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.

Melissa Haworth · Answer

Good post. Florida is a little different on this, which is worth knowing for anyone looking at the Panhandle. State law (509.032(7)) keeps cities and counties from banning vacation rentals outright or setting how long stays have to be, unless the rule was already on the books before June 1, 2011. So in places like Destin, PCB or Pensacola Beach you're less likely to get the surprise city council vote you described. Where it can bite people here is the condo or HOA docs. Florida protects current condo owners from a new rental restriction unless they voted for it, but anyone who buys after the change is stuck with it. So I always tell buyers to read the declaration and the recent board minutes before closing. And yeah, run the long-term numbers anyway.

Muyees Ayilara · Answer

Irv, this is a real one. I have seen this happen in Florida too, not just the small resort towns.

You are right on the main point. If the deal only works on nightly numbers, you are betting on the city council never changing their mind. That is a bad bet. From what I see on the lending side, the pain hits twice. First, the income drops because you go from nightly to long term. Second, when you go to refi, the lender is not going to use your old Airbnb history anymore. They are going to use the long term rent number, like you said. So the value and the loan amount both drop at the same time. That is why I always tell people to run it both ways before they close. If it works as a long term rental, even if it is tight, at least you have a fallback. If it only works as an STR, you have no plan B. The prepay point you made is big too. A lot of people do not read that part of the note until they need to get out, and then they find out it is going to cost them to exit. I have not had to convert one myself because of a ban, but I have had to refi a few after the rules changed. The ones that made it were the ones that could still cover the payment on long term rent.For the guys who did have to convert, did you find the long term tenant pool was actually there, or was that a struggle too? I feel like that is the part people do not talk about enough.

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.

Adam Summerer · Answer

Nashville is a good example of this already being on the books, not just a what-if. New non-owner-occupied STR permits aren't issued in the R, RS, RM and AR2A zones, and existing permits there aren't transferable when the property sells. So anyone buying an operating Davidson County STR in those zones should underwrite the loan as if the next owner can't keep the permit, because they can't. On the financing side, STR DSCR programs vary a lot. Some use projected nightly income, some haircut gross rents, and some want a higher coverage ratio than their long-term rental product. Ask the lender which rent they'll use at refinance, not just at purchase.

Jason Tarabokija · Answer

Good post. In the Jersey Shore towns we work in, the rules can be completely different ten minutes apart. One town licenses nightly stays, and the next one over only allows weekly and longer. So before anyone buys, I tell them to read that town's actual ordinance, check what's on the council agenda, and run the numbers as a weekly or seasonal rental too.

Our towns have rented to summer visitors for generations, but that doesn't mean the rules stay put. Showing up to town meetings and running clean, licensed rentals has done more for us than anything else.

Rati Meskhishvili · Answer

@Irv Arreola @Muyees Ayilara

I tried to put a number on the refi part, because I think the monthly gap is only half of it.

For example, let's take USD 500k cabin, with 25% down payment at 6.75% interest. That's about USD 2,430 a month on the loan plus, say, USD 600 for taxes and insurance. So about USD 3,030 in total a month. If long-term rent covers 70% of that, rent is about USD 2,120 and you are short about USD 900 a month, or around USD 11k a year.

But to refi on that rent, the loan itself has to shrink. At the same rate, getting to 1.0 coverage means a loan of about USD 235k instead of USD 375k, so about USD 140k cash in. At 1.2 coverage it's about USD 195k cash in.

So the real exit cost could be much bigger than the monthly gap. Muyees, what coverage do lenders actually want on a refi like this, once it's being judged on long-term rent?

(I used AI tools to help run the numbers.)

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

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?

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