Using Airbnb to Pay Your Mortgage
Collectively, the cities and towns of the South Okanagan represent a vacation oasis for people from all over the province, country, continent, and world. As a real estate buyer in/entering the area, you see a major opportunity to pay down your mortgage by putting the prospective home on the short term vacation (STR) market. With online resources such as Airbnb and VRBO, doing so is easier than ever. This is indeed a smart strategy IF executed correctly. As the region’s premier mortgage brokerage we’re here to help you make it happen. Below is a breakdown of everything you need to consider.
5 Things Penticton Area Buyers Need to Consider When Planning to Use Airbnb/VRBO to Pay Down their Mortgage
I. Play by the Rules
To be honest, the rules regarding STRs from municipality to municipality in the Okanagan are fairly dynamic, and it is important to monitor local news about the potential for a change in regulations. That said, governing bodies in the Okanagan cannot deny the positive impact that Airbnb has made on the local economy. Visitors that were not able to find favorable accommodations in the past now have greater access, and don’t have to head over to Kelowna instead. Local businesses most certainly appreciate this, as do the local tax collectors. For this reason you can expect the allowance of STRs in the South Okanagan to stick around for the far foreseeable future. However, as a buyer you want to stay informed about the regulations unique to the city/town that you are buying.
Let’s look to Penticton as a prime example. Buyers are pleased to learn that the city is accommodating to your plans to pay down your mortgage with an STR home. Detached houses, townhomes, condominiums, cabins, and even carriage houses (it’s a thing in the Okanagan) along with a variety of other legal housing constructs are permitted for the STR market. That said, you must apply for a business licence to operate a short-term rental. This process ensures that safety standards are met, and helps protect neighbors and corresponding communities from nuisances. Securing a license is fairly straight forward. You can review all of the details on the City of Penticton website right here. Every other town will have their own similar processes in place. If getting a mortgage in OK Falls, Naramata, Summerland, or Peachland (etc.) be sure to check for the STR rules on their respective municipal websites.
II. Check Out Your Competition
Using Airbnb to pay a mortgage is a business decision. As such, we encourage you to approach it in that manner, which means performing a competitor analysis prior to making your purchase. This is neceassry if the primary goal is an investment mortgage, but even if the home will be your primary residence it doesn’t hurt to gauge the competitive market.
Have a look at what’s available in the Penticton area at this very moment. This will help you calculate the level of competition based on the following:
- Location (near Okanagan Lake, etc.)
- Number of bedrooms
- Square footage
- Price range
The greater the competition for the criteria above, the harder it may be to generate a consistent revenue stream from your space. Of course, the flip side is true, and you may uncover a major opportunity in make your new property a highly sought after vacation commodity.
III. Consider Strata (Condo Buyers)
Condominium and other multi-residential complex property owners have a complicated relationship with Airbnb. The City may allow it, but strata may impose unanticipated restrictions on your plans, while others have explicit rules against placing units on STR service sites. Some buyers plan to not report their intent to strata, but they run a significant risk of violating strata bylaws and regulations. This can lead to financial penalties and may result in a forfeit of ownership. Learn the ins and outs of the strata bylaws and regulations of your prospective condo, and also study the BC Condominium Act to keep up to date on amendments as they occur.
IV. Managing Insurance and Liability Risks
Take every necessary step to mitigate the risk of damage and liability that comes with placing your new property on Airbnb or VRBO. Regardless of how stringent the vetting process (ID-verification, user reviews), you will have strangers staying at your home. Neither Airbnb or VRBO offer comprehensive background or credit checks.
Airbnb does provide a Host Protection Insurance program with primary liability coverage for up to $1,000,000 per incident. This provides some protection in the event of a third-party claim of bodily injury or property damage related to a stay on your property. However, the terms and conditions leave lots of room for interpretation. Events and subsequent harm such as water damage, fire damage, vandalism, and criminal mischief may not be adequately covered by the Host Protection Insurance program. A loophole can cost you a small or financially ruinous amount, especially if a neighboring property is also impacted. In addition the coverage provided by your STR service, secure a more robust homeowners insurance policy that covers the liability that comes along with placing your home on the STR market. You will want to factor this cost into what you will be paying for your monthly mortgage.
V. Use Revenue to Pay Down Mortgage, or Consider Alternatives?
You’ve checked all of the boxes above, and are ready to buy a home to generate steady revenue on the STR market. But is paying down the mortgage the best thing to do with your with rental income? One of the most common myths about mortgages is that it is good to pay down your home loan as soon as possible. This is not always the case.
When you pay off your mortgage it does not result in an equal increase in equity. Instead, it simply reduces your principal. On the surface it makes perfect sense to reduce the overall balance of the home loan. However, did you consider the fact that it may be better to put that some of your income towards an investment that yields a greater return? For example, if the interest earned on an investment opportunity is greater than that of the interest you are currently paying on your mortgage, then the investment may certainly make more sense. Speak to your broker and/or financial advisor before committing your Airbnb income to pay off your mortgage. There may be more lucrative opportunities to generate greater overall wealth.
Do you have any additional questions about your up and coming Penticton mortgage? Want to find out how to get the lowest interest rates possible? Contact Carloni Mortgage Brokers today at 250.493.9111.