There’s been lots of talk about vacation properties and short-term rentals recently. Maybe you’ve even heard stats like short-term rentals on Airbnb rentals in Muskoka averaging almost 65% occupancy, daily rates of $460, and $5,600 a month in revenue. So, what do you need to know in order to finance this type of property?
A vacation or short-term rental property will be treated exactly like a cottage or second home. Most notably, no rental income can be used to qualify for the purchase. Vacation rentals are regarded as inconsistent from an income standpoint. Lenders have adjusted their view of vacation and short-term rentals in that they will consider rental income if you have a multi-year history of rental revenue, however. This revenue has to be shown on your tax return and it’s important to note that this is an exception, not the rule for lenders.
For properties with multiple units for larger families or bookings, these are treated as very unique properties. Typical residential financing bases value on one house with 5-10 acres of property. Any additional buildings, although they may have value, don’t necessarily add value from the lender’s perspective. An additional dwelling can actually hinder the value or a lender’s willingness towards a property. This isn’t to say these properties can’t be financed, it just means it’s more of an exception and the lender pool is significantly lower.
Myth: You can use projected Airbnb (short-term rental income) to qualify for the mortgage on the property.
Fact: You can’t necessarily. Without a history of this type of income being consistent, you’re asking the lender to project something that may not necessarily exist.
Imagine a scenario where you’ve found a place that you want to turn into an Airbnb. You know it’s going to be a hot spot for people looking to catch some sun by the lake and are hoping to get a mortgage for the place based on the fact that you’ll have piles of money coming in. Well, that sounds like a cool idea but I do have one concern. The banks don’t view short-term rental income like they do traditional long-term rental income when it comes to your mortgage qualification.
Think of it like a full-time salaried employee versus someone who’s self-employed. Although someone who’s self-employed might make more money, the banks need to see the consistency of that income over a multi-year period. Whereas, a salaried employee has guaranteed income essentially. It may not be fair but statistically, a salaried employee or someone who’s signed a long-term lease is less likely to get fired or leave. An inconsistent income, like an inconsistent rent, is considered riskier from a lender’s standpoint.
Myth: The more buildings on a property, the more overall value there will be from a lender’s perspective.
Fact: This is not always the case. Multiple outbuildings might be perceived as an added value to a seller, and potentially a buyer too, but not necessarily a lender. The majority of a lender’s appraised value is based on the main home and five acres of land (up to ten sometimes). There are definitely niche products and lenders who will entertain these properties and make exceptions for additional buildings, acreage, etc. but the overall rule of thumb is one house plus five acres.
So you’ve done a deal a couple of years back for your current home and are now looking for a new property for a different opportunity… one with two buildings on it! The idea is to live in one and potentially rent the other unit. With two buildings on the property, it has to be worth more right? Maybe that’s the case but the majority of lenders are only going to give you the value of the main home plus five acres of land and forget that the other building even exists.
You might think that this is kind of like a duplex situation in terms of two units but not in the lender’s eyes, unfortunately. There are sometimes even more things at play in these situations like whether the property is in a different province, has shared septic, or has other unique characteristics that aren’t necessarily favourable from a lender’s perspective. In these cases, you’ll sometimes get further ahead with a smaller bank branch that is actually local to the area. They understand the nuances of these types of deals, will likely have a solution for you, and we can put you in touch!
Contact the Kyle Miller Mortgage Agent team if you‘re looking to purchase a vacation or short-term rental property. We’ll provide you with different options so you get the best deal possible!
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