Biggest mistake to avoid in investing in short term rentals

23 Replies

Having been a STR investor, consultant, educator, and property manager for a number of years, I want to spread this piece of advice to prevent as many newbie investors as possible from heartache and money loss. And as a self proclaimed rule breaker, this pains me to even say it.

Be 100% positive that you can do short term rentals in the property you're looking to purchase before you purchase. And not only that, be sure that you can operate it the way you want to before you purchase it. 

Let me explain more using some examples...

*A friend of mine recently purchased a property in Osceola County near Disney World, the vacation rental mecca, assuming that short term rentals would be allowed since everywhere nearby allows it. Turns out after we researched it, that particular parcel isn't zoned for STR. Ugh!

*We purchased a property in a gated community with a 6 month minimum lease thinking that we could get away with having our friends and family stay there and pay us. Our nosy neighbors told on us and our guests got locked out of all the amenities, the gate and we got a slap on the wrist. 

*We purchased a vacation property in a condo association that allowed us to rent on our own but when we tried to offer property management to other property owners who weren't happy with the onsite manager, we got ourselves into a lawsuit. They didn't have anywhere in the bylaws that you couldn't hire property management outside of the onsite property management but they made it difficult enough that it was hardly worth it. 

*In Miami Beach, they are fining owners $20,000 for the first violation, $40,000 for the second, for operating in areas that are not zoned for short term rentals. https://www.miamiherald.com/ne...

*In Orlando proper, they have rules that require the owner to stay on site with guests who are staying in your property. https://www.avalara.com/mylodg...

And on and on they go. With STR being a newer animal for places that haven't traditionally been resort areas, municipalities are trying to figure out how to deal with them. Your best bet is to stick to areas that are traditionally vacation rental friendly and even so, do your research!

This is definitely a buyer beware situation with STR's. Even if you buy in that perfect area there is not guarantee that regulations won't change in the future to prohibit your STR business.

As will all real estate it is advisable to have multiple exit strategies so if you can always "buy right" on any real estate investment you minimize the downside.

Originally posted by @John Underwood :

This is definitely a buyer beware situation with STR's. Even if you buy in that perfect area there is not guarantee that regulations won't change in the future to prohibit your STR business.

As will all real estate it is advisable to have multiple exit strategies so if you can always "buy right" on any real estate investment you minimize the downside.

Very true, John. You'd hope they'd grandfather in the property if it's already a STR but that's definitely not a guarantee!

 

Yikes i been buying in the Disney World area whats the community called

Originally posted by @Chai Xiong :

Yikes i been buying in the Disney World area whats the community called

My team were the ones who did the research. I believe it's a property that's not in a gated community. Do you contact Osceola County before purchasing? Or are you in a different area than Osceola?

 

 

i'm in the Windsor Hills, Windsor Palms, and indian Creek area.  What area are you talking about

Amen to that word of caution! This is an ever-changing landscape with so many cities & municipalities seeking to address STRs if they haven't already. 

We are considering purchasing a property in the San Diego area, where, last year the city council voted to OUTLAW ALL STRs! This ruling seemed outrageous to me (and many others) in a location where STRs/tourism is so prevalent. The outcry was so great that the city withdrew the ruling, but who knows what they may end up coming back with in the future?

We called Avalara MyLodgeTax (whose services we use to file/pay the appropriate taxes in the different locations of our STRs) to ask if it is even possible to obtain a STR license in San Diego right now. They needed a specific address before they could look it up for me, but after checking the address of one of the properties that we are considering they said yes, at the current time it is possible to obtain a STR license for that property but of course there was no guarantee that the city would not change its regulations in the future.

Even if the city allows it, make sure if you are buying in a location that has an HOA that the HOA allows it also. Many (if not most) do not allow rentals for shorter than at least 6 months. We learned the hard way....and are staying clear of any properties with HOAs unless it is in an area where STRs is common and the HOA allows

@Valerie Rogers All great advice! San Diego was another one that I had forgotten to mention as an example. It was pretty extreme to ban them so I'm glad they backed down on that! 

@Wendy Schultz - Thank you for the examples, I agree with all the risks you have outlined. I think the biggest mistake to avoid in investing in Short Term Rentals is to invest in Short Term Rentals. Regulations are changing so rapidly that if you buy a property simply for its STR cash flow potential, it's easy to get caught with your pants down as soon as regulations go south. A great way to take advantage of STR cash flow without the risk is to rent properties from landlords, furnish them and re-rent them as STRs (or longer term furnished rentals). I manage a portfolio of 19 furnished units in the San Francisco Bay area and make a decent income without owning any of them. I would not buy any property as a STR unless I would want to buy the exact same property as a traditional long-term rental property. I fully agree with @John Underwood that the critical considerations are to buy right and to have multiple exit strategies. 

That thought makes no sense. Some areas you have to live in the place to STR. Second, it isn't free to Arbitrage, your business can disappear in the wind along with holding all the leases and the improvements /furnishings you are stuck with. Third, the biggest mistakes are to invest without also be able to cash flow as long term rentals as well as not researching the regulatory climate. Arbitrage will always be the much more risky venture.

" think the bigwgest mistake to avoid in investing in Short Term Rentals is to invest in Short Term Rentals."

Originally posted by @Wendy Schultz :

Having been a STR investor, consultant, educator, and property manager for a number of years, I want to spread this piece of advice to prevent as many newbie investors as possible from heartache and money loss. And as a self proclaimed rule breaker, this pains me to even say it.

Be 100% positive that you can do short term rentals in the property you're looking to purchase before you purchase. And not only that, be sure that you can operate it the way you want to before you purchase it. 

Let me explain more using some examples...

*A friend of mine recently purchased a property in Osceola County near Disney World, the vacation rental mecca, assuming that short term rentals would be allowed since everywhere nearby allows it. Turns out after we researched it, that particular parcel isn't zoned for STR. Ugh!

*We purchased a property in a gated community with a 6 month minimum lease thinking that we could get away with having our friends and family stay there and pay us. Our nosy neighbors told on us and our guests got locked out of all the amenities, the gate and we got a slap on the wrist. 

*We purchased a vacation property in a condo association that allowed us to rent on our own but when we tried to offer property management to other property owners who weren't happy with the onsite manager, we got ourselves into a lawsuit. They didn't have anywhere in the bylaws that you couldn't hire property management outside of the onsite property management but they made it difficult enough that it was hardly worth it. 

*In Miami Beach, they are fining owners $20,000 for the first violation, $40,000 for the second, for operating in areas that are not zoned for short term rentals. https://www.miamiherald.com/ne...

*In Orlando proper, they have rules that require the owner to stay on site with guests who are staying in your property. https://www.avalara.com/mylodg...

And on and on they go. With STR being a newer animal for places that haven't traditionally been resort areas, municipalities are trying to figure out how to deal with them. Your best bet is to stick to areas that are traditionally vacation rental friendly and even so, do your research!

Great advice Wendy, as always! As I’ve said on here many times before, the safest route is to invest somewhere where vacation rentals have been a part of the community for 100 years, such as Pigeon Forge, Outer Banks, Lake Tahoe, etc.

Originally posted by @Ethan Cooke :

@Wendy Schultz - Thank you for the examples, I agree with all the risks you have outlined. I think the biggest mistake to avoid in investing in Short Term Rentals is to invest in Short Term Rentals. Regulations are changing so rapidly that if you buy a property simply for its STR cash flow potential, it's easy to get caught with your pants down as soon as regulations go south. A great way to take advantage of STR cash flow without the risk is to rent properties from landlords, furnish them and re-rent them as STRs (or longer term furnished rentals). I manage a portfolio of 19 furnished units in the San Francisco Bay area and make a decent income without owning any of them. I would not buy any property as a STR unless I would want to buy the exact same property as a traditional long-term rental property. I fully agree with @John Underwood that the critical considerations are to buy right and to have multiple exit strategies. 

Having multiple exit strategies is key. We purchase all of our rentals with the goal of them being LTR's even though we rent 5-6 of them as STR's (Airbnb, Vrbo, Nurse Houses, Insurance Claims Houses) and 4 of them as student houses on 9-10 month leases, the rest are all LTR's.

The STR part of the business is the most profitable but it takes the most amount of work and it could disappear via regulations without a lot of notice, we are always positioned to transition back to LTR if needed. The Airbnb/Vrbo business nets us about 2-2.5x market rent after all expenses on average but 'hospitality' takes a good deal of time. The Nurse/Insurance/student houses average about 1.25-1.35x market rent net all costs but take much less time and turnover issues and costs are minimal compared to LTR's as they usually don't bring all of the crap with them and they never hang things on the walls.

Rick

 

A new regulation we've seen: 

In Madison, WI you can't have a property manager if you run an Airbnb


Originally posted by @Corina Eufinger :

@Wendy Schultz, OML, for real???? Nice way to kill an industry and reduce scaleable growth...

Isn't it ridiculous? 

 

We have a long time duplex STR in San Diego in an area where a very large percentage of the units are STR (Mission Beach). I wanted to add some clarity to the comments on San Diego STR regulations.

The city council passed a regulation (couple years ago) that severely limited STRs where the owner was not resident on the property. A petition was created to place the item on the ballot and it got enough signatures to get the item on the ballot. The city council rescinded their regulation (which had not yet hit the start date).

So problem averted, correct? Not necessarily. At the state level there have been numerous regulations proposed in hopes of addressing the housing crisis or simply to get votes. These regulations have included rent control (even though a ballot initiative to remove rent control limitations got whooped at the voting booth) as well as regulations to limit STRs.

Purchasing in San Diego (and possibly anywhere in the state of CA) expecting to STR is full of risk from both the state and city level but if you were house hacking (owner on site) the risk is significantly less as virtually all of the proposed STR regulations exempt STRs where the owner is onsite.

My own risk level, I would only purchase with STR as the plan in San Diego if I were to live on the property. Otherwise the risk of being banned is too high for my risk tolerance.

BTW according to Zillow, the value of our STR duplex has fallen just over $200K since these STR limiting regulations have been considered. This tells me that people who have San Diego STRs have been selling due to the risk. We are OK because even after the >$200K fall in value, we still have around $1M of appreciation on the RE.

I agree with the OP that the biggest risk to STR in many areas is regulations limiting them. It is why I am not purchasing more STR in San Diego.

I wouldn't purchase to short term rent in any city in the United States

and I can't wait until the term "house hack" falls out of the vernacular. stupidest term in real estate. That's how I tell the difference between a seasoned investor and someone who read a few books

@Dan Heuschele Thank you for clarifying the San Diego regulations. I agree that it's a bit too risky for my blood. 

Move along Ken. We don't need your trolling here. 

Originally posted by @Wendy Schultz :

Move along Ken. We don't need your trolling here. 

Oh man, That just put a smile on my face. I've been reading threads regarding STR for a few hours now and I was getting a bit sleepy. This woke me back up. hahaha.

Just got a letter from the HOA where I have a house trying to get a vote banning STR from that neighborhood. I didn't know the HOA could simply campaign against STR and then vote them out.

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