Hosts who rely on their income from Airbnb could be in for a rude surprise when it comes time to refinance their mortgages.
As the Wall Street Journal reported this week, banks are not looking too kindly on homeowners who earn a significant amount of income from renting out that spare room or in-law in the backyard. These banking customers often find that cashing-in on the sharing economy could either result in a firm “no” from the bank, or they may be granted such a loan only if they agree to a higher rate.
“In the past, a house was either a resident or an investment,” said John Wordock, a senior editor at the WSJ. “But Airbnb is shaking things up a bit.” Wordock hosted a podcast to score more details about the financial risks of renting out via Airbnb or similar services from the author of the Journal report, Peter Rudegeair.
The problem is that most banks have strict rules over what kind of loans they will issue, depending on why that money is being borrowed in the first place. Loan applicants who plan to live in the property need that roof over their head, and are therefore more motivated to make loan payments on time. Those who purchase homes as an investment, however, are subjected to more risk. A future tenant may not pay the rent or could even damage the property, so there is a higher chance that the owner could reach the point at which he or she walks away from the property, and eventually defaults on the mortgage.
One Seattle homeowner, who made $30,000 in one year by renting a cottage in his property’s backyard, was aghast because his bank had a policy prohibiting the underwriting of any loan for a property in which the owner is running a business.
“Airbnb blurs the line between the traditional categories of mortgages,” Rudegeair said. “In the past you were either an owner-occupant, or you were a landlord. Nowadays, a lot of folks are both.”
The fact is: Relying on income from Airbnb is still a risk, particularly to that stodgy banker already haunted by the financial meltdown that dragged on from 2007 to 2009. True, Airbnb now insures hosts in the event a guest damages a property, the result of an outcry after one San Francisco host shamed the company into taking more accountability after her place was ransacked. But a few bad reviews, a fickle customer base, and the fact that Airbnb is one of those hyper-inflated Silicon Valley “unicorns” add to the reasons why bankers become skittish once they see Airbnb income disclosed on a loan application.
Another factor behind banks’ refusal to refinance mortgages for owners disclosing income from Airbnb is the very nature of the mortgage market. As anyone who has secured a mortgage will remember, many mortgages -- after that long and stressful process -- end up being purchased by a third party. Those investors, which include the likes of Citibank, Wells Fargo and Bank of America, are inclined to refuse any transactions when there is a blurred distinction between home or investment. As Rudegeair explained, it is for this reason that when financial institutions buy these real estate loans, they often refuse to purchase mortgages for properties such as bed and breakfasts.
And Rudegeair says consumers should not expect this grey area to become black-and-white anytime soon. No regulatory authority has stepped in to to clarify this matter, and the large financial institutions are keeping their hands off the dilemma as well. Banks still feel burned from last decade’s mortgage catastrophe and are now extremely conservative when loaning money for mortgages (which explains why freelancers and independent consultants have an awful time securing these types of loans).
There is a silver lining, albeit a very thin one. As Rudegeair pointed out, the IRS has a rule about which Airbnb (or VRBO or old-school Craigslist) renters should be aware. If the property you own is your personal residence, you do not have to report any income if you rent it out for less than 15 days. But then keep in mind that you cannot deduct any expenses incurred for renting out your space.
Image credit: Carol Von Canon/Flickr
Leon Kaye has written for TriplePundit since 2010, and became its Executive Editor in 2018. He's based in Fresno, CA, from where he happily explores California’s stellar Central Coast and the national parks in the Sierra Nevadas. He's lived in South Korea, the United Arab Emirates and Uruguay, and has traveled to over 70 countries. He's an alum of the University of Maryland, Baltimore County and the University of Southern California.