You’ll want to consult with a knowledgeable and experienced broker who has financed other STR’s. Financing for a short-term rental is often a difficult task that needs to be executed with great care and detail. Different lenders have various restrictions, interest rates and rules regarding early mortgage termination and you’ll want to know all of these details upfront.
Most lenders allow up to a 20% annual prepayment of the total mortgage amount. So, depending on the cost of your mortgage and what your property is profiting in a year, you could pay your house off within five years. It’s a bit of a stretch, but it’s possible.
If you’re planning on buying multiple rental properties, you’ll want to consult with an accountant. Usually, it’s best to purchase with straight cash, but as this is not a readily available option, it may be wise for you to refinance current owned properties to purchase others. This is called the “refi-and-buy” strategy. It keeps your mortgage payments higher, which give you a better tax write-off, and keeps your liquid cash in your pocket. You use the bank’s money to buy and benefit from the tax savings.
It’s important that this strategy is approached with caution, as it can leave an owner with a high debt load and if the market crashes, you would be left in an unfavorable position. For example, throughout Covid-19 many host’s lost their properties because bookings came to a screaming halt. The debt load on these properties was so high that owners couldn’t afford to make the mortgage payments without the high profits that running an Airbnb provided them. Always make sure that you can afford your home with the estimated monthly rental income value. Do not count on Airbnb income.
Regarding a down payment, rules will vary depending on where you live. In Canada, typical lending rules for rental properties come with a minimum 20% down payment. Short-term rental income may often not be used to “offset” the debt of the mortgage, but long-term rental income can.
What I mean by this:
Typically, with a rental property, you can take the value of the estimated monthly rental income given to you by an appraiser and offset the cost of the mortgage so that it doesn’t add to your debt load. More debt hinders qualification. Banks will use between a 50-80% offset, meaning they will account for 50-80% of the rental income and apply it to the mortgage payment. These rules will allow you to qualify for your mortgage more easily.
Finding an excellent broker who moves fast and knows what they’re doing is key. They’re your lifeline when it comes to a tight deal and financing will either make or break your ability to acquire a property. With a Short Term Rental the zoning affects the lending, and most institutions won’t lend. BMO, CIBC and Credit Unions are who I know that will fund. Here’s who I recommend for a broker to get the job done…
Marlon Lazic
Mobile Mortgage Advisor & Builder Specialist
Mobile Advice | 400 Burrard St, Vancouver, BC, V6C 3A6
Cell: 778-215-3197 | Toll Free: 1-844-673-4806
marlon.lazic@cibc.com | cibcmortgageadvisor.com/marlonlazic
James Dusik
Vice President and Senior Private Banker
BMO Private Wealth
Second Floor
294 Bernard Avenue
Kelowna, BC V1Y 6N4
james.dusik@bmo.com
Mobile 250-718-7788