Using Mid-Term Rentals to Bridge to Short Term Rentals

[Curtis Lipsey]

Hey guys, I was curious if anyone has ever used mid-term rentals (MTR) starting and then later transitioned to short-term rentals (STR)?

My wife and I are at a place now where we feel comfortable to start making offers for potential properties. We found a property that we ran numbers for and we believe it would make for a successful STR. The process of applying through the city to be able to list your STR takes a bit of time (up to 6 months it said online) and I was wondering to myself if there might be any way to reduce the cost of maintaining the property, mortgage costs, etc. if we were to press forward and purchase the property.

I thought to myself that if the property's numbers could successfully stand as a MTR then this might be a good strategy in the mean time as we wait for the city to process our STR request. To the best of my knowledge a MTR wouldn't be subject to any applications or processing time with the city so my thought was that it could be a smart idea.

Has anyone had any experience with this as a strategy?  Do you have any tips/tricks that helped you in the process?

Thanks! 

[Bruce Woodruff]

STRs are totally dependent upon location. MTRs not as much. 

A STR can always become a MTR, but a MTR cannot always become a STR.

I'd be careful with this strategy.......

[Curtis Lipsey]

Quote from @Bruce Woodruff:

STRs are totally dependent upon location. MTRs not as much. 

A STR can always become a MTR, but a MTR cannot always become a STR.

I'd be careful with this strategy.......

Thanks for the comment. Are you saying that the location of a MTR doesn't necessarily mean it would be the best location for a STR?

The property I found is located in a popular neighborhood for STR and conveniently close to hospitals for MTR (travelling nurses would be my target tenant base).

[Bruce Woodruff]

I'm saying that a STR is very location dependent. Very. 

A MTR can be within 5-10 miles of a hospital (for travelling nurses, let's say), but a STR must be close to downtown etc....

[Luke Carl]

6 months to get a permit is a no go market for me. Do short term in areas where they actually want short term.  

It’s like you’re trying to date a woman that just really kinda doesn’t like you 

[John Underwood]

Do they ever decline an application for a STR permit? This location sounds risky for a STR due to current regulation. What if they tighten the screws more after your purchase? Will the number still more as a LTR?

[Curtis Lipsey]

The numbers wouldn’t work as a LTR, but there is definitely potential for it to work as a MTR. 
thank you everyone for your thoughts. We’re wanting to make the most informed decision we can.

[Curtis Lipsey]

Quote from @John Underwood:

Do they ever decline an application for a STR permit? This location sounds risky for a STR due to current regulation. What if they tighten the screws more after your purchase? Will the number still more as a LTR?

I haven’t heard of declining applications, and the 6 mo. Timeframe comes straight from the city site. I feel very confident that they write that as a buffer to CYA for themselves. But still in theory it could take that long.

[Bruce Woodruff]

@Curtis Lipsey What do you WANT to do? STRs? Then I would go find that city where they are welcomed and do it.

[Chad McMahan]

Quote from @Curtis Lipsey:

Hey guys, I was curious if anyone has ever used mid-term rentals (MTR) starting and then later transitioned to short-term rentals (STR)?

My wife and I are at a place now where we feel comfortable to start making offers for potential properties. We found a property that we ran numbers for and we believe it would make for a successful STR. The process of applying through the city to be able to list your STR takes a bit of time (up to 6 months it said online) and I was wondering to myself if there might be any way to reduce the cost of maintaining the property, mortgage costs, etc. if we were to press forward and purchase the property.

I thought to myself that if the property's numbers could successfully stand as a MTR then this might be a good strategy in the mean time as we wait for the city to process our STR request. To the best of my knowledge a MTR wouldn't be subject to any applications or processing time with the city so my thought was that it could be a smart idea.

Has anyone had any experience with this as a strategy?  Do you have any tips/tricks that helped you in the process?

Thanks! 

To each their own. If you like the MTR strategy go with it. I'd extend the same concerns as Bruce. Most people find MTR returns are lower than STR. I find returns are 20%-50% lower, depending on the demand and competition.

[Bonnie Griffin Kaake]

@Curtis Lipsey The term MTR is a relatively new concept. From an IRS perspective, it is a long-term rental LTR since it is 30 days or more. If you start as a LTR/MTR and then want to change or get approval to change to a STR of less than 30 days, your tax professional will need to do a 3115 Change of Accounting form to change from a 27.5 depreciation schedule to a 39 year depreciation schedule.

Be sure to check any HOA regulations, most will not allow a STR even if the city or county approves it. You will also want to know if the HOA will allow a rental of the property at all. Some will only allow one family to rent/live in a property under single family zoning. If you were planning on creating more than one rental unit in a single family zoning area or under an HOA, you want to know this BEFORE you invest in a property.

[Vicki X.]

Quote from @Curtis Lipsey:

The numbers wouldn’t work as a LTR, but there is definitely potential for it to work as a MTR. 
thank you everyone for your thoughts. We’re wanting to make the most informed decision we can.

I'm curious, how big is the difference between the MTR and STR returns in your case?

[Zach Edelman]

I feel like this is a great strategy assuming your cashflowing for those first six months... what's the harm? Especially if this is a long-term investment (buy and hold). 

[KiKi Wood]

Yes! Our properties are located in Indianapolis, IN, where there is a "seasonality" to our market. A lot of our STRs transition into MTRs in the winter. I would say for the other way around (MTR to STR), I would just make sure the area would make for a good Airbnb, and check the data you have (AirDNA, etc.) to make sure the numbers are in your favor!

[Bonnie Low]

Yes, I did this, though not sure if it was exactly as you desribed. We started out converting one of our LTR properties to MTR. I wasn't sure if it would be successful (it is) but it was relatively low risk - it cost me about $10k to furnish it. I figured worst case I'd sell off the furnishings or use them for staging flips and convert it back to an LTR. We use a PM for our LTRs but I decided to self manage this one since it's near me. I'm so glad I did! Not only have I learned invaluable lessons about vetting guests, getting lease agreements, setting up our systems, etc. I also do the turns myself. And let me tell you, if you've never done your own turn you can't possibly imagine all that goes into it. It really helped me understand the job and it sure makes you appreciate your cleaners! When we eventually bought our STR I had 80% of it figured out already just from having run our little MTR myself. It made it much easier to furnish our STR becaused I already had created a check list and expense list from our MTR and I had a full list of turnover requirements based on our MTR experience which I only had to update for our turnover crew on our out of state STR. The lessons alone were well worth it. It's just been a bonus that it has worked out very, very well as an MTR.