This step-by-step guide demystifies the process for financing your Airbnb and arms you with the tips and tricks you need to confidently invest in a new vacation rental property anytime, anywhere.

How to Finance Your Vacation Rental: A Step-by-Step Guide

Let’s cut to the chase: There’s no one correct way to finance your vacation rental. The truth is there are a handful of options, and your success as a rentalpreneur is dependent on understanding which option makes the most sense for your goals, finances, and the current economic climate.

This step-by-step guide is meant to demystify the whole financing process and arm you with the tips and tricks you need to confidently finance a new rental property anytime, anywhere.

How to use data to protect your investment

1. How to assess the economic climate: Is now the right time to finance?


The rollercoaster ride that is the American housing market has taken some particularly dramatic turns during the COVID-19 era. The 30-year fixed rate mortgage average dropped to a historic low in December 2020 (2.6%), only to begin climbing throughout 2022 (6.6% as of October) without a clear end in sight.

Many homebuyers—including rental hosts and property managers—went from feeling bullish to bearish, assuming mortgage rates are a clear indicator of the risk associated with new investment. However, history tells us it’s not quite that simple.

As mortgage rates rise, home prices typically decline. This is the yin and yang of American real estate.

House prices may fall nearly 10% if mortgage rates remain near 6.5%, and they may fall 20% in the event of a full-blown recession, according to Moody’s Analytics’ Chief Economist Mark Zandi.

Whether you’re an aspiring host looking to acquire a second home or a seasoned property manager wanting to expand your portfolio, you must ask yourself: What am I more comfortable with? A higher mortgage rate or a lower sticker price?

And remember that no two markets are the same, and trends will also differ across location types. (Think coastal towns versus mountain towns.)

Specific financing options (which we’ll cover in a moment) may seem more or less attractive during times of economic uncertainty. Again, there’s no right or wrong answer here; all rentalpreneurs will have a unique take. Where one person sees risk, another person will see opportunity.

“If you’re expecting overall appreciation of your investment, if you’ve invested over the past couple of years, that’s probably not a good assumption,” AirDNA Vice President of Research Jamie Lane said in our September 2022 Monthly Market Review. “And there is going to be some weakness if you’re looking to buy now. That may provide some opportunities in markets where home values are declining.”

There’s no such thing as a risk-proof business, and that includes short-term rentals (STRs). But data tools can go a long way toward mitigating potential risk.

If a given property isn’t expected to appreciate in value like it has in years past, it’s more important than ever that you closely monitor your cash flow. What are current trends around occupancy and average daily rates (ADRs)? What are your local competitors charging? What should you be charging? What’s your overall earnings potential? Data holds the answers to these questions and more, so be sure to do your homework before financing any new properties.

You can, of course, always wait for mortgage rates to drop again before financing your next rental. But what if rates hold steady or even continue climbing for years to come? Will you regret not locking in at 7% if they eventually reach 10%?

And what about inflation? If the Federal Reserve continues accelerating interest rates in the months or years ahead, will that play a role in your decision to finance a new rental? These are the practical, albeit slightly uncomfortable, questions you must consider.

Real estate, in times good and bad, remains one of the smartest investments on planet earth. But the differences between owning a second home and operating a financially successful vacation rental cannot be understated.

2. How to get started: What’s the first step in financing my vacation rental?


If you’re ready to get started, your first step toward financing is to clearly define your investment thesis.

“Why do I want to invest? What do I want to invest in? And where do I want to invest?” 

This is another case of no right or wrong answer; it all depends on what you are trying to achieve by investing in STRs. For example, some investors are primarily looking to purchase rentals for personal use in areas they enjoy visiting. They're less concerned about turning a significant profit. For them, the goals are proximity, flexibility, and the prospect of leveraging rental income to offset a mortgage.

On the flip side, other investors' main objective is maximizing their annual cash flow and cash-on-cash returns. For them, the location of the property is less important so long as the revenue potential is high.

Understanding these factors is a vital first step to figuring out where to start looking for investment opportunities. If you need help getting started, or if you already have opportunities in mind but still have questions on how best to proceed with mortgages and loans for STRs, Host Financial is a great resource that specializes in financing and capital advisory services for the rental industry.

3. How to create a financing roadmap: What’s my long-term game plan?


Once you’re satisfied with your investment thesis, this next step is all about due diligence. Investing in real estate is likely one of the most significant financial commitments you’ll make in your lifetime, with potentially hundreds of thousands or millions of dollars at risk. Making sure you fully understand what you’re signing up for is critical, to say the very least.

First, it’s necessary to understand your risk tolerance. Some investors are perfectly fine making large investments with high risk and high reward potential, while others are not. Per usual, this all goes back to your attitude and preferences as an investor.

Second, you need to understand the markets you are investing in, which you’ve previously determined based on your investment thesis. More specifically, you need to self-educate on the key metrics for your target markets. What are the ADRs? What are the occupancy percentages—which can be calculated by dividing a property’s total number of booked nights by the total number of available nights? What about the general cost of homes in the area? Or the influence of seasonality on your monthly and annual revenue?

This is the time to evaluate micro and macro trends that could impact your investment. 

Lastly, once you’ve made the decision to invest, start using a data tool (if you aren’t already) to stay on top of those key metrics and see how trends change over time. Not only is real estate a serious commitment, but it’s also long-term, and the metrics that make the initial investment attractive could improve or worsen over time. This is precisely why a data tool is one of your best insurance policies. When it comes to vacation rentals, data isn’t a nice-to-have; it’s essential.

4. How to choose a loan: What’s the best loan option for my vacation rental?


There’s a variety of options when it comes to financing your second home mortgage. Below, we highlight your best bets.

Particularly if you’re buying your first vacation rental property, the most familiar option is the traditional or conventional loan. A traditional loan is pretty straightforward and offers some of the most competitive interest rates on the market but also has some of the most restrictive lending requirements and is the least scalable option for STR investors looking to grow a property portfolio. 

Traditional lenders will generally look at two factors to qualify the loan: the creditworthiness of the borrower and the individual’s income. Most banks only allow a maximum Debt-to-Income (DTI) ratio of around 43%, meaning an individual’s borrowing power is limited by the amount of money they personally make.

Unlike a traditional loan, asset-based loans for investment properties are evaluated by looking at the actual or potential income of a given property (e.g., rental income) rather than an individual borrower’s W2 income and debt-to-income ratio.

Lenders will look at the income of the property and calculate the Debt Service Coverage Ratio (DSCR)—the property income divided by the principal, interest, taxes, insurance, and HOA fees (if applicable)—to qualify the loan.

This type of loan is a significant advantage to an STR investor because borrowing power is not constrained by individual income. The investor is able to scale a property portfolio and add new properties by simply providing sufficient evidence that the properties are cash-flowing and that there is sufficient equity for the down payments and associated fees.

A hard money loan is a type of loan that is secured by real property. Hard money loans are considered loans of last resort or short-term bridge loans. These loans are primarily used in real estate transactions, with the lender generally being individuals or companies and not banks. 

The financing options listed above are some of the more common approaches, but there are multiple ways to creatively finance STRs.

Investors with existing home equity may want to explore using a Home Equity Line of Credit (HELOC) or Cash-Out Refinance on their existing primary home or other investment properties. These options allow the investor to tap into the equity they have accumulated in a given property and use that equity toward the acquisition of a new rental property. 

Other STR investors find success with private financing. This often takes the shape of an individual or individuals funding part or all of the purchase. The beauty of private financing is that you can work out your own terms between parties for loan payback or equity in the purchase.

Many others are turning to house hacking. This is the practice of getting a loan for a primary residence (which often has more favorable terms than an investment loan) and living there while you rent out part of the home as a vacation rental. This can be a room in your main home or a private space, like a basement unit.

Finally, it never hurts to talk to your bank. During the meeting, don’t talk about the loan terms you’re looking for. Instead, tell them about the investment you’re looking to make and what you intend to do with the property. For instance, are you buying a rundown property in a popular neighborhood with the intention of rehabbing it (and thus raising its value)? The bank may have a specific loan product that fits your needs that you never knew existed.

5. How to use data to protect your investment: Which STR metrics matter?


Below are some of the key metrics that any investor should be looking at when considering a potential STR investment:

Airbnb Rental Income: One of the most important factors in securing an STR mortgage for rental property lenders is short-term rental revenue. How much will your rental property earn per month and per year? This is the most basic metric to calculate the future ROI of a property. Use Rentalizer to see what any house in the world could earn as a short-term rental. 


Airbnb Occupancy: Occupancy Rate = Total Booked Days / (Total Booked Days + Total Available Days). Occupancy is the percentage of available nights an STR is booked in a given month, and thus, the higher the occupancy, the more revenue the property will generate.


Capitalization Rate: The ratio of Net Operating Income (NOI) to property asset value. For example, if a property recently sold for $1,000,000 and had an NOI of $100,000, then the cap rate would be $100,000/$1,000,000, or 10%.


FICO Score: By far one of the most important factors impacting your ability to obtain affordable short-term rental financing. A FICO credit score tells lenders about your creditworthiness (how likely you are to pay back a loan based on your credit history). It is calculated using the information in your credit reports. FICO scores are the standard for credit scores—used by 90% of top lenders.


Debt-to-Income (DTI): DTI is calculated by dividing your monthly debt payments by your monthly gross income. Lenders use it to determine the riskiness of you as a borrower. It helps determine how well you manage monthly debt obligations and if you can afford to repay the loan.  


Debt Service Coverage Ratio: The Debt Service Coverage Ratio (DSCR) measures the viability of a real estate deal by measuring the ability to use cash flow to pay current debt obligations. It is calculated by dividing income by PITIA (Principal, Interest, Taxes, Insurance, and HOA Fees) to get a ratio of income to cost.


Investing in STRs may seem complex, but it doesn’t have to be. As long as you identify your investment goals, understand your market, and carefully measure the key metrics of success, you can invest with confidence and achieve financial freedom.


For more tips on where to make your next investment, check out our latest Best Places to Invest Report.

And for insight on which trends are shaping the STR industry right now, review our newest U.S. Market Review.

This blog was written with assistance from Host Financial’s Adam Windham and AirDNA’s Kellen Kruse.

Adam Windham is the co-founder and CEO of Host Financial, an industry leader in lending and capital advisory services for the STR space. Adam has over 15 years of experience in the real estate industry, both as a developer and investor, and he leverages that experience to help clients structure and finance their investments for the highest possible degree of success. Adam holds an MBA in Real Estate Finance and a Bachelor’s degree in Construction Management from California Polytechnic State University in San Luis Obispo, California.

Kellen Kruse is Head of Real Estate at AirDNA. He uses 15 years of experience in finance, data analytics, and business development to help enterprise clients in the Real Estate and Tourism sectors scale data operations and achieve results. Kellen is an Airbnb Superhost and holds an MBA from UCLA Anderson School of Management and a degree in Finance and Accounting from the University of Kansas.

AirDNA's data tools help you understand where to invest, when to adjust your pricing, what your competitors are doing, and much, much more. Find out what's really happening in your target vacation rental market today.

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5. How to use data to protect your investment

How to Finance Your Vacation Rental: A Step-by-Step Guide

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