luxury lamp and books on bedside table in bedroom

Mortgages for investment properties are generally priced higher than mortgages on primary residences. (Getty Images)

As of August, Airbnb had more than 4 million listings worldwide. Travel research firm Phocuswright reports that private accommodation rentals in the U.S. reached about $32 billion in 2017 and could reach $37 billion next year. But with the growing popularity of home rental websites like Airbnb and others, homeowners and prospective buyers should know that renting out all or part of their home can have implications on their mortgage or refinance.

[Read: Can You Actually Refinance Your Mortgage Too Often?]

Andrew Weinberg, principal of mortgage brokerage Silver Fin Capital Group LLC, recently helped a client with a cash-out refinance on a home in Sag Harbor, New York. "They rented out their own home by the day for about 30 days during the year and rented some other place [for themselves] in a less trendy area," he says.

The clients had taken out the original mortgage on the house as a primary residence, but renting it out on Airbnb potentially blurred the line between primary residence and investment property. And if the lender now considered the home to be an investment property, it could mean a less favorable interest rate following its refinance.

That's because mortgages for investment properties are generally priced higher than mortgages on primary residences. "The theory is that people who live in their own property are less likely to default," says Stuart B. Wolfe, mortgage banking attorney, co-managing partner and chair of the banking and finance department at Wolfe & Wyman LLP, where he represents mortgage lenders, banks and other financial institutions.

Fortunately, because the rental was only 30 days out of the year, the lender didn't reclassify Weinberg's client's house as an investment property. But there was another complication: To qualify for the cash-out refinance, the client planned to use around $30,000 a year in Airbnb rent in addition to other sources of income. Lenders often view rent from a traditional lease as income, but Airbnb income can be sporadic and the concept is relatively new so they don't view temporary vacation rentals in the same light.

"We actually went to [government-sponsored mortgage buyers] Freddy [Mac] and Fannie [Mae] and confirmed that they … can't get the benefit of the [Airbnb] income to qualify," Weinberg explains. However, the client had just enough income from other sources to qualify for the refinance, so the deal eventually closed. But Weinberg says this highlights some important lesson for Airbnb hosts. "With any transaction, you have to calculate the borrower's income and expenses," he says. When tens of thousands of dollars can't be counted as income, it can prove problematic, so Weinberg says homeowners should understand what income mortgage lenders will count.

Elizabeth Colegrove and her husband own nine traditional rentals and vacation rental homes in South Carolina and California. They've sidestepped the Airbnb income problem by applying for mortgages on investment properties based on the more conservative but stable income of traditional lease agreements. "We get them approved based on traditional incomes and then the next year we can count them as vacation rentals," she explains.

[Read: What You Should Know About Adjustable-Rate Mortgages.]

Another benefit to this approach: If local regulations change and the couple can't use a property as a short-term vacation rental, they know they can always go back to a traditional rental. Regulations can vary depending on local ordinances, so it's important to know the rules in that jurisdiction before buying. "[For] everything we buy, the numbers have to work both ways," she says. She's found that local credit unions and local mortgage brokers are more amenable to underwriting them versus large national banks and that corporate leases running two to six months offer a middle ground between 12-month leases and Airbnb rentals.

While some mortgage lenders haven't evolved to meet the needs of buyers who are hosting on Airbnb, at least one startup attempts to fill that need. Seattle-based Loftium launched earlier this year and caters to buyers who plan to rent out in their home on Airbnb, often to subsidize their mortgage. It provides down payment assistance in exchange for a large portion of Airbnb rental income over the next one to three years. Currently, Loftium works with Umpqua Bank as the mortgage lender, with more partnerships in the works.

Under other circumstances, some buyers take out a piggyback loan, which allows buyers to avoid private mortgage insurance even if they don't have a 20 percent down payment, get financial help from family or wait until they've saved up a down payment. Buyers can now get down payment help from Loftium and share Airbnb revenue with it. "The homebuyer is not going to pay us back," explains Yifan Zhang, Loftium's CEO and co-founder. "We pay ourselves back [with Airbnb revenue]." Of course, this comes with some stipulations: The room must be continuously available on Airbnb with the exception of eight "freebie" days per year and hosts have the right to cancel up to three guests per year without penalty if they feel uncomfortable.

Zhang admits the arrangement doesn't appeal to everyone. But for those who are comfortable with home-sharing, she points out that Loftium also "provide[s] ongoing support to make the Airbnb process easy. With automation and smart messaging with guests, it becomes a passive income stream for the homebuyer."

For those purchasing a property specifically as a rental, the lower interest rates on primary residences can be tempting; however, lying about how you plan to use a property can backfire, Wolfe says. "If it's an investment opportunity, the borrower most likely would be making material misrepresentations," he explains. Even if the borrower never misses a payment, he or she could be in default of the loan due to their misrepresentation. Renting out a room in your home while you're living in it likely wouldn't cause problems unless it violates homeowners association regulations, condo or coop bylaws or local ordinances, according to Wolfe.

Of course, circumstances can change and a property that was purchased as a primary residence can later become an investment property because the owner decides to rent it out rather than sell. In that situation, Wolfe says the lender looks at whether the borrower originally intended it as a primary residence. "The longer the borrower is there before the usage changes, the more genuine the intent appears to be," he says. The lender can find out if someone actually lived in the property by asking neighbors or checking water usage, for instance. He says lenders can uncover misrepresentations during random audits or checks immediately after the loan is made.

[Read: You Finally Paid Off Your Mortgage. What Now?]

"My best advice is for a borrower to be totally honest with their lender," Wolfe says. "Whatever the borrower's intentions are, they should be clear. If they're thinking of Airbnb-ing [the property], they should put it in writing during the loan application process." If you need a mortgage on an investment property, the lender may have another program to better suit that need.


The 10 Best Ways to Buy Real Estate

Investing in real estate.

Model homes on grass.

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Investing in real estate directly can be lucrative, but it also comes with pitfalls. It often involves large initial investments, it can be a time suck and additional costs can pile up along the way. Real estate investment trusts are a far simpler alternative. These publicly traded companies invest in residential, commercial and other types of real estate. And because of certain tax advantages, they're required to pay out the vast majority of their income as dividends. It's a popular equity class that has spawned a horde of focused exchange-traded funds. Here are U.S. News & World Report's 10 best-ranked REIT ETFs, as ranked today.

#10: VanEck Vectors Mortgage REIT Income ETF (ticker: MORT)

#10: VanEck Vectors Mortgage REIT Income ETF (ticker: MORT)

Real estate agent showing house to a couple.

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Mortgage REITs don't own real estate, but instead raise capital or borrow money to finance real estate by investing in either mortgages, or mortgage-backed securities. They make their money by the spread between the rate they borrow at and the interest they earn on the mortgages, and use various interest rate hedges to mitigate risk. So interest-rate sensitivity is high. MORT invests in 26 mREITs, including large weights in Annaly Capital Management (NLY) and AGNC Investment Corp. (AGNC). Also, MORT yields 8.2 percent, reflecting the high yields of the mREIT space.

Expenses: 0.41 percent (includes 16-basis-point fee waiver)

#9: iShares US Real Estate (IYR)

#9: iShares US Real Estate (IYR)

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The IYR holds the more traditional equity class of REITs – trusts that actually own and operate properties. This is also a broad ETF that provides exposure any kind of real estate you could want. IYR's 126 holdings dabble in everything from apartment complexes to office buildings to nursing homes to industrial property to even hotels and resorts … and a few mREITs are thrown in there, too. IYR isn't overly invested in its top holdings, with mall operator Simon Property Group (SPG) and communications real estate specialist American Tower Corp. (AMT) combining for just 11 percent of the fund's assets.

Expenses: 0.44 percent

#8: PowerShares KBS Premium Yield Equity REIT Portfolio (KBWY)

#8: PowerShares KBS Premium Yield Equity REIT Portfolio (KBWY)

Couple With Real Estate Agent in Apartment

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The KBWY is an unabashed yield chase, even going so far as to use a dividend yield-weighed methodology to determine its holdings. Moreover, this fund focuses on small- and mid-cap REITs only, so this isn't for timid REIT investors. For instance, as of this writing, Geo Group (GEO) and CoreCivic (CXW) – a pair of for-profit prison stocks that yield more than 7 percent, but have endured enormous swings over the future of their business with the federal government – are the top two holdings at 11 and 10 percent, respectively. For an equity REIT, though, KBWY has an excellent yield of 6.8 percent.

Expenses: 0.35 percent

#7: iShares Cohen & Steers REIT ETF (ICF)

#7: iShares Cohen & Steers REIT ETF (ICF)

Backlit apartment building against dramatic sky

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The ICF, like IYR, can expose investors to a wide range of geographies and real estate types. However, the portfolio is far more limited, at just 30 holdings, because of the fund's focus on the most "dominant" stocks in any particular space. This is a "who's who" of equity REITs, including big allocations to top holdings SPG, storage REIT Public Storage (PSA) and Prologis (PLD), which specializes in leasing distribution facilities. While the ICF (3.9 percent) yields a bit less than IYR (4.4 percent), the former boasts a superior total return to ICF over most significant time periods, and it's cheaper to boot.

Expenses: 0.35 percent

#6: iShares Global REIT ETF (REET)

#6: iShares Global REIT ETF (REET)

A globe on top of financial papers.

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An important note about any fund with "global" in the name – that's not the same as saying "ex-U.S." So if you think that with REET, you're getting all international REITs with no American exposure, it's quite the opposite. In fact, almost two-thirds of REET's portfolio are U.S. REITs, including the same three top holdings as ICF – Simon, Public Storage and Prologis. And the only top 10 holding outside the U.S. is French outfit Unibail-Rodamco SE. Outside the U.S., the heaviest regions covered are Australia and Japan, and those are only at about 7 percent each.

Expenses: 0.14 percent

#5: SPDR Dow Jones REIT ETF (RWR)

#5: SPDR Dow Jones REIT ETF (RWR)

(iStockPhoto)

The RWR is another broad-based, low-cost REIT ETF that aims to cover most of the possible flavors in the real estate world. It has all the majors well covered – industrial at 25 percent, retail at 24 percent and residential at 20 percent – and also has healthy smatterings of health care, self-storage and hotel properties as well. A theme you'll find among these REITs is similar top holdings, and that's the case here, with SPG, PSA and PLD among the top 10. Simon is particularly heavily weighted at a little more than 9 percent. It also has a decent but unspectacular yield of 3.8 percent.

Expenses: 0.25 percent

#4: First Trust S&P REIT Index Fund (FRI)

#4: First Trust S&P REIT Index Fund (FRI)

San Jose, California

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First Trust's entry into the REIT space is an extremely broad ETF at 159 holdings. Nonetheless, it still shares many of the similarities we discussed before, including an SPG-PSA-PLD top three holdings, with Simon at more than 7 percent of the fund. But while the top holdings are a little imbalanced, the portfolio itself is much more well-rounded than many of its peers. Retail makes up more than 23 percent of the fund's assets, but after that, residential, office, "specialized" and health care all range around 12-16 percent. The smallest allocation? Hotels and resorts, which still enjoys a 6 percent-plus weight.

Expenses: 0.48 percent

#3: Real Estate Select Sector SPDR Fund (XLRE)

#3: Real Estate Select Sector SPDR Fund (XLRE)

Person building house with building bricks beside stack of coins, close up

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A change in the Global Industry Classification Standard in 2015 made real estate its own sector, and prompted SPDR to create real estate- and financial services-specific funds – the XLRE and XLFS. The Financials Select Sector SPDR Fund (XLF) also held real estate, but dumped those holdings in mid-2016, making the XLRE the lone Select Sector fund to invest in real estate. At 10.3 percent, SPG is a major weight among XLRE's 29 holdings, but the fund also has a hefty communications bent, with AMT at 8.2 percent and Crown Castle International Corp. (CCI) at 5.6 percent.

Expenses: 0.14 percent (includes 115-basis-point fee waiver)

#2: Schwab U.S. REIT ETF (SCHH)

#2: Schwab U.S. REIT ETF (SCHH)

Germany, Hesse, Frankfurt, View of villa with garden

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Schwab's REIT product has cemented a place near the top of the U.S. News & World Report rankings thanks in large part to its dirt-cheap fees – 0.07 percent, or just $7 annually on very $10,000 invested. Still, despite its low cost, you're not really sacrificing much in performance, with SCHH outdoing many of its peers over the trailing three- and five-month periods. However, you are sacrificing income, with the fund boasting a mere 2.5 percent yield based on the past year's worth of payouts, and there's nothing about the holdings list, which features the same 1-2-3 combo the other general REIT ETFs here.

Expenses: 0.07 percent

#1: Fidelity MSCI Real Estate Index ETF (FREL)

#1: Fidelity MSCI Real Estate Index ETF (FREL)

Aerial view of residential housing development

(Getty Images)

Fidelity's FREL shares more in common with the XLRE than other funds on this list, thanks to its significant holdings in communications REITs AMT and CCI. However, it's far more expansive – at 165 constituents, FREL has the widest holdings base on this list – and it's also cheaper than XLRE. The only note on FREL is that it's young, with little performance history, and thus little indication as to how it acts in certain environments. But only a third of the fund is invested in its top 10 holdings, so single-stock risk is less prominent than in many other REIT ETFs.

Expenses: 0.08 percent

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Tags: real estate, Airbnb, mortgages, personal finance, money


Susan Johnston Taylor has contributed to the money section of USNews.com since 2011, covering everything from personal finance apps and spending strategies to mortgages, insurance and estate planning. Her articles on business and personal finance have also appeared in or on The Atlantic, The Boston Globe, Learnvest, Entrepreneur and Fast Company. Susan's goal is to offer readers new insights and practical ways to save money, advance their careers or improve their lives. You can find her on Twitter @UrbanMuseWriter.

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