All Forum Posts by: Bryce G.

Appraisers may shy away from using the income approach to write appraisals, but the broader market does reflect it.  If Gatlinburg, TN stopped allowing short-term rentals all of a sudden, market valuations there would likely fall, and probably by a lot.

Given the extent to which the STR premium may not be already priced in, an STR-focused residential REIT, or even an activist REIT that acquires enough housing supply to control the vote, changes STR rules and then exits a neighborhood or condo building could be an interesting, albeit unpopular, venture.

I think in most cases, a house which generates more income as an STR cannot be worth the same if STR is disallowed. Income-generating potential is the largest factor in the valuation of real estate and despite emotional attachment we have to our houses, they are no different. If a neighborhood in an area where STR rents are higher votes to allow STR, they are unlocking a value increase by increasing the price which new buyers and investors would be willing to pay for houses/assets in that neighborhood. The only way value could be higher in an neighborhood that bans STR, is if non-STR occupants are willing to pay more per unit time than STR occupants. Perhaps there are places where this is true, such as high-end gated communities where STR demand is low and owners and non-STR occupants will pay more (call it the 'tranquility premium') not to have STRs in their neighborhood. But for many neighborhoods in touristy areas where the STR premium is higher than the tranquility premium, allowing STRs will increase values in the broader market. Even though some owners may not like it, I think market forces have a greater impact on value than personal preferences.

Good points.  Is probability-adjusted cost of an increase in undesirable occupants really high enough to warrant giving up $2M in valuation on a house?  In many cases I think the financial upside with STRs can justify increased tenant-screening costs, and potentially even some revenue-sharing mechanisms with neighbors.

In some areas, the government collects a tourism tax from guests, mitigating strain on local resources. I wonder if a similar model could work at a micro level with a fraction of STR revenue shared with impacted neighbors.

The response I get most often when I ask this question is that it's disruptive to local lifestyles to have more frequently rotating tenants and as a result STRs can decrease property values.  The first one is qualitative, but the second question is quantitative and pretty straightforward. Unless long-term occupants are willing to spend more per month than short-term occupants, any given property will always be worth more as a short term rental.

To give a numerical example, according to CBRE, the average US cap rate from H2 2022 is 6.14%. Consider a given property that can rent for $4500/month or $450/night (not atypical numbers for a 4 bedroom home in many touristy areas). Ignoring operating expenses for the sake of simplicity, its value as a long-term rental is $4500 * 12 = $54,000 / 6.14% = $879,805. Its value as a short-term rental is $450 * 365 = $164,250 / 6.14% = $2,677,850. The valuations would be equal if long-term and short-term rental rates were equal, but short-term rental rates are higher most everywhere in the world. HOAs and local governments that disallow short-term rentals are asking all owners to shoulder a heavy financial burden (in this example a ~$2M investment loss) for the benefit of the neighbors who believe that short-term rental tenants are disruptive to their lifestyle.

I get the sense that many opponents of STRs don't fully understand or consider the financial implications that their position to disallow STRs has on owners in the community.