How Will STR Restrictions Affect MTR Profitability?

Question

In locations where STR become restricted, it seems probable that many, if not most STR owners who are no longer legally able to offer the STR option, will choose to turn to MTR. With a house full of furniture, and a possible need (due to purchase price and investment return expectations based on higher STR income) for greater income than a LTR can generate, the MTR option seems like "the next best thing". So, basic supply and demand in the marketing area would lead one to expect that MTR prices will decline, leading to much disappoint, stress and possible negative returns for existing MTR property owners in those areas.

Kinda makes MTR investing in metropolitan or suburban areas a little tricky. Perhaps when considering a MTR investment, one should run an analysis based on more competition and lower rates (stress test) to see how the investment performs under these conditions. I fear this may render even a greater percentage of residential properties outside the "investment" range with ROI too low to consider.

What do YOU think?

Jamie Banks · Answer

I’m seeing a lot of STRs convert to MTRs in markets with increased STR regulations. As you mentioned, this can lead to price softening as operators reduce their monthly rates to improve vacancy. In my opinion, in order for those in the MTR space to really succeed, we need to be proactive not reactive. Gone are the days where you can just list on Airbnb and Furnished Finder and hope for 100% vacancy. Reaching out to insurance companies, corporations, and relocation companies to either get direct contracts or to be listed on their preferred housing inventory list is necessary to maintain high occupancy coupled with continued high rent rates.

Dan H. · Answer

I have experienced exactly what the OP describes…We had an STR that operated legally as an STR for 24 years (in Mission Beach) not get selected in the recently enacted STR lottery. There were almost 200 units not selected in the lottery. I have no way to know how many of these were existing furnished STR units but I believe it was a very large percentage. The result was many furnished STR units could not be rented as an STR. I suspect a very large percentage of these units chose to convert to MTR units generating a glut of MTR units. I have minimal insight as to the other units and recognize my sample of one is a minimal sample size. What I accepted for MTR monthly rent ($3.5k) was 1) ~10 days of my summer STR rent 2) about 50% of my average monthly rate for the year 3) virtually the same as I could get as an unfurnished LTR rent but I provide furnishings, pay utilities, and pay a higher PM fee (15% MTR vs 8% LTR). This means that I accepted a much smaller return for my MTR than I would have received if I had converted it to LTR. We have made 7 digits plus on this property. I can afford to run it as an MTR indefinitely even with the negative cash flow (our PITI on this unit is ~$4k). However, I should not be financially stupid to keep it as a MTR. The MTR Tenant is in until Oct and may extend further (they are traveling nurses). When they vacate we may need to re-evaluate but I want to keep it as furnished rental regardless of chance of getting a STR permit in the near future (we were initially in the 80s in the wait position, but 50+ lottery winners have been accused of cheating on the lottery so we may be in the low 30s if none of the accused cheaters can prove they did not cheat).What about owners that have purchased recently and have not made the profit we have on their property? If their MTR rent has fallen similar to my experience, many have to be financially struggling. If they bought recently at high LTV they have to be experiencing very large negative cash flow as either a LTR or MTR (likely not even covering their PITI (plus MTRs pay utilities and have higher PM fees than LTR).As indicated I can weather this setback indefinitely or I can choose to convert to LTR helping the cash flow situation slightly. Selling will not happen. I would be interested to hear other people’s experience who have had their STRs regulated away and to contrast it with my experience.

Luke Stewart · Answer

This is key, write them out as LTR properties, then you can always fall back on those rents if the MTR doesn't work. This was my approach with a duplex this spring and it definitely makes things less stressful as the market changes.

Rob Bergeron · Answer

I would not be putting a bunch of eggs into the mid term rental market in my market (Louisville).

Dan H. · Answer

The lottery was set up as a weighted lottery. There were 3 weighted tiers for STR operations and proving you paid the occupancy tax. Max weight happened for 5+ years. Fifty some users are accused of using STR data and tax payment from previous ownership to get max weight into the lottery. Seeing my two Mission Beach STRs have been operated by family as STR since 1999, 1) I wish there was additional weight given for more than 5 years 2) it is unfair for those that used previous ownership as their STR to increase their chance in the lottery. by the way the city required the STR owner to provide occupancy and tax payment records. This leads me to conclude that the city has no easy record of who has been paying STR occupancy taxes or who has been operating STRs. They can look up sales records and see if property has changed ownership in the time that it has been claimed as operated by current owner as STR. I suspect they have zero easy means to catch someone that has owned for at least 5 years that makes up the occupancy and occupancy taxes paid. Scary. The way it should have worked is city looks at their records determining who has paid occupancy taxes for each threshold for the weighted lottery. They notify owner of what city records show and if in error owner gets opportunity to prove they paid occupancy taxes longer that city believes. A year ago, I fired my STR PM. I needed to get the records from them. Fortunately my owners portal was still up back then and I was able to get this data. What if I could not? I guess instead of 1 out of 2 lottery picks I would have had better chance of getting zero even though the STRs have operated every year since 1999.I have not heard any update on the cheating scandal since it first broke ~2 months ago. I do not know how many if any lost their STR licenses. I do not know my current position in the queue. I could be as high as ~30 (if all fifty something lost their license). I will still be very slow moving up as new housing results in 30% (so rounded 3 new units results in one new STR license) and I suspect those with licenses will not switch from STR or sell.

Don Konipol · Answer

Absolutely 100%. This is the BEST advice I’ve seen in any MTR thread!

Colleen F. · Answer

@Dan Heuschele How do you cheat in the lottery? @Bonnie Low You have seen more people enter the MTR market but also a demand fall off. The health worker segment of MTR has existed for a long time but demand fluctuates and they aren't looking for the same locations in some areas as STR. You may see some perfectly good STR not make it as MTR. Some people may also exit MTR due to having underwritten a property as a STR.

Bonnie Low · Answer

Yes, I absolutely agree with your stress test concept @Don Konipol and have been thinking about it quite a lot lately. MTR has burst onto the scene (despite some people continuing to insist it's not a "thing") as an investing and hospitality niche in its own right. I hear many new investors wanting to get into MTR investing specifically, which I think is a risky move if you're a new investor and in it solely for the purpose of offering MTRs. And now we have the new pressure of failed STR properties or those regulated out of their markets shifting to this niche, which makes sense as an option if you already have a furnished rental that you probably paid top dollar for, but unfortunately, the underwriting for MTRs is very different than STRs. VERY different. Further, it can be tricky to find your ideal guest and to market to that niche. It's not as easy as just throwing your property in Airbnb. So it's likely that many investors making a last ditch effort to pivot to MTR won't be successful because the numbers just don't work and lead gen is more challenging. I think we're seeing a lot of low quality hosts fail in STRs not just because their markets are saturated but because the properties are sub-par and so is the guest experience. Those factors are no different in MTR so if you're failing in STR and trying to salvage your investment in MTR, you're likely to be plagued by the same issues. However, if you've bought your property right, underwritten it conservatively, AND you have a great property, great design and a hospitality mindset, you'll probably beat the vast majority of the competition. Personally, we always underwrite out MTRs as LTRs. If they work as an LTR, they'll work (at last from a numbers standpoing) as an MTR. It would be much, much harder to have underwritten it as an aspirational STR then have to try to pivot. As you pointed out, the MTR space is about to get real crowded, but I'm fairly confident the market will normalize. We saw a lot of people jump into STRs over the last few years since it became more well known, folks like Avery Carl helped de-mystify and systematize it and we all heard the hype of people just killing it through COVID. Those days are mostly over and I suspect we'll see the numbers of STR units normalize over this year and next and, more importantly, the number of low quality operators disappear first from the STR space. I think we can pretty much predict the same will happen in the MTR space as well. It's just my guess, but it seems likely.

Chris Seveney · Answer

@Don KonipolI agree. I have never been a big fan of MTR as it’s a very limited client pool and high vacancy for many (of course there are those that perform well whixh people will comment about rarely people comment when things go bad). I have read reports that 75-95% of real estate investors fail. You would think from those on BP the numbers would be inverted.I think besides the STR ban more apartment complexes are keeping a unit as a MTR as well which allows for people traveling for work but also those visiting family. The ease of a complex managing the unit is far superior than having to manage a single family. Thus I agree with you the supply side is continuing to increase and demand is not maintaining supply which will lead to a race to the bottom on rents or converting it to a long term rental - which if numbers don’t work as a long term rental then shame on investor as there are even probably 1000 posts on BP about making sure your STR works as a LTR.

Alexandra Jimenez · Answer

I'm currently worried about this as I have 3 MTRs in Louisville where STR restrictions have sent STR owners scrambling into MTRs. The feedback from a couple of prospective tenants who have come to see my property is that it ticks all of their boxes but as local rates drop they went for price. I lowered my rent, but if I go much lower I may as well just rent it as an LTR. What constitutes ideal revenue between LTRs vs MTRs. What's considered decent profit margin that makes it worth doing an MTR vs LTR?