Financing Short-Term Rentals

As short-term rental platforms have become more ubiquitous, the rules and regulations surrounding this type of occupancy have gotten more strict. Some small communities are pushing back against these services, claiming they are disrupting the social fabric to the point of “upending their way of life”. Bylaws vary between municipalities, but a license typically can only be issued to a person for the property in which they reside—their principal residence. Long-term rental stays of more than 30 days are allowed to be advertised and rented through online platforms. Property managers, businesses, societies, and commercial operations are ineligible to operate a short-term rental.

Short-term rental operators on platforms like Airbnb or VRBO must have a business license and include their license number in all online listings and advertising. You must have strata and/or landlord approval before applying for a license, which costs $104 per year in the City of Vancouver for 2022.

I’ve rented out a spare bedroom in my 2 bedroom condo in Downtown Vancouver for a number of years with no issues—charging upwards of $150 per night. It’s best to play it safe and look out for red flags well in advance. Like paying attention to the grammar being used in the enquiry, or locals staying for one night during an event. I only open my home to business travellers, solo adventurers, or foodies, and stipulate that they have great reviews and a clear profile picture (which is hidden until you accept the booking to avoid discrimination). I’ve met some amazing people in the process and formed life-long connections. My favourite memories are when travellers bring a cultural token of appreciation in the form of wine or snacks—the key to my heart.

If you are seeking financing for short-term rentals, some of the concerns will include insurance, external government risk, local pressure from neighbours, and of course nefarious activities like parties and damage. Airbnb does have Host Liability Insurance providing $1 million USD in coverage for these rare occurrences, though it’s becoming increasingly difficult to deal with Airbnb customer support.

The Green Mortgage Team are stellar mortgage brokers that specialize in financing short-term rental properties. They provided information on how they vet these cash-flowing properties:

Property challenges

  • Financing up to 60% for Type B, and 80% for Type A.
  • If you can’t get insurance, you can’t get a mortgage.
  • Cabins/Cottages: size, utilities, access, location, construction type, WETT certification.
  • Resorts: hotels are a no-no, title ownership, bylaws restricting use, rental pools.
  • General: strata approval, city approval, neighbours.

Financing challenges

  • Which “bucket” is an Airbnb in? Residential? Hotel? 
  • Income at the time of purchase.
  • No hospitality industry experience.
  • No lease, no consistent bank deposits.
  • T1s. Statement of rental activities.
  • Refinancing a vacation rental.

How to finance

  • 2nd home: easier to finance resort-style properties. No income is used to qualify.
  • Rental property: some lenders use market rents. Some properties don’t qualify as a rental. Net worth or some self-employed programs can help alleviate these issues.
  • Small biz/commercial: based on the short-term rental income. 2-3 year history, with you as the manager.
  • Debt coverage ratio: 1.25.

Debt servicing

  • Rental and corporate guarantee.
  • Rental income: prefer leases, sometimes can use market rents. Financials and rent roll of existing properties are used.
  • Corporate guarantee: corporate net income can be used to boost qualifications as well. Up to 75-80% leverage on these assets.
  • Short-term rentals in the company name. Seek independent accounting advice.

Lessons

  • Design: design sells, more rental income back with good design. Good return on investment. Durability matters.
  • Automation: keyless entry, nurturing with auto texts.
  • Communication: speedy replies, and great customer service. You are in the hospitality business. Not the same as having a long-term tenant.

Tips

  • Coordinate design with the local area (pictures of the beach, forest, etc.).
  • Discount weekly by 10%, monthly by 20%. Money off the top for longer-term stays. Nearly double the income.
  • Keep the income and nightly rates low to generate positive reviews. Proof of concept before raising rates.
  • Photography is an important piece of the puzzle.
  • Property managers charge 20-30% of gross rent.

Tools

  • Airbnb analysis spreadsheet.
  • Commercial analysis tool.
  • Investor kit.
  • AirDNA: macro data on vacancy rates, average daily rates, track ongoing pricing.

Locations

  • Victoria, Tofino, Ucluelet, 100 Mile House, Sunshine Coast, Sechelt, Gibsons, Penticton, Kelowna. Go north to Pemberton. 
  • If you drive more than 4-5 hours from Vancouver, there is a steep drop-off in opportunity.
  • Stay away from the Gulf Islands. Overseen by the island trust. Deters out-of-town investors.

Credit: Airbnb, Green Mortgage Team, City of Vancouver

Adam Naamani
Adam Naamani

Real estate specialist, tech entrepreneur, programmer, martial artist.

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