Vacation rentals have rapidly become a popular asset. Airbnb is a prime example of this, as more and more people find out about the ease of renting compared to booking hotels. The pandemic certainly accelerated the demand as well, with many people booking secluded getaways in an attempt to change up their scenery.
If you’re interested in getting into the rental market, but have some questions about how to finance a vacation rental property, here are some tips for getting started.
Lay Out Your Motives
It’s important both you and your lender understand how you plan to use the property. Most vacation home buyers rent it out for most of the season with little personal use in order to maximize rental revenue. If you plan to do this, it’s important to note that mortgage rate options for investment properties are different than what you will see for private second homes.
Borrow for the Right Usage
How you plan to use your vacation property will influence your financing options. As we mentioned above, if you plan to operate your property solely for renting, you’ll want to research investment property loans. If you’re planning to buy exclusively for family use, you may have better luck securing better terms through a conventional loan. In either case, every lender is different, so be sure to be transparent about your plan and let them help you decide which loan makes more sense for you.
Factor Your Debt-to-Income Ratio
Your debt-to-income ratio takes everything from your taxes to your mortgage into account, and is calculated by dividing total recurring monthly debt by gross monthly income. Debt-to-income ratio, as well as your credit score and cash reserves, can all be determining factors when it comes to actually qualifying for financing.
Save some Extra Funds
A good way to exhibit financial stability when financing your first vacation rental property is by having some cash on hand. Most investment property mortgages require a down payment of 20 percent or more as it helps lessen the risk on the lender’s side, but can also benefit the borrower. Since vacation rental financing can be a bit costlier than a primary home mortgage, the more money you put down, the better chance you have at a lower interest rate.
Research the Market
Even if you have an idea of where you want your vacation property to be, you should do thorough research of the market. Explore your options by calculating the income-generating potential of different locations and properties. From the average cost of homes and seasonality, to occupancy percentage and nightly rates, it’s important to know all the different factors that could affect your investment.
Be Prepared for Other Ownership Costs
Vacation rentals can be a very lucrative asset, especially when it comes to the location. And while rental income can help cover the usual taxes and insurance costs, there are other ownership costs that will come up along the way. Maintenance and repairs, for example, will need to be covered, and you may need to hire someone to maintain the property while you’re away. Be sure to account for all potential expenses of your rental property to make sure it’s still in the cards for you financially.
Buy with Confidence
Owning a vacation home is more within reach than most people think. By working with a reputable lender, you can find options that fit your current financial goals in order to maximize the ROIIO of your property.
Finance Your Vacation Rental with RCN Capital
Here at RCN Capital, we have short-term and long-term financing options for your next rental property. Whether you’re looking to purchase a family vacation property, or are interested in financing a property for generating rental revenue, RCN has you covered. Reach out today to learn more about our loan programs.