High risk/high reward STR markets, capped permits, etc. Thoughts?

[Sean Bramble]

Many long-standing vacation markets link permits to properties, which makes them transferrable. i.e., once you have one, you own a hospitality asset that can be sold in the future as a business rather than a "home". i.e., sell at cap rate instead of based on comps. Either that, or they won't ever cap permits, making your investment just as transferrable. These markets are WAY more business friendly, but I've noticed cashflow is often lower given appreciation driven by recent flood of investors/ second home buyers. Think Destin, Smokies, blah blah ... you know where I'm talking about

Then you have rapidly developing "new" vacation markets in more rural areas where counties/ towns are still figuring out how to treat STRs. I've come across a few that seem somewhat dependent on occupancy taxes (i.e., probably won't outright ban STRs in the future), and require nontransferable permits linked to people (not properties) which haven't been capped ... yet ... could happen eventually if enough locals complain. So they're STR friendly today, but tomorrow is unknown. If they cap permits, current investors will likely get grandfathered in and be allowed to continue operations, but they won't be able to sell later at the premium STR cashflow implies bc permits aren't transferrable ... so not-so-great exit options. You'd be selling based on comps instead of cap rate and miss out on a lot of upside. That said, capping permits caps supply, so your cashflow is assured to remain high if you keep the property. OR maybe they won't cap at all ... no one has a crystal ball.

Cashflow tends to be higher in some of these "newer" markets, but the risk profile is a totally different ballgame - higher risk, higher return, but possibility that new regulation hurts your exit options and causes a lot of headaches. THESE are the markets I'm interested in - just my personal preference and risk tolerance

Anyone out there pursuing similar off-the-beaten path markets? How do you think about these risks?  Would love to hear your thoughts/ investment philosophy

Thanks everyone!