What happens to your STR loan if the city bans short term rentals?

Question

I came across a situation this year that every STR investor should sit with for a minute. Picture an investor who buys a three bedroom cabin in a small resort town, and the deal only pencils because of nightly bookings.

18 months later the city council votes to ban stays under 30 nights for non owner occupied homes. Just like that! , the property is a long term rental, and market rent covers maybe 70% of the payment.

Now every refi conversation starts from the long term rent number, not the Airbnb history. That's a tough pill to swallow when you bought on the nightly numbers.

What took from it:

• Run the deal on long term rent too. If it only works as an STR, you're betting on the city council.

• Check local rules and what's on the council agenda before you close, not just what's legal today.

• Read your note for prepayment terms. Exit options vary by lender, and you want room to move if the rules change.

Has anyone here had to convert an STR to a long term rental because of a rule change? How did you handle the financing?

John Racine · Answer

@Irv Arreola Agree on running the long-term numbers. One thing I'd add: a lot of these bans are written as "stays under 30 nights," and that leaves a middle option between nightly and a 12-month lease, which is furnished stays of 30+ days.

That's how I already run most of my units. The calendar is set for 30+ day stays with 30-60 day minimums, short stays only fill gaps of a few days to two weeks, and I leave a 60-day window after each stay so mid-term guests can extend. One construction crew extended four times and stayed 90+ days. So when a city moves to a 30-night minimum, a furnished unit doesn't automatically become a long-term rental. It can keep running furnished at 30+ days.

Two caveats. Read the actual ordinance, because some cities define the minimum differently or regulate furnished rentals too. And 30+ day revenue can come in below what the nightly history showed, so it's a floor, not a replacement. Still, underwriting three ways (nightly, 30+ day furnished, and long-term unfurnished) gives a more realistic downside than jumping straight to LTR rent.

On the financing side, I'm not a loan or finance expert, but I'd imagine a DSCR loan could be affected. I wouldn't expect much else to change. Curious whether you've seen lenders give any credit to 30+ day furnished history on a refi.

Jules Aton · Answer

Mine are in heavy tourist beach areas which I feel provids some insulation. They can add more hoops to jump through and increase permit fees but would cause a riot if they put a dent in tourist traffic and the dollars that come with it.

Lauren Kormylo · Answer

Mine is too, a seasonal beach town, where the residents depend on summer visitors and second-home owners for their economy. There are only 1,300 year round residents, and over 25,000 visitors on a summer weekend. If they outlawed STRs, I could sell at a profit, as real estate there continues to go up.

Ametria Chaney · Answer

This is such an important cautionary tale, and you laid it out perfectly. The loan itself doesn't change when the rules do — the payment, the rate, and the note stay as signed — but everything the loan depends on does. A lender refinancing that cabin will underwrite it on long-term rent, so the value and the exit both shrink overnight. That's why I always tell investors to underwrite a property two ways before they buy: once on the short-term numbers and once on long-term rent. If it only works as a nightly rental, you're not buying a property, you're betting the city council never changes its mind. Here in Memphis, we've seen how quickly local rules and neighborhood demand can shift, so that second set of numbers is the one that protects you. Thanks for sharing this — it's a lesson newer investors need before they close, not after.

Dan H. · Answer

I have long time STRs (since 1999) that are located where they recently implemented a quota. One on my STRs did not get a permit (despite having legit max lottery entries meaning I had proof of paying the transit occupancy tax (TOT) at least 5 years and not more than 3 complaints) along with over 100 other STR lottery entries not getting a permit. This caused a glut of MTR rentals as virtually every one of the existing STRs that did not get a permit transitioned to MTRs. The MTR rent was the same at LTR but landlord was paying utilities, furnishings, and sometimes OTA fees on the MTR. This implies MTR was resulting in far less cash flow than the LTR.

You would think this would result in a mass transition to LTR but it did not. I very slightly considered the transition to LTR because I was mid 80s in the queue. By the time I got to the front of the queue via standard means (likely years), my furnishings lifespan could be up and I would need to purchase new furnishings to have a successful STR. Why stay as MTR? For me, personal/family use played a part in the decision. The unit also was not designed as an LTR and would be a quite limiting LTR. I also had already made a fortune on this property and could carry it for the rest of my life and still have made a fortune on this property. So i never gave converting to LTR a serious consideration.

So about 6 months after the quota went into effect, the city accused 80 some of cheating on the lottery, but each of the accused would get the opportunity to show they had not cheated. I suspect all or virtually all those accused of cheating was found to have cheated. Almost exactly one year after the quota went into effect I got my STR permit on this unit.

I make more as an STR than LTR on this unit, but even if they were the same I would operate this as an STR for family use. My brother stayed in the unit for about 1.5 weeks in Oct.

Rules change and not always in a fair manner (my STRs from 1999 should have got permits before those that were just being started as STRs but those not yet STRs got an entry in the lottery (not max lottery entries like mine). How is it fair that an STR that has paid TOT for over 20 years gets shutdown so someone else can start an STR?).. This is a risk and should be properly accounted for in any underwriting.

Good luck

Irv Arreola · Answer

Wow, This is a great real world example, thank you for sharing it. Mission Beach is about as tourist driven as it gets! I’m usually down there often myself

if a quota can land there, it can land anywhere.

The part that stuck with me is that the rule stayed even after the numbers behind it turned out to be wrong. That's exactly why I tell investors not to build the whole deal around today's rules. Look at what the property does as a long term rental too, and keep some reserves in case licensing takes a year like it did for you.

Glad the lottery worked out on your end. Out of curiosity,

Did you have a plan B lined up while you waited, or did you hold them vacant until the license came through?

Dan H. · Answer

I have STRs in the most touristy area in San Diego (mission beach). A pure beach vacation market. Where our units are located there is the beach 1 minute away and a large tourist attraction (Belmont park) a few minutes away. Hard to imagine a more touristy area.

There are people that look at STRs as taking housing stock away from the local citizens. The city council implemented a quota on STRs city wide. This included a quota (higher than the rest of the city) on the tourist area of mission beach.

Mission beach hit its quota which should not be a surprise as virtually every unit was a vacation rental. The rest of the city still has not hit its quota proving that they did not have the STR problem that the quota was implemented to address.

What makes this quota to address a problem that does not exist more aggravating is there are council members that still refer to the estimated STR numbers that have been proven to have been inaccurate.

My point is that even heavy tourist beach areas are not necessarily immune from anti STR regulations. You need to stay vigilant. They can make up reasons to regulate STRs and even if the made up reason is proven to be false, the regulations can stay.

For us, everything so far has worked out with respect to the lottery, but it did take some time (almost exactly 1 year).

Good luck

Andrew Steffens · Answer

Good points - some thoughts:

1 - This is why investing in FL has an advantage, Florida Statute § 509.032(7)(b) stops municipalities from changing STR laws. The locality can do some things like require inspections and registration but cannot ban it outright overnight. I believe AZ may have something similar.

2 - At least in my area, the lower echelon sub $500k STR's can usually pencil out to close to breakeven LTR (give or take a couple hundred per month), the lower end smaller home market is more crowded and offer lower returns. The higher end market $800k+ houses often have the best STR ROI but the biggest loss if you had to take it to a long term.

3 - Echoing pre-payment penalties, it is very important especially now when rates are high, not to trade a 3-5+ year pre payment penalty for a slightly lower rate if purchasing now.

What happens to your STR loan if the city bans short term rentals?

What happens to your STR loan if the city bans short term rentals?

Most Popular Reply

8 Replies