Refinancing a short-term rental to access the rental home’s equity was once an ordeal. Because you didn’t have a standard lease with a renter, lenders felt uncomfortable about your money-making potential.
You were considered too high risk.
But that changed with the explosion of the short-term rental industry. Lenders have now seen a track record for short-term rentals. They can generate 30% more profit on average than those standard yearly leases when managed effectively.
But just because you can do something doesn’t always make it a smart financial move for your short-term rental business. So we’ve got 7 reasons to consider pulling the equity out of a short-term rental. Does it make good sense for you?
1. Renovations Could Increase Bookings
To increase your profits on short-term rentals, you need consistent booking. You must have the ability to earn a premium for the property. Is the home outdated or run-of-the-mill? You may struggle here.
You could use the home’s equity better align the property with guest expectations. Or you could give it some character, making it more than a place to stay. Make it an experience.
2. Buy Another Property for Cash
You’ll find many benefits of paying cash for a property. Access restricted foreclosure properties. Avoid a cash buyer swooping in and taking a property you wanted while you wait for financing. Home sellers are often willing to take less when they can get it in cash.
Be careful not to overextend yourself by taking all your equity to reinvest, but it can be the right move for a sure-thing kind of property.
3. Keep Properties in Good Repair
Sometimes cash flow can get tight, and it always seems to happen at just about the time major appliances start to go out, or you realize you need a new roof.
Your short-term rental is going up in value, especially in the current seller’s market, but the money you need to keep the home in good repair is tied up. An Mt Pleasant refinance can give you access to that equity and the cash it represents now rather than later.
4. Lower Your Interest Rate to Facilitate Growth
Interest rates are still at record lows. If you have a four or five-percent interest rate on the property, you could significantly lower your payment and access that equity at the same time.
If you’re trying to grow your rental business, that’s money you can put to work for you in whatever capacity you need: hiring employees, brand-building, advertising, whatever.
5. Pay Yourself Back for a Cash Buy
With interest rates this low, this one could make a lot of sense for you. And no, you’re not canceling out the benefits of paying cash.
You got a better deal by paying for a house in cash. That’s instant equity and a lot of it. Now, you could choose to refinance that home, take a percentage of the equity out and use it to invest in another cash-only property.
This can work especially well if you like to buy fixer-uppers that lenders won’t touch. Pay in cash, keeping enough money to get it to lender standards, and then refinance it. Don’t forget to get the home re-appraised because it’s now worth quite a bit more than you paid for it.
6. Pay Off High-Interest Loans
When you started your short-term rental business, chances are you acquired some debt beyond a mortgage to get your startup off the ground.
This happens a lot when real estate investment buyers are just starting.
You bought a home thinking you’d need X amount to fix it up. It cost you double. Home inspections don’t catch everything. You had no choice at the time but to put it on credit cards or get short-term loans with outrageous interest.
The longer you keep these loans, the lower your profit-making potential. Accessing your equity through a refinance of this now rehabbed property or a different one can lower your rates and support your short-term rental company’s financial health.
7. Meet the 10-Property Rule
Many lenders follow a 10-property rule. It says they won’t finance a new property if you have more than 10 homes that currently have mortgages on them. They recognize that real estate investors keeping this many mortgages are playing with fire.
If you’re approaching that 10-property limit and have one or more properties that are close to paying off, pull equity from one of the properties, pay off some of the smaller loans and free up your ability to get another mortgage if you need to.
Access Equity in a Short-Term Rental
Growing your equity is smart for your long-term real estate investment health. But there are clearly sometimes when accessing the equity in your short-term rentals can help you stay financially solvent and grow your business.