Investment

Do New Short-Term Rental Regulations Make Investing Risky?

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New short-term rental regulations are sprouting up around densely-populated states like California and New York. These regulations can stop new investors from setting up shop while making established hosts much wealthier. with stricter short-term rental lawswhat should real estate investors do to hedge their risk against being stuck with a property that can’t be rent out?

Both Ashley and Tony own short term rentals. Ashley’s is situated in a town with no regulations, while Tony has vacation rentals scattered across multiple markets, each with its own specific ordinances. Tony knows that even with these new laws, there are still steps you can take to ensure that your short term rental investment isn’t ever at risk of being left empty.

If you want Ashley and Tony to answer a real estate question, you can post in the Real Estate Rookie Facebook Group! Or, call us at the Rookie Request Line (1-888-5-ROOKIE).

Ashley:
This is Real Estate Rookie episode 204. My name is Ashley Kehr, and I’m here with my co-host Tony Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast, where every week, twice a week, we bring you the inspiration, information and stories you need to hear to kickstart your investing journey. And one of the things we like to do when we start off is read some of the wonderful reviews that have come in for this podcast, from the folks in the rookie community. And today’s podcast comes from Brandy18, and Brandy says, “Love this podcast!! Ashley and Tony are so knowledgeable and such a wealth of knowledge. I really love the Rookie Reply episodes because they have been so relatable. Thank you for all that you do for us rookies.”

Tony:
And low and behold, today is another Rookie Reply. So what are we talking about today, Ashley Kehr, what’s going on?

Ashley:
We’re talking about short term rental regulations. So we had actually brought this up on one of our podcasts very briefly. So we thought it would be a good idea to go into a Rookie Reply about it. So where I invest right now, my only one short term rental that’s up and running, there is no regulation at all. It’s a very small rural town, but I know Tony where you invest there are regulations. And I believe in Joshua Tree, those regulations are changing.

Tony:
Yeah, exactly. So we thought it’d be cool to kind of talk about the changing landscapes around short-term rental regulations. So before I dive into specifically what’s going on in Joshua Tree, where we invest quite a bit. I want to talk about that first piece, just about like policies in general, and how we kind of navigate those in our business.

Tony:
We typically like to look for places that have clear established and somewhat mature policies around short term rentals in that city. We typically … and this is us in our business. We typically avoid investing in places that have zero short-term rental policies and permitting procedures whatsoever, because it’s hard to know which way the dice will roll if and when that city ever decides to implement short-term rental permits or some kind of ordinance.

Tony:
So for example, back in April of this year, the City of Ithaca, New York, we were traveling across United States and we landed in like Western New York. And I was just doing some research around that area, that region. And one of the cities, Ithaca, New York, they allowed for short term rentals, but they ended up passing this ordinance that severely limited the ability for owners to operate their short term rentals. So essentially if you didn’t have a lakefront property, you could only list your property out 29 days out of the year. Which is less than 10% of the available time that you were able to do it before. And even if you had a lakefront property, I want to say it was like somewhere in the mid 100 days that you could rent out your property. So I like to invest in places that already have established really clear policies and processes around short term rentals.

Tony:
The second thing I look for when I’m investing in a market is economic dependency. And what I mean by this is I like to invest in places that are economically dependent on the revenue that short term rentals generate. So in the smokey mountains, there’s no big business headquarters, there’s no universities, there’s no shipping ports, there’s no film and TV. Same thing in Joshua Tree, like the main thing driving these economies is the vacation industry. It’s people coming in, staying for a couple of nights, usually in a short term rental, and then going back home. So, it would be very hard for me to imagine that in Joshua Tree or in the smokey mountains or all these other markets we’re looking into, that they would tell us as the owners, that we can only rent out our property 29 days out of the year. Because it’s like, where would people stay? Like where would people go if they limited us in that way? So, anyway, I just wanted to preface it first by saying, that’s kind of my take on how we’ve handled permits so far.

Tony:
Now, the change that happened in the area of ​​Joshua Tree is that they haven’t limited or banned short-term rentals, but they have made it a little bit more difficult for folks to get their permits in terms of what you need to show when you’re applying. They’ve increased the cost. They’ve also increased the cost for the actual permitting fee that you have to pay to apply. And there’s also talk about them limiting how many short term rental permits one person can have. If you were in before this new change, you’re grandfathered in. So for us, we’ve got quite a handful of properties out there, so we’re fine. But moving forward, they’re saying that they’ll limit the number of short term rental permits that one person can have to two.

Tony:
Now, is that a bad thing? I don’t know. I mean, it might be a good thing for us because we already have a pretty dense population of properties out there. And there are some ways, I think as property managers, you can still add to your portfolio. But it’s not a ban. It’s not telling us that we can no longer profitably operate our short term rentals. So I think anytime someone hears about a shift or a change, they immediately freak out and say, “Short-term rentals are the worst. And I don’t know why you guys are doing this and there’s too much risk.” But that’s not always the case. I think understanding what those changes are, making a game plan and moving forward from there is the best way to go.

Ashley:
And worst case scenario, you can go into another market.

Tony:
Exactly.

Ashley:
right?

Tony:
yeah.

Ashley:
And like you said, you were grandfathered into what you had existing into that area. And then, you make that pivot, you make that shift and go into maybe even a different real estate strategy, which you know you would love to evict tenants someday. But yeah, so thank you so much for that wealth of information, Tony, on just the rules of regulations. Did you have anything that you wanted to add to that?

Tony:
The only other thing that I’ll add is that demand and policies are not related to one another. So even in Ithaca, New York, where they limited the number of stays to 29 days. So there was a 90% reduction in the utility of a property, that doesn’t mean that there was a 90% reduction in demand for that market. So if you ever get to the point where there’s this artificial limit on supply, as demand continues to grow. Well, law of supply and demand means that prices go up.

Tony:
So honestly, if you ever do find yourself in a situation where say the number of short term rental … let me give you a real world example. One of the cities we invest in is Twentynine Palms, California, which is the neighboring city to Joshua Tree. They just recently passed an ordinance and they’re going to cap the number of permits they’ll issue at any given time to 500. Well, we have three properties in that city, it’s now capped to 500. So, for the near future , we’ll never see more than 500 properties active in that market. So what does that mean? It means that as demand continues to increase for properties in Twentynine Palms, but this pool is fixed at 500. It means we can start raising our prices because there’s this limited supply, but there’s this increasing demand. So it means people will be willing to start paying more. So, it might hurt your ability to scale in a market, but honestly it could improve your property’s profitability if some of these regulations get passed.

Ashley:
And who wouldn’t rather have less properties and make more money? Than having more properties-

Tony:
More making less.

Ashley:
To make that same amount. yeah.

Ashley:
Well, thank you guys so much for joining us for this week’s Rookie Reply. I’m Ashley @wealthfromrentals and he’s Tony @TonyJRobinson on Instagram. And we’ll be back on Wednesday with a guest and we’ll see you guys next time.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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