Are STRs as we know them dead in Colorado (and other places)?

[James Carlson]

A bit of a rant here ... I've been in these forums for seven years and have followed the Airbnb laws in Colorado the entire time. I've always been able to find my STR clients investments that are legal and whose numbers works. Even new laws restricting short-term rentals seemed only to present new opportunities to savvy investors who knew how to find the gaps.

But the last year here, I've started to wonder if Airbnb and short-term rentals as I've known them are dead in Colorado. 

It seems that a mix of regulation on the legal side and taxation on the numbers side have changed the landscape. Anyone out there feeling this?

Airbnb laws

On the laws side, the noose feels like it's tightening. 

-- Much of Denver metro has outlawed it. (I know there are exceptions in Wheat Ridge, Westminster, Adams County, etc. I still have clients crushing it there.) 

-- Ski towns like Breckenridge and Steamboat Springs have essentially banned it. 

-- Unincorporated counties -- historically, the more conservative, skeptical-of-regulation type of government bodies -- have clamped down. Routt County, where Steamboat is, bans STRs. Clear Creek County and Gilpin County have caps and are past those caps, as is Summit County. Jefferson County, which technically allows short-term rentals, is fickle with permits and just revoked one of my clients' permits for arbitrary reasons.

-- The biggest indicator of turning public sentiment was just last month, in December, when voters in Woodland Park approved a ban on vacation rentals that also appears to NOT grandfather in existing licensed properties. I've never seen a new STR law that didn't grandfather in existing permitted short-term rentals. (Littleton and Colorado Springs, for instance, initially had laws allowing Airbnb and then revoked those laws but grandfathered in existing permits.) And Woodland Park is not known as a big liberal city.

Numbers side

And then there are the numbers, which just aren't as good as they were.

-- The influx of STR supply has certainly brought down Airbnb revenues the last few years for everyone. That dynamic will balance out this year, it appears, but still the gold rush of a few years ago is definitely over.

-- But the real nail in the coffin could come in the Colorado legislature which is considering reclassifying STRs as commercial property for property tax purposes. (Senate Bill 33, for those keeping score.) I just ran numbers for a client on a $550,000 property. Under current law, annual property taxes would be $2,300. If this new bill passes, their bill would jump to $9,800/year. 

So, what does this all mean?

The state law on property taxes is the biggie here. If it passes, I think the motivations to buy a vacation rental in Colorado will change from mostly investment to mostly personal. There will always be people with money who want a second home in Colorado who are fine as long as their mortgage is covered. But maybe the days of nabbing a killer STR investment are coming to a close.

If the property taxes are not changed, then you still have to deal with a shrinking pool of areas that allow STRs. But I think savvy investors will be able to navigate those laws to take advantage of artificially suppressed competition to do well. 

What are others feeling out there?

[John Mausteller]

Wow - this is crazy and I didn’t know it was getting like this out in Colorado.  It’s especially surprising that the mountain / ski resort towns have banned STRs.   I do agree across the board almost everywhere - the numbers are getting harder and harder to work.  Mainly because of increased competition coupled with high interest rates.   I’ll be curious if this bill passes reclassifying them as commercial.   

[Bruce Woodruff]

I think that (generally) vacation rentals will always have a place. People love staying in homes rather than just hotels. It has become a big part of travel......of course it will depend on the particular locale and the ordinances in place.

However - the property tax issue will absolutely kill it. Dead. This will force investors who are set on the STR thing to move their business - and their money - elsewhere. The morons proposing this type of thing never think that far ahead. Hopefully the bill does not pass, but if it does look for a good number of people to leave. The LTR laws in states like Washington and Cali are doing the same thing.... giving investors a reason to leave as well...

[James Carlson]

@John Mausteller

To be fair, the Colorado ski towns haven't literally banned STRs, but they have installed low caps on the number of permits and are getting to those caps only through attrition. The existing number of vacation rentals are so far over those caps that anyone who gets on the wait list today will likely wait 5-10 years before they're up for a permit.

I do think this is the natural progression of what is still a relatively new industry. In the infancy of this new wave of Airbnb, say 5 years ago, there was a lot of money to be had, which draws in a lot of investors, which starts to suppress the revenues and also draws attention from critics, which leads to taxation and regulation. I'm not always opposed to some of these measures, but I am objectively looking at how this will affect investing decisions.

I agree, the reclassification of vacation rentals to commercial property is the big issue I'm watching.

[James Carlson]

@Bruce Woodruff

I agree with a lot of what you said. I think the proposed bill could very well kill vacation rentals in Colorado. (I do wonder if over a few years, there would be a balancing out dynamic? Say, where that bill pushes so many investors to sell that remaining STR owners see their revenues go up, which offsets the increase in property taxes? Maybe, but probably not to a significant degree.)

I see your posts and know where you come from philosophically. I don't always agree that these regulations are terrible. I think governments have a role to play in trying to tackle affordable housing concerns, but even I think the reclassification bill will crush the little guy, or at a minimum needs revising. It does seem like the little guys found a way to make a little money here (Airbnb is often someone's first taste of owning a small business) and now we're going to treat all STR owners like a big corporation.

I know government wants to disincentivize the mass-buying of whole areas for vacation rentals. It's one tool for them in a fight for affordable housing. (The bulk of the problem is Nimby-ism and local regulations that prohibit sufficient building of new homes to meet demand.) Nonetheless, I could see applying this law but only to rentals owned by a single person above a certain number. Like, this doesn't apply if you own three or five or ten, but it applies to every STR you own above that number. Something that still allows the smaller operations to build something for themselves.

[Robin Searle]

@James Carlson I do think this bill will pass but the big unknown is exactly what the new tax rate will be. It's my understanding it will make a new category of "lodging" so won't be the same as commercial. I've heard it may increase tax rates to up to 4x current residential rates. Honestly I don't think it will go that far. For me personally with a triplex of STRs in Colorado Springs I'm watching and waiting. It wouldn't go into effect until 2025 with taxes due in 2026. The bill is due to be reviewed on Feb 13th. Lots of options as far as raising nightly rates as other STRs shut down, converting to MTR or LTR or doing an exchange to another state. I do think this bill will have a big negative impact on tourism in Summit County. Overall I think nationwide it's getting very tough to get into the STR space and make money and the fact that a municipality can tank your business at any time calls for a strong back up plan from the start!

[John Underwood]

It is definitely getting tougher all over the county.

It is always good to diversify.

The Pigeon Forge area has also reclassified STR's as commercial. This has driven up the property taxes there.

They also are implementing a new STR permit for those in the county but not in the city. The city already had a STR permit in place.

Our permit will cost us about $500 per year. I don't remember how much our taxes went up.

The good news the PF area embraces STR properties.

The bad news they are finding more ways to make money off these properties.

I have the bulk of my investments in LTR's and I'm happy with this.  

[James Carlson]

@Robin Searle

Great insight on the potential tweaks of the bill. I wonder if we all at some point revert back to LTR. Even the MTR market will start to be affected by this, right? I see a lot of people turning their short-term rentals into midterm rentals. At some point that market becomes saturated, pushing revenues down and the extra juice won't be worth the squeeze. 

[James Carlson]

@John Underwood

I didn't know that Pigeon Forge reclassified STRs as commercial. Have you seen any changes in the marketplace due to that change? Selloffs? Transitions to different rental models? And how big of a multiplier was the change from residential to commercial? Because here, the proposal would increase property taxes about 5x. 

[Bruce Woodruff]

@James Carlson You probably already know my thoughts on STRs vis a vis 'affordable housing' :-)

But this is going to play out as it will, and ultimately even Gov't intervention/restriction will fall to the power of the free market, so we'll see how it goes.

I wish the property owners and entrepreneurs well, although some of them will learn that 'elections have consequences' as 44 so famously said.

[Michael Baum]

I crossed Colorado off the list of STR states a while ago. You could see this coming for a while now.

[AJ Wong]

Quote from @James Carlson:

A bit of a rant here ... I've been in these forums for seven years and have followed the Airbnb laws in Colorado the entire time. I've always been able to find my STR clients investments that are legal and whose numbers works. Even new laws restricting short-term rentals seemed only to present new opportunities to savvy investors who knew how to find the gaps.

But the last year here, I've started to wonder if Airbnb and short-term rentals as I've known them are dead in Colorado. 

It seems that a mix of regulation on the legal side and taxation on the numbers side have changed the landscape. Anyone out there feeling this?

Airbnb laws

On the laws side, the noose feels like it's tightening. 

-- Much of Denver metro has outlawed it. (I know there are exceptions in Wheat Ridge, Westminster, Adams County, etc. I still have clients crushing it there.) 

-- Ski towns like Breckenridge and Steamboat Springs have essentially banned it. 

-- Unincorporated counties -- historically, the more conservative, skeptical-of-regulation type of government bodies -- have clamped down. Routt County, where Steamboat is, bans STRs. Clear Creek County and Gilpin County have caps and are past those caps, as is Summit County. Jefferson County, which technically allows short-term rentals, is fickle with permits and just revoked one of my clients' permits for arbitrary reasons.

-- The biggest indicator of turning public sentiment was just last month, in December, when voters in Woodland Park approved a ban on vacation rentals that also appears to NOT grandfather in existing licensed properties. I've never seen a new STR law that didn't grandfather in existing permitted short-term rentals. (Littleton and Colorado Springs, for instance, initially had laws allowing Airbnb and then revoked those laws but grandfathered in existing permits.) And Woodland Park is not known as a big liberal city.

Numbers side

And then there are the numbers, which just aren't as good as they were.

-- The influx of STR supply has certainly brought down Airbnb revenues the last few years for everyone. That dynamic will balance out this year, it appears, but still the gold rush of a few years ago is definitely over.

-- But the real nail in the coffin could come in the Colorado legislature which is considering reclassifying STRs as commercial property for property tax purposes. (Senate Bill 33, for those keeping score.) I just ran numbers for a client on a $550,000 property. Under current law, annual property taxes would be $2,300. If this new bill passes, their bill would jump to $9,800/year. 

So, what does this all mean?

The state law on property taxes is the biggie here. If it passes, I think the motivations to buy a vacation rental in Colorado will change from mostly investment to mostly personal. There will always be people with money who want a second home in Colorado who are fine as long as their mortgage is covered. But maybe the days of nabbing a killer STR investment are coming to a close.

If the property taxes are not changed, then you still have to deal with a shrinking pool of areas that allow STRs. But I think savvy investors will be able to navigate those laws to take advantage of artificially suppressed competition to do well. 

What are others feeling out there?

I've written extensively about this recently. The window of opportunity to own and operate a successful, particularly luxury vacation rental in premium areas is open but closing. On the OR Coast the regulations have grown 10X in the past 5 years, but there is still significant opportunity, particularly for initial owner/operators. 20%+ CoC is still quite common for premium Coastal STR's.

[Sean O'Keefe]

I hope not

[James Carlson]

@Bruce Woodruff

Quoting 44 ... you're pandering to me. ;)

I do find it interesting how housing issues often cross political lines. (And God strike me down for wading into politics here.) I see some conservative areas here who would traditionally support private property rights coming down heavy against STRs. And then I see liberal areas for whom affordable housing is the cause du jour suddenly balk when multi-family density is proposed in their neighborhood. 

We will certainly see how this plays out. I think there will be a lot of crossover in this upcoming legislative fight. 

[James Carlson]

@AJ Wong

Yeah, I've seen your posts about the Oregon coast. It seems every market goes through a cycle -- unnoticed potential; early titillation as the potential becomes known; flood gates open and gold rush is on; property prices rise, revenues drop, regulations come in; and finally balance is found. Like you're pointing out, it's nice to find a location that's early in that cycle.

For most STR buyers here in Colorado, your motivation better be as-much-or-more to have a place to visit in the mountains because you're cash-flowing a little but nothing spectacular.

[Leland S.]

When the STRs are now selling at the 1% rate you expect for a long term rental, the market has become saturated and too risky. My STR property has seen a hit. Getting a $150/nt on a 4-bed house, then getting $200 damage and having to haggle with Airbnb to get it paid out is just boorish.

[James Carlson]

@Leland S.

Yep, when I'm running quick numbers on STRs in Colorado, I use a ratio of gross annual rent to price. I'm seeing about 10% for most properties, if they're nice enough, 12% is better and 15% is a really about as good as I see. So yeah, that's even less than that typical 1% rule. 

Again, it's now about wanting to have a place in Colorado (because this state is F-ing awesome). Most of my clients nowadays are not pure investors. They're aspiring mountain-property/vacation rental owners who want to visit and hope their rents when not visitng can cover their mortgage.  

[Leland S.]

Quote from @James Carlson:

@Leland S.

Yep, when I'm running quick numbers on STRs in Colorado, I use a ratio of gross annual rent to price. I'm seeing about 10% for most properties, if they're nice enough, 12% is better and 15% is a really about as good as I see. So yeah, that's even less than that typical 1% rule. 

Again, it's now about wanting to have a place in Colorado (because this state is F-ing awesome). Most of my clients nowadays are not pure investors. They're aspiring mountain-property/vacation rental owners who want to visit and hope their rents when not visitng can cover their mortgage.  

 I'm in the same boat, and wish to have a mountain home. As I looked into Gulf beach house investments, the numbers there are break even. Likely the same thing, people are fine with having a zero cost vacation home. 

[John Underwood]

Quote from @James Carlson:

@John Underwood

I didn't know that Pigeon Forge reclassified STRs as commercial. Have you seen any changes in the marketplace due to that change? Selloffs? Transitions to different rental models? And how big of a multiplier was the change from residential to commercial? Because here, the proposal would increase property taxes about 5x. 

 I think it was a 2x or 3x multiplier. I don't remember.

I doubt anyone is selling due to this. If they are them they had too thin of margins already.

[Collin H.]

Government eventually eats its own. Taxing authorities have had their eye on vacation rentals as a huge, new found pot of gold.  Not only do they gouge the owners with massive new tariffs and no increase in services, but tourists as well, with exorbitant occupancy taxes.

But greed kills, and these overreaches will do the same.  

[AJ Wong]

Quote from @James Carlson:

@AJ Wong

Yeah, I've seen your posts about the Oregon coast. It seems every market goes through a cycle -- unnoticed potential; early titillation as the potential becomes known; flood gates open and gold rush is on; property prices rise, revenues drop, regulations come in; and finally balance is found. Like you're pointing out, it's nice to find a location that's early in that cycle.

For most STR buyers here in Colorado, your motivation better be as-much-or-more to have a place to visit in the mountains because you're cash-flowing a little but nothing spectacular.

Agreed. I'm a huge fan of Boulder and hope to acquire something in the area one day soon. Same story for the coast. There are not a plethora of 'home run' STR's that are going to return in 2-3 years but there is significant value and definitely properties that will return 20%+ COC and definitely several dozen that are obvious values in their own right, and will absolutely carry all operating costs. Six figure income is still impressive for any residential SFR..optimally rates improve and so will rates of return with a refinance. Several have mentioned utilizing low down payment second home loans for qualifying. We've closed had a few luxury/jumbo STR's that way, where the revenue is surpassing projections.

[James Carlson]

@Leland S.

Well if you opt for the mountain home over the Gulf home, let me know. ;)

[James Carlson]

Quote from @AJ Wong:

Quote from @James Carlson:

@AJ Wong

Yeah, I've seen your posts about the Oregon coast. It seems every market goes through a cycle -- unnoticed potential; early titillation as the potential becomes known; flood gates open and gold rush is on; property prices rise, revenues drop, regulations come in; and finally balance is found. Like you're pointing out, it's nice to find a location that's early in that cycle.

For most STR buyers here in Colorado, your motivation better be as-much-or-more to have a place to visit in the mountains because you're cash-flowing a little but nothing spectacular.

Agreed. I'm a huge fan of Boulder and hope to acquire something in the area one day soon. Same story for the coast. There are not a plethora of 'home run' STR's that are going to return in 2-3 years but there is significant value and definitely properties that will return 20%+ COC and definitely several dozen that are obvious values in their own right, and will absolutely carry all operating costs. Six figure income is still impressive for any residential SFR..optimally rates improve and so will rates of return with a refinance. Several have mentioned utilizing low down payment second home loans for qualifying. We've closed had a few luxury/jumbo STR's that way, where the revenue is surpassing projections.

Boulder's awesome. Had a client close on an MTR there this summer in a nice townhouse walking distance to Pearl Street. Can't do STRs there, but again he's fine with covering most costs and then getting to use it a few months of the year. 

Sounds like you're doing well with your properties out west. Congrats. 

[AJ Wong]

Quote from @James Carlson:

Quote from @AJ Wong:

Quote from @James Carlson:

@AJ Wong

Yeah, I've seen your posts about the Oregon coast. It seems every market goes through a cycle -- unnoticed potential; early titillation as the potential becomes known; flood gates open and gold rush is on; property prices rise, revenues drop, regulations come in; and finally balance is found. Like you're pointing out, it's nice to find a location that's early in that cycle.

For most STR buyers here in Colorado, your motivation better be as-much-or-more to have a place to visit in the mountains because you're cash-flowing a little but nothing spectacular.

Agreed. I'm a huge fan of Boulder and hope to acquire something in the area one day soon. Same story for the coast. There are not a plethora of 'home run' STR's that are going to return in 2-3 years but there is significant value and definitely properties that will return 20%+ COC and definitely several dozen that are obvious values in their own right, and will absolutely carry all operating costs. Six figure income is still impressive for any residential SFR..optimally rates improve and so will rates of return with a refinance. Several have mentioned utilizing low down payment second home loans for qualifying. We've closed had a few luxury/jumbo STR's that way, where the revenue is surpassing projections.

Boulder's awesome. Had a client close on an MTR there this summer in a nice townhouse walking distance to Pearl Street. Can't do STRs there, but again he's fine with covering most costs and then getting to use it a few months of the year. 

Sounds like you're doing well with your properties out west. Congrats. 

Thanks! Definitely proud of the vacation rentals and investment deals my clients secured last year. Although it was hyper competitive and timing was super critical on the majority.. I wish more of my clientele had an appreciation for MTR. SO many more options and the reduced responsibilites and work loads are under valued until you deal with them.. lol Also when you factor in management fees it can be quite comparable in net proceeds, without the wear and tear on the property and furnishings. 

[Albert Hasson]

Heightened regulation is going to be a nationwide trend over the next few years.  It will happen in red AND blue states.

Why?

It's simple, people who spend good money on the home of their dreams don't want STR's next door to them. People don't want to share their quiet neighborhoods with renters who don't value peace and quiet and a sense of community. I am so so glad I've kept all my properties as LTR's. Not sexy but I sleep like a baby every night and cash those checks on the 1st of every month!!

[Mark S.]

@James Carlson Both markets I am in have reclassified STRs as commercial. Playing devil's advocate - why shouldn't they be? A STR is not someone's primary home so why should it be taxed as such. It is a business. And how much of this (taxes, regulations) is a reaction to investors setting up STRs anywhere and everywhere without any consideration to the neighborhood they are doing it in and the impact on that neighborhood. Sure, someone is going to respond that ‘my STR always has nice quiet guests and is impeccably maintained' and that may be true. But there are places for STRs and places they don't belong because they introduce a transient business into a residential, ‘know your neighbor' area.