Short or Long Term Rentals?

Question

Hey BP. I'm a new investor, initially started on BP 3 years ago but took an unintentional break, now looking to start analyzing properties and better understanding the Palm Springs market. I've done two hard money loans recently and am now looking for short or long term rentals to build some equity. As I'm currently working full time, a long term rental seems more attractive at face value, but I've heard Palm Springs can be a great STR market as well.

With the right setup I think both are great options, but curious to get other insights and perspectives on pros/cons for both. I've also heard some of the cities in the area are tightening up restrictions on STRs which is definitely a major consideration.

Austin McAnena · Answer

@Ben Stoodley very helpful and I really appreciate your insights, which reinforce my initial strategy to focus on long term rentals. With an expensive Southern California market, I’m now really looking to expand to out of state emerging markets, where I can look to do multi family. My only previous apprehension was the ability to be close and/or need to travel constantly, but with advice from others I know it can be done with the right analysis and due diligence. Thanks for helping out a rookie!

Melissa Wesling · Answer

Hi Austin, It's important to have an agent who has experience with short term vacation rental investment properties to help you find the areas that have rental friendly regulations and desirable locations for guests. Let me know if you need a recommendation! It looks like Palm Springs has some regulations like licensing and inspections. Sometimes cities will also require licenses and inspections for long term rentals as well. I have STRs and LTRs (in the Midwest). A positive to LTRs is that you can set it and forget it if you have good tenants. A pro to STRs is the profit can be much higher than an LTR. You can consider trying the property as an STR and then turn it into an LTR if need be in the future (as long as it follows the regulations).

Ben Stoodley · Answer

@Austin McAnena it depends on your current financial position and investing goals. I see you’re working full time for what sounds like a cool company that’s could do great in this environment , so if you plan to stay full time for the next few years AND you’re making decent money, I say go LONG TERM. Your decision isn’t final, you can always change after current leases expire. Short term is under a lot of heat with tons of taxes like mentioned earlier. It may make sense, but, you would need to know every detail about those laws. For example, some of those areas near Coachella can get enough STR income in 1-2 weekends to cover annual mortgage ! If your subject falls into that category (and the laws haven’t changed the ability to do this during Coachella and Country Fest) then I would seriously consider that. This is a unique situation available due to those concerts. BUT, COVID could really effect those type of concerts negatively. Another reason to go long term is that most lenders will underwrite the deal based on long term rents. So the value and overall project analysis should be done on LONG TERM rental income regardless. Any STR plays can be handled down the road. Hope this helps !

Ben Rodriguez · Answer

@Austin McAnena I hope my insight can be helpful. I am unfamiliar with the Palm Springs market, however I ran 2 STR in Nashville during our boom. There were a lot of hoops to jump through in order to stay compliant with the developing city policies. After 4 years of that silliness, we sold one property and rented the other one long term. I will say if you can get good tenants, the long term is definitely a great way to go. One of the biggest things to consider is what are the costs of doing STR in your area. In Nashville to run it above board you had to start a business specifically for the STR, you had to collect and remit sales tax as well as Occupancy and Privilege tax which all together ended up being in the 40% range. That kind of money, on top of all the expenses of operation (laundry, snacks, etc.) can really eat in to potential profits.However, it can still pay your mortgage and all utilities fairly easily. I never used an STR management company so they could be an easier route for all of that.Shoot me a line if you have any other questions about STR.

Austin McAnena · Answer

That's a really good point @Melissa Wesling, having the option to move from STR to LTR as long as the situation makes sense for the property and regulations in the area. A lot of great ideas to evaluate!

Austin McAnena · Answer

Thank you @Ben Rodriguez, that's super helpful to see the other side of STR's with the incremental costs associated, along with any city-wide regulations. Considering a STR management company as well could make all the difference.