In the land of real estate investment, financial storms make for rough waters. They beg for the life-preserver of strong financing solutions . All owners feel this rising pressure, but one sector loves sun above all: AirBnb and other short-term rental (STR) investors. If that’s you, how can you weather this storm? As we all leave summer 2023 behind….as interest rates swell high and economic squalls threaten to make landfall,,,,.how to stay afloat, ideally thanks to a capital source that just “gets it”?
Amid economic downturns, such as the 2008 financial crisis and the upheavals brought by the COVID-19 pandemic, the process of securing financing for any property becomes a formidable voyage. Traditional lending institutions tighten their purse strings, leaving investors grappling with an array of obstacles.
The turbulent waters of Airbnb/STR loans, in tougher economic times, present a range of challenges, including the following:
- Underwriting to short-term rental income – Investors and lenders see the value of the property differently. Owners, especially those with proven revenue-data want their loan underwritten (like a commercial property) based on rents, while lenders often look at the “housing asset” like all others and will base value on comparable nearby homes. This can be a large gap, affecting loan values.
- Regulatory change – While STR’s feel like a permanent fixture to many of us, it’s easy to forget that they are a recent creation. As such, regulators (and neighbors) are still getting used to them and there is a regular struggle in some cities over whether and/or how to allow them to function, to license them, etc. This obviously can affect their lendability.
- Less-experienced borrowers – One last challenge to mention in the STR space is the relative inexperience of these borrowers. Many are not traditional real estate investors. For some lenders, this means that they are more difficult to bank.
So, how do STR investors navigate these treacherous waters? They should set a course towards customized financing options, ideally ones that really “get it”. Options may include:
“Short Term Rental” Cruising:
There is a small number of lenders in this market that, quite simply, just “get it’. They are outfitted with the right mental gear to make STR loans works, even amidst the squalls.
Hard Money Haven:
Hard money loans, often sourced from private investors or firms, offer a lifeline by providing quicker liquidity, although at the cost of higher interest rates.
Private Lending Shores:
Seeking refuge in the realm of private lenders—whether friends, family, or individual investors—can provide flexible loan terms and interest rates, creating a more sheltered borrowing experience.
Crowdfunding Fleet:
Some feel that why brave the tides alone when you can join forces? Crowdfunding allows multiple investors to pool resources, forming a robust financial fleet capable of navigating uncertain waters.
Seller Financing Breezes:
Some sellers extend a direct lifeline by offering financing themselves, circumventing many traditional lending obstacles and reinvigorating investment pursuits.
No matter what your choice, keep in mind that the challenges above come on top of the “regular” difficulties that threaten to wash out your financing:
- Credit Score Swells: Lenders often raise the bar for credit scores during economic turbulence, causing many prospective borrowers to be left stranded on the financial shores.
- Appraisal Anchors: Economic uncertainty often leads to cautious property appraisals, potentially sinking financing deals by affecting loan-to-value ratios.
- Debt-to-Income Conundrum: Traditional lenders prefer a certain debt-to-income ratio in the best of times, but the unpredictable income fluctuations during a recession can push borrowers beyond these bounds.
- Deepening Down Payments: As financial seas grow choppy, lenders may demand larger down payments to mitigate their own risks, capsizing investment or refi plans for many. What might have floated at 20% downpayment may no longer work if the lender asks for more.
One other stabilizing factor worth mentioning as help with these challenges is the STR investor’s choice of investment structure. There are two primary lanes used to sail into STR-land, and they both look the same once they’re on AirBnB or other booking platforms. The first lane involves purchasing properties, while the second relies on arbitrage – ie, leasing properties and then subletting them on the platform. The latter approach requires less initial capital. Either way, one can rent them out as traditional Airbnb listings, capitalizing on the platform’s global reach and demand for unique accommodations.
During economic recessions, when upfront investment capital might be limited, the arbitrage model emerges as a strategic alternative. Airbnb arbitrage involves leasing properties and then subletting them on the platform, requiring less initial capital and offering potential returns in a challenging economic landscape.
In the tumultuous sea of Airbnb financing during economic recessions, a calculated navigation strategy is key. Exploring these alternative financing and investment approaches, and seeking expert guidance can empower investors to conquer challenges. From there, you’ll be able to set sail towards the sunny horizon of your investment aspirations.