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.
Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
3y
So in my neighborhood HOA I get it.
There are people with young kids that don't want the potential sex offender or serial killer or the late night Bachelorette parties making noise at 2AM. They deserve quite and peaceful enjoyment of their property.
That is why I don't buy in an HOA neighborhood. I buy in tourist areas where vacation rentals are embraced.
Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
3y
So in my neighborhood HOA I get it.
There are people with young kids that don't want the potential sex offender or serial killer or the late night Bachelorette parties making noise at 2AM. They deserve quite and peaceful enjoyment of their property.
That is why I don't buy in an HOA neighborhood. I buy in tourist areas where vacation rentals are embraced.
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.
I dont believe that is how it works. take 2 identical houses in a neighborhood. #1 is used as a long term rental, #2 is a short term rental. now, the money they generate is different, the STR will generate more money (while also having more costs), but their value would both be the same. in fact, a case could be made that house #1 is more valuable, as it has less wear and tear than house #2.
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.
Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
3y
Yeah, a house is a house. A home used as a STR has the same value as one used as a primary residence.
I believe that most of the opposition to STRs is partially a perceived problem. A properly run and maintained STR isn't a problem.
Having said that, I think the main issue that municipalities have is the lack of LTR housing for residents. In some areas, there has been a dearth of LTRs. Sedona AZ comes to mind.
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.
as someone who is on an HOA board, yes we do allow STR's, but we wouldnt even consider getting involved with your points. i dont know about other places, we barely get people to volunteer for our board positions as it is and we dont require much.
Real Estate Consultant · OH · Member since 2023 · 2k+ posts · 1k+ votes
3y
Something I have wondered about with local government.... is there a force behind the hotel industry pushing for cities to ban or heavily regulate STR so they don't lose as much business?
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.
Rockaway, NJ · Member since 2016 · 2k+ posts · 2k+ votes
3y
transient residents will always care less about a property than long term residents, which increases the risk to the collective community. you're lying to yourself if you think you'll mathematically prove your way out of that.
"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."
This premise is correct for buildings of more than five units. However, it's completely incorrect for single family homes. SFHs are valued using the comparative market approach meaning, regardless of income, it's compared to the physical attributes of nearby recently sold homes. You can see this simply by recognizing that about 30% of single families already show income, in the form of long term rents, and neither those rents nor the NOI are even acknowledged in an appraisal.
Not only is the small percentage of STRs (1% of homes currently?) not going to change that dynamic, but you can already see this in high STR locations. This is included in an appraisal on a property in Gatlinburg, TN, where ~90% of the homes are STRs:
"The sales comparison approach to value was given primary weight with some consideration to the cost approach due to the age of the subject property. THE INCOME APPROACH WAS NOT APPLICABLE IN THIS REPORT." (caps are mine)
I have three other appraisals, in the same market, essentially saying the same thing, so it isn't a one-off appraiser.
Any lender will tell you the same thing which would leave as the buyer pool cash buyers dumb enough to pay more for the exact same house than another simply because it's renting as an STR.
"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."
This premise is correct for buildings of more than five units. However, it's completely incorrect for single family homes. SFHs are valued using the comparative market approach meaning, regardless of income, it's compared to the physical attributes of nearby recently sold homes. You can see this simply by recognizing that about 30% of single families already show income, in the form of long term rents, and neither those rents nor the NOI are even acknowledged in an appraisal.
Not only is the small percentage of STRs (1% of homes currently?) not going to change that dynamic, but you can already see this in high STR locations. This is included in an appraisal on a property in Gatlinburg, TN, where ~90% of the homes are STRs:
"The sales comparison approach to value was given primary weight with some consideration to the cost approach due to the age of the subject property. THE INCOME APPROACH WAS NOT APPLICABLE IN THIS REPORT." (caps are mine)
I have three other appraisals, in the same market, essentially saying the same thing, so it isn't a one-off appraiser.
Any lender will tell you the same thing which would leave as the buyer pool cash buyers dumb enough to pay more for the exact same house than another simply because it's renting as an STR.
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.
Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
3y
Cap rates/ the income approach is typically only used to evaluate and compare 5+ unit multifamily buildings/ commercial property whereas single family homes are valued based on comps. Your typical home buyer doesn't care about the cap rate or potential income from using the property as an STR or even an LTR, they care about the character of the neighborhood, the quality of the local schools, the commute to their job or proximity to family, the finishes, the floor-plan, updated kitchens and baths, the paint color, the yard, etc.
HOAs and local governments are typically against STR's because STR's are a considered a commercial use of a property, and most neighborhoods consisting of single family homes/condos are residentially zoned which doesn't allow for commercial use. Also due to the steep appreciation curve over the past few years, which has outpaced income increases in many places, a lot of areas are experiencing issues with affordable workforce housing and low inventory in general. STR's are seen as exacerbating that problem because they reduce the number of housing units available for locals to purchase as a primary residence, which is what residential properties are zoned for.
Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
3y
Cap rates/ the income approach is typically only used to evaluate and compare 5+ unit multifamily buildings/ commercial property whereas single family homes are valued based on comps. Your typical home buyer doesn't care about the cap rate or potential income from using the property as an STR or even an LTR, they care about the character of the neighborhood, the quality of the local schools, the commute to their job or proximity to family, the finishes, the floor-plan, updated kitchens and baths, the paint color, the yard, etc.
HOAs and local governments are typically against STR's because STR's are a considered a commercial use of a property, and most neighborhoods consisting of single family homes/condos are residentially zoned which doesn't allow for commercial use. Also due to the steep appreciation curve over the past few years, which has outpaced income increases in many places, a lot of areas are experiencing issues with affordable workforce housing and low inventory in general. STR's are seen as exacerbating that problem because they reduce the number of housing units available for locals to purchase as a primary residence, which is what residential properties are zoned for.
Rental Property Investor · Orange County, CA · Member since 2016 · 740 posts · 529 votes
3y
A lot...... you are correct, some towns/ residents SELFISH. yes- SELFISH. Those in power are voted in by the people that are against it who are SELFISH. HOTELS, lobbyists, retired neighbors, etc. For example: Tourism is good bc it brings in $ for the local businesses which means they are more busy. But "locals" that have this selfish mentality don't care, what they see is they have to stand in line or wait for the restaurant or store, or traffic issues. Its an inconvenience to them and its quite selfish. Because the local business needs $ and then they can spend more money and hire more people. The taxes the city gets can help create MORE jobs, etc.
STORY TIME: I have a couple STR cabins in the mountains and there is a big STR hate group up there and I made the mistake of commenting on the open facebook group about STR's and I kid you not- one person actually said, "Do you know how hard it is to get a window lake view at the restaurant with these STR"s up here? I have to wait 30 minutes just to get my favorite spot". That is literally why she hates STR's- (see....selfish reasons). I told her, if the STRs go away- will you support the restaurant and eat there for every meal? Because that restaurant will be closing down without tourists unless you plan to support them and make up for it!
Investor · Manteca, CA · Member since 2017 · 1k+ posts · 2k+ votes
3y
Because most HOA communities with long term owners don't want to live next to short term "hotels". Constantly having new "neighbors" that range from perfect to absolute nightmares
As a home owner, I want my neighborhood, calm, quiet, clean, well maintained and stable. Yes.... some STR LL and PM's can provide that consistently .... but some dont. Too many variable constantly changing. Too many variables with how well its run, maintained and who is "living" there.
Now if I live in a resort type community...built around some destination or attraction, then it comes with the territory. The tourists ARE the economy.... I'd still prefer they stay in resorts or hotels, rather than live next to me.
Property Manager · Orlando Kissimmee Davenport Salt Lake City, Park City · Member since 2019 · 991 posts · 1k+ votes
3y
The same reason we would all throw a hissy if our neighbor told us they were bulldozing their house and putting in a steel mill there.
People don't want commercial businesses that have the potential to be disruptive in the middle of their quiet residential neighborhoods. And they're fine to think that.
Of course, zoning laws prevent your neighbor from building that steel mill. And in time, they will prevent you from operating that STR as well. They've just been slow to catch up to the STR changeover from someone crashing on your couch to full-on short-term rental only properties that are essentially a boutique hotel. But more and more areas are catching on and changing every day, and 50 years from now there's almost no chance you'll still be able to run an STR in a residential neighborhood anywhere.
Buy STRs in tourist areas where commercial STRs are expected and necessary. Or chase the returns in a private neighborhood where businesses aren't supposed to operate. The choice is yours, but no one is going to weep for you when that residential neighborhood that doesn't allow commercial use starts cracking down on people trying to use their property commercially.
"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."
This premise is correct for buildings of more than five units. However, it's completely incorrect for single family homes. SFHs are valued using the comparative market approach meaning, regardless of income, it's compared to the physical attributes of nearby recently sold homes. You can see this simply by recognizing that about 30% of single families already show income, in the form of long term rents, and neither those rents nor the NOI are even acknowledged in an appraisal.
Not only is the small percentage of STRs (1% of homes currently?) not going to change that dynamic, but you can already see this in high STR locations. This is included in an appraisal on a property in Gatlinburg, TN, where ~90% of the homes are STRs:
"The sales comparison approach to value was given primary weight with some consideration to the cost approach due to the age of the subject property. THE INCOME APPROACH WAS NOT APPLICABLE IN THIS REPORT." (caps are mine)
I have three other appraisals, in the same market, essentially saying the same thing, so it isn't a one-off appraiser.
Any lender will tell you the same thing which would leave as the buyer pool cash buyers dumb enough to pay more for the exact same house than another simply because it's renting as an STR.
Residential RE (<5 units) is based on comps, but the comps take into account numerous factors including potential income.
Those Gatlinburg appraised value was based on comps (not income), but those comps reflect the income potential. This is because investors purchase at prices that result in the RE being profitable. The higher the income, the higher the investor can and will pay which drives the prices upwards which is reflected in the comps. The high STR revenue of the last few years is what have driven up the prices substantially in properties close to the Smoky mountains.
Yeah, a house is a house. A home used as a STR has the same value as one used as a primary residence.
I believe that most of the opposition to STRs is partially a perceived problem. A properly run and maintained STR isn't a problem.
Having said that, I think the main issue that municipalities have is the lack of LTR housing for residents. In some areas, there has been a dearth of LTRs. Sedona AZ comes to mind.
Yes, it's true, in Sedona very rarely do you find a profitable LTR investment. STR's, however, are crushing it- if approached correctly.
There may be financial benefits to a community, but not everything is about money. When I buy a home in a nice residential neighborhood, I want it to remain a nice residential neighborhood. I don't want different neighbors every 3-5 days. I want neighbors I can build a relationship with and our kids can grow up together. Rotating visitors increases the risk of noise issues, crime, and other problems that I don't want in my neighborhood, even if it will increase my property value.
Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes
3y
As someone that was in the thick of the legal battles in 2016 to save Nashville STRs I can provide a lot of insight into this issue. I attended all of the city hearings on STRs and proposed legislations.
I heard home owners speak out about their experiences living next to STRs and I too would be very upset and want them all gone.
A mother was talking about how she had a new born baby and between Thursday through Sunday they never slept due to the parties happening next door. She started full on sobbing while describing her experience. This is not a once of STR experience that she was describing. This was a common occurrence. There were blow up dolls in the windows, beer cans on the front lawn, etc. No one...and I mean no one wants to live next to that.
One can argue that's just a result of a poorly managed STR, well if that's the case then almost all of them are poorly managed since that's such a common experience. I personally managed my STR and did vetting like crazy for guests. I looked through facebook profiles, etc. I still had instances of parties happening and I called the police on my own STR to shut it down.
The other issue here is the affordability factor for long term renters and home owners. Back when Nashville was a free for all STR location, for every house I built 100% of the pre construction interest was an investor looking to buy an STR. It is such an incredibly lucrative market that every single house would be turned into an STR. I saw it happening in 2016. The cost and availability to LTR and home owners would be greatly diminished. Sure...you can make the argument that the market would regulate itself at some point.
As someone that supports STRs being allowed to operate, I 10000% understand the concerns people have and I too would be very upset with the stories I have heard. I also fully support some restrictions that have been put in place to protect homeowners.
I understand you would like everyone to look at the question the way you do. Homeowners, however, are not concerned about investor benefits, they are focused on their own property values and on quality of life which is what gives value to the neighborhood as a whole. Speaking as homeowner myself (gotta update my BP Profile).
Real Estate Agent · Syracuse, NY · Member since 2018 · 4 posts · 0 votes
3y
@Bryce G. My town just banned STR's. I am currently in the middle of a project and now trying to decide if I should flip it instead of keeping it like I had originally planned
As someone that was in the thick of the legal battles in 2016 to save Nashville STRs I can provide a lot of insight into this issue. I attended all of the city hearings on STRs and proposed legislations.
I heard home owners speak out about their experiences living next to STRs and I too would be very upset and want them all gone.
A mother was talking about how she had a new born baby and between Thursday through Sunday they never slept due to the parties happening next door. She started full on sobbing while describing her experience. This is not a once of STR experience that she was describing. This was a common occurrence. There were blow up dolls in the windows, beer cans on the front lawn, etc. No one...and I mean no one wants to live next to that.
One can argue that's just a result of a poorly managed STR, well if that's the case then almost all of them are poorly managed since that's such a common experience. I personally managed my STR and did vetting like crazy for guests. I looked through facebook profiles, etc. I still had instances of parties happening and I called the police on my own STR to shut it down.
The other issue here is the affordability factor for long term renters and home owners. Back when Nashville was a free for all STR location, for every house I built 100% of the pre construction interest was an investor looking to buy an STR. It is such an incredibly lucrative market that every single house would be turned into an STR. I saw it happening in 2016. The cost and availability to LTR and home owners would be greatly diminished. Sure...you can make the argument that the market would regulate itself at some point.
As someone that supports STRs being allowed to operate, I 10000% understand the concerns people have and I too would be very upset with the stories I have heard. I also fully support some restrictions that have been put in place to protect homeowners.
In the same boat as Luka-- I think where nashville laws have landed have been pretty good! If your property is zoned for a commercial purpose or you have an approved Specific Plan/ HOA that allows it, then Rent it out all you want. but if it is zoned for Single family, leave it single family or allow the owner to do a primary occupancy STR and not taking away their right to make money with their own home-- which was the full intent of AirbnbSTR when it started.
All governing bodies need to consider the needs and concerns of it's citiczens with those who want to invest in their city from the outside. So part is political and part is economical.
With our already low inventory of SFR being available at affordable prices ( since nashville wages have not kept up with the cost of living and most cities have that issue so nashville is nothing special) if every new construction was pre-sold as an STR you have a few things happen,
1) You turn area's or subdivisions in to hotels/ ghost parts of town where there are not occupant owners that want to live due to the issues assocaited with what luka mentioned
2) Build quality is already low , but you de-incentivize quality construction because the it will just be a rental / short term home so the quality of the inventory produced goes down, so future investment and future inventory is hurt for SFR since not many people -- as being an agent, want to live in a home where it was used and abused for years on end, because a lot of times those homes doe not attract the average home buyer sine they want a home not a hotel and want better quality homes.
3) you increase the rate of in-affordability if all homes were STR's .... in the past decade of living here what I bought when I first moved here at $127,000 in 2011 to What that same house is worth at $500,000 and I've done absolutely nothing to it except make it a rental property and maybe buy a few more with the heloc i got, but I am part of the problem of owners who bought, have multiple units , are not selling and contributing to higher prices and lower inventory but I am doing well for myself and my business which is fine, but i am in a position to say it's fine, where most people just want to live in a place they love and close to where they work, and if they cannot afford a home since all these STR are carrying an extra 150-250k premium on the sale price then it puts wealth building on hold or out of reach for others and government is the body that can regulate and but some guard rails on both
and finally then we have to consider what is best for the health of the city. If a City is a tourist built city, then we have tourist built problems (which nashville already has in droves ) but if we build our cities to incentives long term residence, growth, business, -- the whole city benefits from a healthier and more stable and robust economy and honestly a more enjoyable place to live. Which will incentivizes more investment, more tourists and more STR Communities and SFR construction over the long term.
Real Estate Agent · Houston, TX · Member since 2021 · 1k+ posts · 715 votes
3y
Indeed, the financial implications of short-term rentals can be substantial for property owners. These benefits should not be downplayed when discussing the impact of STRs on real estate values. However, it is important to also consider other factors that may contribute to disruption in local lifestyles such as noise levels, "party-houses", and overcrowding. As a result, cities have begun to introduce regulations regarding STR operations in order to better balance the interests of both homeowners and renters.
