March 3, 2025 | 3.5 Minute Read
Last week, I completed a refinance on one of my short-term rentals (Airbnb). I had owned the property free and clear for nine years. For the first seven years, I rented it to two different Section 8 tenants.
Since there was no mortgage, my cash flow averaged around $800 each month. However, both tenants left the property in poor condition, requiring significant expenses to restore it to rent-ready status so most of the profit was therefore reinvested back into the property.
After the last tenant moved out in September 2022, I decided to take the property in a new direction. By that time, my company had already converted several rentals into short-term rentals, and I saw an opportunity to do the same with this one I owned. I ran my projections and felt confident about the potential for this 1,800 sq. ft. 4-bedroom, 2-bathroom home as a short-term rental.
My goal was simple: if I could generate at least $800 in net income per month—equaling or surpassing my previous rental income—I would be satisfied.
After investing $82,586.62 in renovations and furnishings, I launched the property on Airbnb and VRBO in December 2022. In the first month, it generated $3,512.35 in revenue, with a net profit of $883.92. I was on my way.
The property is called The Vista. Check it out on Airbnb and VRBO.
My goal for the first year was simply to break even and recoup the conversion costs. Unlike the luxury vacation rentals that Airbnb gurus on YouTube often hype with massive profits and returns, properties in small cap markets focus primarily on affordability, offering steady returns rather than flashy profits.
Short-Term Rental Performance
To be fully transparent, here are the financials for the past two years:
2023:
Gross Revenue: $45,613.76
Net Profit: $13,750.36
Monthly Net Income: $1,145.86
2024:
Gross Revenue: $42,554.01
Net Profit: $20,962.43
Monthly Net Income: $1,746.87
You may notice that while I earned less revenue in 2024, my net profit increased. Here’s why:
I spent $12,669.74 on furnishing the property in the first year. I deducted $1,055.81 per month in 2023 to recoup this expense. My net profit increased in 2024 when this cost was repaid.
Initial higher maintenance costs in the first year as I fine-tuned the property based on guest and housekeeping feedback.
The influx of short-term rentals into the market heightened competition, causing the average yearly occupancy to drop from 69.25% in 2023 to 54.25% in 2024. Am I worried? No. My break even is 25.48% occupancy to cover monthly costs.
A new short-term rental lacks history and guest reviews, making it harder to attract bookings. As the property gained positive reviews and credibility, bookings increased, improving occupancy and profitability. The property has a 4.93 (out of 5) rated on Airbnb and a 9.8 (out of 10) rating on VRBO. Check out the latest review from this past weekend from Amy on VRBO: “This place was only 15 minutes from the Alabama Theater. Quiet neighborhood. Wonderfully decorated and furnished. Beds were comfy too! Best thing, best customer service I have ever had from a host” – This is what gets me bookings.
Why I Refinanced the Property
A refinance should always have a strategic purpose. In my case, I planned to use the funds to purchase another property. After consulting my lenders, I secured a 30-year loan with a 6.75% interest rate. The property appraised at $235,000, and I refinanced at 57% loan-to-value (LTV), resulting in a loan amount of $133,950. My monthly principal and interest payment (P&I) is $868.80.
My previous monthly fixed costs including taxes and insurance were $386.74. The fixed costs with the monthly PITI payment is now $1,255.54. If I maintain the 2024 monthly net income average of $1,746.87 for 2025 and deduct $868.80, my adjusted projected net income will be $878.27 per month.
Why did I opt for a lower LTV? My goal was to recoup my investment while maintaining a manageable monthly payment to preserve cash flow. Many investors aim for the maximum 75% LTV leverage on a refi, but that would have come with a higher interest rate and less cash flow. Only refinance what you need. No more.
Refinancing: Short-Term Rental vs. Turnkey Rental
Turnkey Rental:
Debt Service Coverage Ratio (DSCR) minimum: 1.2
Requires a signed lease proving rental income
Tenant must be in place on or before closing
Short-Term Rental:
DSCR minimum: 1.5 (and my actual for each year of operation below)
2023: 4.04
2024: 9.34
2025 ( YTD): 7.16
Requires at least 12 months of documented income from Airbnb, VRBO, etc.
Investors may tie up capital for 12 months before refinancing
Did I make the right decision? Every investor has different needs. I wanted to maintain cash flow at or above the turnkey rental income with less wear and tear, and no tenant turnover costs, even if I have more hands-on management as an STR. This worked for me and were the main reasons why I pulled the trigger refinancing this property.
Looking to refinance a turnkey or short term rental, check out REIBrokers.com and reach them at loans@reibrokers.com for a free consultation.