How Financing an Airbnb Investment Differs from Traditional Rentals

How Financing an Airbnb Investment Differs from Traditional Rentals
Airbnb Advice
February 2, 2019

Why Airbnb Investors are Ahead of the Game

In this series of weekly posts, we will explore some of the ways that Airbnb investors are getting ahead during this turbulent period for property investment.

These are the topics we will cover:

Part 1: How Financing an Airbnb Investment Differs from Traditional Rentals

Part 2: Tenancy Issues that are Avoided with Short-Term Guests

Part 3: Liquid Property Investment: Regain Control Over Your Investing

Part 4: Maintenance and Keeping your Airbnb Investment Pristine

Part 1: How Financing an Airbnb Investment Differs from Traditional Rentals

With opportunities for Airbnb investments growing in New Zealand, it’s only natural that curiosity on the process has increased in the past year. Exceptional results reported by the Airbnb host community has encouraged Kiwis to look into what’s available for them and the steps required to explore avenues like Airbnb. While property investment isn’t a new concept, Airbnb property investments are. As such, they do have a slightly different path than traditional approaches and will require unique steps during the set-up process.

What Constitutes as an Investment Property?

An investment property is defined as a property that has been purchased for the purpose of earning a rental income from the property. It is usually a property that the owner doesn’t intend to live in (though it can be) and can be either a long-term or short-term investment. Because these kinds of properties are bought for the sole reason of generating a profit, earning potential is always evaluated before it is purchased. In this respect, Airbnb investments are no different from traditional ones.

There is, however, a difference in how loans are secured for each type of investment properties. Deposit sizes and interest rates will generally vary, as well as the steps required to achieve approval from the lender. This can be a barrier for some potential Airbnb hosts, however, with the earning potential available in Airbnb investments, is a worthwhile process to take on.

Financing an Airbnb Property

Financing an Airbnb investment property is possible through a property loan from your bank. While it’s not the same as securing an owner-occupier home loan, there is still a set minimum deposit for prospective Airbnb property investors which will typically be a higher rate.

Investment properties require a deposit of 30% as specified by the Reserve Bank of New Zealand’s LVR rates. This rate was recently changed at the end of 2018 to reflect New Zealand’s stabilising property industry. The easing of lending for property investments is an encouraging sign for potential and current investors, particularly those utilising contemporary platforms like Airbnb to generate income.

Lending restrictions for Airbnb investments will differ from bank to bank, so it’s important to discuss conditions and requirements with your lender sooner rather than later. There are also a number of other factors that come into play, such as insurance on your property, insurance on your loan and your expenses as an Airbnb host.

How Traditional Investment Loans Differ to Airbnb Properties

Applying for further financing from the bank for investment properties does require its fair share of due diligence. While most people will generally use a long-term rental property when providing evidence for their investment earnings, Airbnb rentals provide a different route. Currently, banks don’t consider these properties in the same way. With an Airbnb property and all the required evidence, you are actually in a better lending position than you would be for a traditional application.

There are similarities between property investments, in terms of the property generating income, however, as mentioned Airbnb investments are perceived differently by banks. Evidence of your income from your hosting efforts will need to be proven in statements from the past two years. Lending for an Airbnb investment will depend on your positive income flows from the property as it is treated like a business and not a rental.

When an owner of a traditional rental property applies for further financing to purchase an additional home, the loan provider will perform a rental appraisal to assess the income from the property. Banks will then usually consider the earnings at 70% of the net income (to factor in maintenance and occupancy fluctuations). In contrast, Airbnb rentals are looked at as businesses by banks. This means that 100% of the income from the property will be considered in the appraisal, giving a higher likelihood of loan approval. Using an Airbnb property as evidence for income does require two years worth of earning history (in the form of tax returns), however, it is definitely worthwhile as a much stronger application strategy. Remember - you can still use your rental appraisal to support any further financing you may require during these two years.

With traditional property investments, you are usually able to gauge rental income based on your property’s location, size and amenities. Given the short-term rental nature of Airbnb, supporting evidence for your loan application will require the aforementioned past earning records and a future strategy for hosting efforts. These are issues that will need to be discussed with your loan provider at the time of application. Property loans are approved based on their ability to earn income and be paid back within the specified time period. The more you can do to prove this, the more straightforward the process will be.

Preparing to Apply for an Airbnb Investment Property Loan

Preparing to apply for an Airbnb investment loan will require the provision of supporting evidence and financial statements. It is best to have this information completed before you start your application. It’s also crucial to be aware of your obligations, New Zealand recently introduced ATPR tax rates for holiday rentals, so you should take note of these and understand how they affect you and your income.

Your application’s success will depend on your ability to provide documentation that meets their lending criteria. As Airbnb is a relatively new form of property investment, a history of a positive income flow from guests of the platform and a plan for your next steps will be beneficial. You’ll also need to specify the area you’d like to purchase in, identify the type of property you’d like to buy and perform a basic return-on-investment analysis.

For New Zealand Airbnb hosts, the most profitable are based in Auckland CBD. This is due to high demand for tourists and the best earning potential on nightly-rates. Those looking to invest in an Airbnb property should look for these kinds of opportunities, as they will have the most favourable outcomes. Hence, they will be the most successful applications for investment loans.

Airbnb has revolutionised the tourism and short-term accommodation industries. Providing new ways of seeking accommodation when travelling and allowing homeowners to profit from New Zealand’s growing sectors are just some of the ways it has made an impact nationwide. With these expanding possibilities, Kiwis are able to explore what’s available through them with investment properties - and banks are taking notice.

Purchasing a property for Airbnb can provide a return-on-investment greater than traditional routes if done right. With lower overheads, tenancy problems removed from the equation, and unparalleled flexibility, it’s truly the new way to invest. Not only this, but it’s also easier to grow your property portfolio with Airbnb investments. Further financing is made simpler through Airbnb hosting income and is looked upon more favourably by the banks if you have the right documentation. Exploring what’s available through your lending provider or with your current property can lead to a seriously profitable 2019 with your property investment.  

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