How to Finance a Vacation Rental Investment

Assuming you have picked a good investment and been guided by a knowledgeable Realtor this is what you need to know. Also we work with expert mortgage brokers in Florida, Georgia, North Carolina and Tennessee.

Different Types of Short-Term Rental Loans

There are a handful of options to consider when thinking about your second home mortgage. Let’s look at the best available financing options when buying a vacation home. 

Traditional Financing

Great for 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.

Asset-Based Loan

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.

Other Financing Options

Two other options investors can explore are 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 Short-term Rental property. 

Hard Money Loan

This is not a good option. 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.

Vacation Rental Investment Advisors

Segreto Group has guided new buyers and seasoned investors from all over the country to purchase a Florida vacation rental property. Our main focus area is the Florida Gulf Coast. Clearwater Beach down to Sanibel Island. Including but not limited to:

  • Siesta Key
  • Lido Key
  • Anna Maria Island (AMI, Holmes, Bradenton Beach)
  • Longboat Key
  • St Pete Beach
  • Treasure Island
  • Madeira Beach
  • Indian Rocks & Indian Shores
  • Manasota Key
  • Boca Grande
  • Sanibel Island & Captiva
  • Estero Island
  • Clearwater

Key Factors

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 (ABNB) OccupancyOccupancy 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%.

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 RatioThe Debt 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.

Segreto Group 941-444-2270

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