absolutely correct.

There's a distinct difference in the bank size between a rental, a long-term rental and a short-term rental. And this is very important because why do banks like long-term rentals? They like to lend you money on long-term rentals. They don't love lending money on Airbnb. And this is a problem that hopefully will fix itself down the road.

Banks are typically a bit behind when it comes to regulations and financing, but where the issue falls nowadays on Airbnb specifically is that banks will see them more as commercial type lending. They look at them more as hotel slash motel because of the high turnover rates. So, the financing from a traditional residential mortgage can be limiting.

In some cases you can find, more down payment is often required. 35% down, 25% down, alternate lenders, B-lenders, private lenders. Now, sometimes when we hear in a regular residential type investing world, we hear private lenders and we get scared at the rates and we get scared at sometimes the cost of that.

But the cash flow can be very beneficial on these properties. So, sometimes these extra expenses still do make sense. So, taking on different types of financing, not your traditional bank financing can absolutely be an option for people looking to qualify for these types of properties.

Now, the question then becomes how does the bank know if it's an Airbnb or a long-term rental? In the mortgage world, what we often find is that if it walks like a duck and talks like a duck, it's a duck. And what I mean by that is you have to remember; banks are looking at things like the MLS.

What does the MLS listing say about this property? Is it saying things like currently rented out for summer months, many leases in place, great Airbnb? If it says these sorts of things on a listing, the bank is more likely to treat it as such, right? If it walks like a duck talk, like now this same listing could be presented a completely different way.

One listing says great property by the lake. Great cottage could be great for investors, set up a showing at your leisure. But it's all in how this listing can be presented to the bank. That's very important. Things like a schedule anybody that's put an offer together and knows what a schedule is.

This is where you have your conditions pertinent to the offer. Things like assuming contracts, assuming Airbnbs, these are things again that the bank can pick out of a typical contract and see what's going on with this property? How is this property actually being held? What are the occupants doing with it?

So, banks are looking, banks aren't opposed to Googling properties. We see that all the time. Now, you Google an address and banks will see this is listed on Airbnb. These are, again, these are things that the bank can find. They don't love the idea of Airbnbs. So, working with a strong financing team that can help sometimes shape the deal presented the right way certainly can help. There's also a whole other aspect of this, for example in Buckhorn and they mentioned they had an Airbnb. Buckhorn is a great area, but again, their financing can be a little tricky.

Depending on the location, depending on the plot of land, how many cottages on it? You may have to look at some sort of alternate type financing, but work with a strong team, make sure that they have options when it comes to these types of properties. Secondary home is another way that people can buy properties.

Now, this is a difference from investors. Some people come to us and say look, I don't necessarily want a full-time rental. I want to buy a cottage and maybe I want to rent it out on the odd weekend and offset some of the costs. When you're acquiring this property, you have to pick one or the other, you have to pick, am I buying this as a secondary home?

And am I buying this as a rental and things like this can influence the amount of down payment you potentially qualify for. Talking with a strong financing team. Just make sure you're in contact with people who are familiar with this type of structuring, because there can be certain pitfalls on the contract, on the Googling and on the advertising that can sometimes push an easy approval into the realm of the decline for no good reason other than how it is.

Daniel St Jean: Thank you very much. And you know what, that's interesting. You mentioned the word pitfall because how many times has this come up from the lawyer, from the mortgage broker, from the people who are doing it from the accountant. So, it seems like short-term rental and Airbnb is a great strategy.

But probably way more pitfalls and things to be careful about then say regular buy and hold. So, as long as you're working with the right lawyer, accountant and property manager, then Hey you'll probably be okay.

Daniel Patton: I would agree. That's the thing you definitely want to surround yourself.

Most investors that I work with have full-time jobs. They have families they're busy, managing other parts of their lives often you know, much more important than rental properties. So, absolutely you have to have a great team, property management, realtor, coach, finance, lawyer, insurance, cleaning companies, as with stressed earlier.

These are things that we maybe don't think about when it's your regular long-term rental. So, those are great tips for sure.

Daniel St Jean: Alright, thank you, Daniel.