You may have seen in the news that Uber is creating controversy in many cities across the United States. Generally, this involves sanctioned cab drivers protesting that Uber allows almost anyone with a car to become a driver, however those drivers are labelled as “freelancers” or “contractors” rather than employees, which allows Uber to save money in the long run. Expect court cases on the legality of these practices to continue into the future, and for qualifying as an Uber driver to get tougher.
One disrupting startup has drawn less controversy, however: Airbnb. This app seems to serve as a win-win: Homeowners can rent their property for short periods of time, and travelers get cheaper access to more comfortable accommodations. Many renting out their property are now looking to pay off their mortgage quicker by using Airbnb cash and possibly refinancing to a 15-year loan.
This might not be as easy it seems in the near future. Although the home finance world is still wrapping its head around Airbnb and similar services, it could cause problems for owners looking to refinance in the future. Here are three questions you should ask yourself before you sign up for Airbnb, especially with the intent to pay down your mortgage.
I ) Is It Even Legal?
First of all, you need to examine whether you’ve got every legal box checked before you start renting out rooms. There are a number of angles to consider.
For one, some urban areas have laws in place to monitor the short term renting industry. Sometimes the regulations change dramatically outside of city limits. For example, consider Miami. In the Miami Beach area, short-term rentals are banned in all single-family homes. Surfside requires registrations every time you host someone via Airbnb (and you’re limited to three such stints a year). That may seem stiff, but the Miami area is still within the Top 5 hottest locations for Airbnb in the United States.
Also make sure that you’re not going to get yourself in trouble in terms of taxation. National tax code allows you to pocket the revenue if you rent your property less than 15 nights a year. That doesn’t mean your local law doesn’t require its own 6 percent bed tax.
Are you a member of a Homeowner’s Association? You can probably count on a no-short term rental policy.
II ) Will Paying Off Your Mortgage Be as Financially Simple as It Seems?
The biggest grey area in the Airbnb trend is how to classify a property when the owner rents it out for an additional source of income. Is it a residence or a business? Where’s the line between the two?
This is where those looking to refinance stumble into trouble. First of all, many Airbnb users assume that they’ll be able to get another residential mortgage when they refinance, and this may or may not be true, depending on lender. Some lenders will want to finance the home as an investment property and not a residential one. Interest rates on these properties are typically higher because lenders see them as riskier: Owners aren’t always around to keep an eye on the home, and rental income can vary dramatically depending on time of year.
But what if you are living in the home at the time of rental? It might not matter. If you’ve added Airbnb income to your debt-to-income ratio, some lenders will still see that as something that could fall through, hence the risk.
Based on a study from Corelogic, residential properties were, on average, financed 84 percent at a rate of 3.76 percent during April 2016. Investment properties were financed 72 percent at a rate of 4.29 percent. Do these terms still make your plan to pay down the mortgage feasible?
III ) Will Your Homeowner’s Insurance Still Apply?
Many lenders require a homeowners insurance policy before giving you a mortgage. This will be a problem if your current insurance policy is nullified by you hosting renters on the property.
Many policies, like residential mortgages, are issued with the expectation that the owner themselves will be the only ones inhabiting a property. Most homeowners insurance policies are crafted explicitly for residential properties, refusing to cover any commercial activities. You may need to invest in a different, more expensive insurance policy, or run the risk of having your policy cancelled if your Airbnb business is discovered, which in turn may get you in trouble with your lender.
The good news is that Airbnb itself now offers primary liability coverage.