Has anyone turned a commercially zoned property into an STR?

Question

Hi,

I am looking to connect with anyone who has previously bought a commercially zoned property and converted it into a short-term rental. More specifically, I am looking into an off-market property that is historically zoned as a bed & breakfast but is currently operating (not very well!) as a short-term rental that does not serve breakfast. The property includes a 3/3 single family home plus two additional 1/1 cabins. It is located in a destination that has seen a ton of appreciation over the past few years. The part that confuses me is exactly how to comp the property.

Should I be comparing it to the value of other single family homes in the area or is the value solely based on the net operating income and cap rate since it is commercially zoned?

Are there advantages or disadvantages to buying a property that is commercially zoned for use as a short-term rental?

Has anyone ever bought a historic bed and breakfast and turned it into a short-term rental that does not have staff onsite or serve breakfast?

Thank you! Clara

Chase Hoover · Answer

Zoning varies widely by jurisdiction.  I'd recommend reviewing the code of ordinances in your city/county and giving the zoning/planning office a call to discuss your plans and get more information.

However, commercial/business zoning is typically much preferrable than residential as it tends to provide more flexibility.  Since it's currently operating as a commercial hospitality property, the current zoning should be perfectly fine for what you plan on doing, food or no food.

Some jurisdictions classify differently for "bed and breakfast" versus "overnight lodging" in that the former serves food and has on-site staff (again, this varies widely by jurisdiction).  Review the code and give the office a call and they'll be able to give you the best answer.

In terms of valuation, commercial hospitality properties are more heavily valued on NOI cap rate than sales comps.  When analyzing a P&L, there will likely be owners' discretionary expenses, depreciation, etc you'll need to back out in order to try and determine the true NOI.  Try to get at least 3 years P&Ls and tax returns (so you can compare pre-covid #s).

In addition to the property's financial performance, an appraiser will take into consideration the sales figures of other B&Bs in your vicinity to determine sales price per sf, price per room, etc.  Do not compare to single family homes.

We buy properties like this all the time - scoop them up for cheap because they're under-performing, remodel, boost NOI by managing it right = significant increase to the property's value.  I also buy and sell B&Bs for clients.  We have some for sale in VA right now if anyone's looking!

Rolly Weaver · Answer

@Sean Bramble, changing zoning didn't cause any issues with the mortgage....

Good thing, because I didn't even think to worry about that.

Rolly Weaver · Answer

I bought a property and had to change the zoning to allow STR.

We had to go in front of two county boards in order to do so and have inspections with fire department and code department.

We did this is Georgia, so I'm sure its different in your neck of the woods.

The whole process took around 4 months.

Account Closed · Answer

I’m missing something. Isn’t a B&B a STR?

Jon Martin · Answer

IMO already being zoned commercial could serve you better as municipal restrictions get tighter. Oftentimes these restrictions will outright ban STRs in your standard residential single family zoning codes, especially those under 9000 SF, and tend to only allow them in commercial zones. Take a closer look at your city's STR regulations, assuming they exist.

The house I purchased (Greenville SC) happened to be zoned "Office" but is a 2/1 SFH that has been occupied for decades and is therefore legal non-conforming. The county is motivated to rezone it because it's an oddball legacy zoning code that doesn't fit what's around it. However I plan to keep it that way, because that code is one of the few that is allowed under the new municipal rules if I were to get annexed (just outside city limits).

Sean Bramble · Answer

@Rolly Weaver what happens from a lending perspective in this scenario? For instance, if you purchased the property with a residential loan, do you have to swap to a commercial loan after rezoning?

Has anyone turned a commercially zoned property into an STR?

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