📉2025 STR Loophole | How to identify, close and participate with weeks to spare.

[AJ Wong]

For my STR investor friends living under rocks - or have had a failed offer or transaction on the vacation rental investment they were waiting for..don't lose faith and there is still material participation hope!

In just the past few weeks we've helped several investors (looking for a very long time!) identify, assess and get into contract on properties that have a realistic opportunity to close and comfortably participate for 2025. There are several property prospect characteristics and transactional tips to look for and apply that can solidify eligibility and ensure the investment intentions are achieved. 

- Seek active, turn-key STRs with transferrable permits or a very straightforward permitting process. NOTE - just because a listing describes STR activity or the listing broker represents it can maintain usages does not mean that it can be re-permitted, launched and rented in what will amount to 4-5 weeks (including holidays). Our number one STR investment advice (anywhere) is permitting..permitting and permitting. When the timeline is condensed with little to no margin for error - it is essential that investors or their professional representatives verify and validate not only STR permit/license eligibility but that they have a clear understanding of the process, procedure and timeline post closing. Many STR permits/licenses do not transfer outright..and even if eligible must be reapplied for. Investors will want to verify before an offer is made, during their contingency period and one more time for good luck that the procedural process executable within 2-3-4 weeks of closing..MAX. For example: a most recent STR transaction we have pending, the STR permit does not transfer outright, but we verified with the planner directly that if the client submits the single page application on Monday - the permit will be issued by Friday.

- HARD PreQualification and SOLID mortgage broker or loan officer. Time kills deals..and nothing jeopardizes a closing like failed financing. I work with a very tight team of experienced and reputable mortgage brokers that I can rely on to answer difficult calls and questions..every single time I call, text or email. Mortgages are hard, especially large ones on short timelines - things can and will be delayed or go wrong..the key is: COMMUNICATION. So long as the borrowers, brokers, sellers and title team are on the page, delays can be negotiated and resolved. When parties assume - they doom. Work with a lender that has a proven reputation, organization and optimally experience with your broker or area. 

- Insurance for STRs can be more difficult to issue than a general policy. Depending on where the property is located (flood zone - GOV shutdown) its best to provide a buffer and get on the insurance policy quotes as soon as you have an executed contract. Lenders are also getting more stringent on what the policy actually covers - and how - so optimally provide to your lender the actual quote for binding within a week or two of agreement.  

- Inspections & Follow up estimates for repair. Rushing a real estate deal - is rarely a good one! But, if you have to execute efficiently (like in a 1031X) due diligence is NON-negotiable. The majority of my time is not in fact spent identifying quality STRs (we do that intuitively & scientifically :) - it's validating, re-validating and ensuring that they are! Inspection reports ALWAYS reveal items or conditions that were not known at the time of offer (that is the entire point of a contingency period) - for the buyer to validate what they are buying. The mechanics are typically: 1. Inspection. 2. Notable items are independently inspected by the related: contractor, plumber, electrician... and a written estimate is provided. 3. Through transparency - parties resolve via repairs, concession, price reduction and/or compromise. 4. Or they don't - and terminate. The point of emphasis for buyers is that they can have confidence and compensation in resolution and the best way to support the position is with real, hard estimates and insight from a related licensed professional. NOTE: A hard or quick NO is as valuable as a YES. Many investors have lost more than they returned by forcing a transaction. When in doubt? DELAY! Via a written extension to get as much validation as required for a smart investment. Smart sellers will acquiesce. 

- Order your Appraisal ASAP. Believe it or not the STR market is HOT. If you can wait until you get through your contingencies great, but otherwise just order the appraisal as soon as your loan is locked. Depending on where - scheduling can take a week or so and there is a 50/50 chance of an item of note or change the appraiser needs to make to the report. If you're just getting the report close to closing, you're asking for a need to delay and probably upset your post closing schedule. You waited this long to get into contract - don't wait on paying for the appraisal (maybe even pay $50 extra) to get them there ASAP and bonus - it is a check and balance on terms. If it's short - there is usually an opportunity to re-negotiate.

- Post closing team coordination and execution. Now that the contingency period has ended - closing is right around the corner and guess what? You're sorta on your own to get the listing live. Hopefully you have your new photos scheduled (if necessary) a few personalization items in your Amazon cart and your beginning your local interviews for cleaners, handyman and emergency contacts. Your RE Pro and title team should be able to provide some references, but another helpful resource has been Angi's list (in remote areas) or go to references from other clients your team has helped. The general theme is to hire the best, pay the best and have a back up plan for just in case. Particularly for out of state or area investors, properties have unexpected hiccups that will need attention. A good game plan is that when you revisit your new home post closing, spend an extra day or two familiarizing yourself with the attractions that will draw your guests. Make friends. Become a 'local,' and ask for references. 

WHAT NOT TO DO

- Force a purchase in 2025. Accelerated depreciation is a bonus, not a basis. If you've been dreaming of a coastal cottage or second mountain cabin for years - the next two years offer the same asset reallocation opportunity. Remember: the deduction is one year, the mortgage and property taxes are 'forever'. 

- Overpay or overcommit. It might be really difficult to say NO or walk away from a home that online checked ALL the boxes but you know what is worse? Making an investment to 'save' that quickly devolves into a bleeding liability. There is no amount of tax deductions (which by the way are only occurring because of HIGH INCOME) that is worth the headache. The STRLH is optimized for high wage earners, earning enough that they can usually qualify and afford to purchase the property regardless of the tax benefits or proposed income. It isn't absolutely necessary to use participation now...so make sure the investment absolutely is. 

- Overextend your buy box. For the reasons above - the pressure to perform can be emotionally distracting. STAY FOCUSED. You can look wide and far for reference, but don't get delusional. Narrow your prospect list and spreadsheet to the top ten, top five and top three with a 4A and 4B. Schedule the showing and visit and re-visit the most eligible prospect. If it doesn't check or work on BUYERS terms. Move on..possibly to next year or refresh the process on Monday. Not the same day. Let yourself and the market breathe. Maybe that prospect comes back to market - unexpectedly...but you're now better prepared to act due to your effort and energy. 

- Not enjoy the process. Smart asset or not, if it's too stressful to begin with - what are the chances it won't be for the life of the loan or ownership? Nobody can win a championship or perform surgery on their own. They need a great team to succeed. Slow down... to go faster. Get your (Oregon) ducks in row! Budget/Financing. Broker/Prospects. Boots on the ground. There is no magic STR recipe but hopefully here are some ingredients to make sure it is at least investable.

Anything to add? Good luck! 

[Mike Grudzien]

AJ nails it again!!