Can You Use Loans to Run Your Airbnb Operation

In this article we cover:

We are in the golden age of the gig economy. Almost every asset we own can be monetized. From cars to pools to large backyards with room for a tent to rooms in our house to our entire house to a beach house, as the saying goes, there’s an app for that. Airbnb provides a platform to those looking to monetize their entire home, or a portion of their home, to guests who want to use the space as a de facto hotel. However, operating an Airbnb rental is hard work and expenses come up. In this article, we will explore if you can use loans to run your Airbnb business.

The different types of expenses for an Airbnb investment property

Before we jump into what loans can and can’t be used to run your Airbnb operation, we need to first understand the costs that are involved and categorize those costs. There are three categories of costs associated with operating an Airbnb: capital expenditures, maintenance, and monthly operations. It’s important to understand these three categories because they will directly impact the types of loans you can and can’t use, and ultimately lead to you being a better Airbnb host and operator.

Capital expenditures

Capital expenditures are money spent on acquiring or maintaining fixed assets, such as land, real estate, and equipment. For our purpose, this is the land, house, furnishings, or value-adds for your Airbnb rental. For most Airbnb operators, capital expenditure represents the biggest barrier to entry to becoming an Airbnb host.

If you already own the property that you plan on using for your Airbnb operation, and it is fully furnished, in other words, the property is “turn-key”, it is fully functioning and ready for you to rent out immediately, then you most likely will not have any capital expenditures.

However, if you are an aspiring Airbnb operator and looking to purchase a new property, have a property but it’s not ready to host renters, or looking to add another property to your portfolio of rentals, then you will need to understand the loan options below for this category.

The above reference to value-adds means any non-critical home furnishing that can add additional value to your renter’s experience such as bicycles, children’s toys, kayaks, etc.

Maintenance

Maintenance expenses can vary depending on the type and location of your Airbnb property. Let’s review a general list of maintenance expenses now; but realize that if you have a unique property (say a cabin in Alaska back-country, or a remodeled shipping container in the Texas desert), it is up to you to do additional due diligence on the special types of maintenance work that might pop up and which we might not cover or be aware of in this article.

Generally speaking, you will have the following maintenance expenses for your Airbnb operation, including but not limited to:

Anticipated yard care: mowing the lawn, watering the plants, weeding the garden, spraying for insects, lawn irrigation, seeding, mulch, landscaping, etc
Unanticipated yard care: storm cleanup, damage from animals (i.e., a deer eats all your shrubs and now you need to replant and protect the garden), etc
Home maintenance: replace the water filters, pipes getting clogged, general wear and tear repair, HVAC units, refrigerators, washer/dryer, broken chairs, broken dishes, old stuff that needs to be updated, etc. Any homeowner will tell you that there is always something that needs to be repaired or replaced.
Cleaning costs: Your Airbnb will need to be cleaned after every renter
Supplies: Think toilet paper, paper towels, trash bags, soap, coffee pods, etc

There are a lot of maintenance expenses to consider when operating an Airbnb. But it is good to go into it with eyes wide open.

Operations

Operational costs are unavoidable expenses. Some of which will have slight increases in cost over time. Here’s a look at operational expenses that you can anticipate paying with your Airbnb operation:

Monthly mortgage payment: Typically the largest expense for Airbnb operators is the monthly mortgage payment
Property insurance: Property insurance for vacation rentals, and long-term rental properties for that matter, is more expensive than property insurance for your primary residence due to occupancy laws. Consider contacting a local independent insurance agent where your Airbnb property is located to talk through your options. More than likely that a local independent insurance agent already has customers who are operating an Airbnb in your market and they will have expert local knowledge that can be helpful.
Property taxes: Likely already built into your monthly mortgage payment (along with your property insurance), but keep in mind that property taxes go up. Also, make sure you do your due diligence on property taxes for the state that your Airbnb is in. For example, South Carolina taxes second homes at a higher rate than primary residence homes.
Taxes: Your rental income will be taxed
Utilities: Gas, electric, water, internet, trash, etc.
HOA fees: Your Airbnb property might be in an HOA, which might also have restrictions on short-term rentals. Proceed with caution when purchasing an Airbnb property within the jurisdiction of an HOA.
Airbnb fees: Airbnb takes a percentage of every booking
Local taxes and registration fees: Some jurisdictions require additional taxes, fees, and registrations. For example, Washington, D.C. requires all Airbnb operators to register and maintain a Short-Term Rental License.
Property management fees: If you don’t live close to your vacation rental, you will likely need the assistance of a property manager who can come to the property if needed to oversee maintenance, cleaning, check-in, check out, etc.

Which loans can be used for an Airbnb operation

Now that we have thought through and categorized typical expenses for an Airbnb operation, let’s look at Airbnb financing options to assist with running your operation.

Capital expenditures

For acquiring the actual property, the primary loan options are:

Conventional mortgages, FHA loans, VA loans. Down payments are typically 25% and interest rates can be higher than a primary residence because short-term rental properties carry more risk.
Home Equity Line of Credit is a home equity loan that allows you to pull equity out of your existing property. Usually, you can tap around 75% – 90% of your home’s equity and have a specific draw period and payback period. These Airbnb loan options typically have higher interest rates than a mortgage on your primary residence.

These four loan types listed above are not the only options (cash-out refinance is another option not explored in this article) but are the most straightforward when it comes to acquiring a rental property. As a borrower on each of the options above, be prepared to have your credit score pulled.

Without the equity in your home to tap into, or without enough cash on hand for the down payment, you can investigate Term loans via biz2credit and other online lends. When starting the application process via Biz2credit, make sure you select “real estate” when asked what you need the funds for.

Alternatively, you can seek a personal loan from traditional financial institutions like banks and credit unions. However, these typically carry very high-interest rates and are limited in what you can use the funds for.

Many might wonder if you can use proceeds from an SBA loan to help fund your Airbnb rental purchase or downpayment. The answer is no across the board: proceeds from an SBA microloan cannot be used to pay existing debts or to purchase real estate, and proceeds from an SBA 504 loan cannot be used for investment in rental real estate (SBA 504 loans are usually for commercial real estate purchases, not single-family homes converted to a vacation rental), proceeds from an SBA 7(a) loan can be used to purchase real estate but when the property will be held for investment purposes you become ineligible for the loan as it is intended for small business that plans on occupying the real estate being acquired.

For more information on SBA loans, review our quick checklist to understand SBA loans in 2022.

For home furnishing and value-adds, the loan options are:

Working capital loan via biz2credit or other online lenders
Term loans via biz2credit or other online lenders
SBA Microloans can be used for a variety of purposes when you need less than $50,000 to rebuild, re-open, repair, enhance, or improve your small business. Examples include: working capital, supplies, and furniture
SBA 7(a) loans have extensive eligibility requirements, but it is possible to use this type of loan for things like furniture

Maintenance

For maintenance expenses for your Airbnb operation:

Working capital loan via biz2credit or other online lenders
Term loans via biz2credit or other online lenders
SBA Microloans can be used for a variety of purposes when you need less than $50,000 to rebuild, re-open, repair, enhance, or improve your small business. Examples include: working capital, supplies, and furniture
SBA 7(a) loans have extensive eligibility requirements, but this type of loan can be used for working capital
A 504 loan cannot be used for working capital

Operations

For maintenance expenses for your Airbnb operation:

Working capital loan via biz2credit or other online lenders
Term loans via biz2credit or other online lenders
SBA Microloans cannot be used to pay existing debts such as mortgage payments but can be used for a variety of purposes when you need less than $50,000 to rebuild, re-open, repair, enhance, or improve your small business. Examples include: working capital, supplies, and furniture
SBA 7(a) loans have extensive eligibility requirements, but this type of loan can be used for working capital
A 504 loan cannot be used for working capital

Loan alternatives to help run an Airbnb operation

A business line of credit might meet your needs instead of – or in addition to – an investment property loan as an Airbnb operator if you only have maintenance and upkeep to worry about. One of the benefits is you can tap as much money as you need up to the limit, but only pay interest on the amount that is borrowed. A business line of credit can be revolving, similar to a credit card. This means the business line of credit is open-ended and can be used and paid down repeatedly as long as the account remains open.

For additional information, please read our blog post titled Why Should a Small Business Open a Business Line of Credit?

Finding a lender

Whether you are after a loan to start your Airbnb rental business, VRBO vacation rental property business or you have a rental property that needs funds for operating, Biz2Credit is a great place to start. Our helpful staff will provide you with exceptional customer service and will work hard to understand the needs of your business, the intended uses for your loan, and the best terms that can be offered. Get in touch today to find out how small business financing can help you.