All Forum Posts by: Dax Nollenberger

Quote from @Jonathan Balog:

Hi Dax,

This is a great summary for someone looking to get familiar with the STR ordinances here in Monterey County. If I may offer one clarification - Carmel-by-the-Sea DOES allow short-term rentals but the area in which they are allowed is confined to the commercial district. There are several dozen legal/approved short-term rentals in the commercial district in downtown Carmel-by-the-Sea but the City is not issuing any new permits. If someone is interested in owning an approved short-term rental in Carmel-by-the-Sea, they would need to purchase a property that has an existing STR permit and transfer the permit with the ownership. I have been involved in several transactions in where this has been done.

 Interesting. Thanks for the clarification!

In the face of a transforming housing landscape and tightening availability, California has embraced Accessory Dwelling Units (ADUs) as a beacon of opportunity and practicality. Bolstered by state laws, cities, and counties have been mandated to open doors to Accessory Dwelling Units (ADUs) and Junior Accessory Dwelling Units (JADUs), offering homeowners new opportunities to maximize their property's potential. That said, this statewide initiative has led to a plethora of local ordinances, each with its own set of rules that can overwhelm those considering an ADU build.

In Santa Cruz County, the rules can vary depending on the location of your property. The incorporated cities—Santa Cruz, Capitola, Watsonville, and Scotts Valley—each dictate their own ADU regulations. In contrast, the unincorporated areas abide by the Santa Cruz County municipal code. This blog is the first in a series of ADU regulation educations that will address each regulating body in Santa Cruz County. Today, we start with the County itself.

As a Santa Cruz Realtor eager to educate both myself and my readers through extensive research, I aim to provide a base of knowledge that allows you to take action and tackle your ADU adventure. In this post, we’ll delve into the nuts and bolts of what an ADU is, explore its potential to alleviate the housing squeeze and navigate the specific regulations you’ll need to understand before adding an ADU to your property.

Disclaimer: These regulations are subject to change. Always consult with the County for eligibility requirements. 

What is an ADU?

An Accessory Dwelling Unit (ADU) is an independent dwelling unit with a dedicated exterior entrance that provides complete living facilities for a household… To meet this definition, ADUs must have a full kitchen, including a built-in permanently installed cooking appliance, and a full bath with facilities for sanitation and bathing. Courtesy of Santa Cruz County Code. See the Resource section for a link.

What is a JADU?

A Junior ADU, or JADU, is a dwelling unit contained within the walls of a proposed or existing dwelling unit, with a dedicated exterior entrance. JADUs can be converted from either habitable space (such as an existing bedroom) or non-habitable space (such as a garage or storage area). JADUs may not be more than 500 square feet in size, including additions of no more than 150 square feet. JADUs must include all of the following facilities: independent provisions for living, sleeping, eating, and cooking (area meeting the definition of an efficiency kitchen), and shared or separate sanitation facilities with the main dwelling unit. Courtesy of Santa Cruz County Code. See the Resource section for a link.

Definitions

Conversion ADU- The conversion of any portion of a legal accessory structure, or any portion of a single-family dwelling, or any garage, for the purpose of creating an ADU.

ADU Benefits

Now that it is clear what an ADU is, let's discuss the potential benefits.

1. Additional Income: The most obvious of the benefits listed, ADUs can supplement the mortgage, offset living expenses, or even pay for your next vacation!
2. Increased Property Value: Properties with ADUs are becoming increasingly attractive, particularly for those looking to jump into the market for the first time. While ADUs won’t influence every buyer, they are a nice incentive to encourage buyers to pay more.
3. Flexibility and Versatility: Even for those not looking to rent out the space, ADUs provide an opportunity for multi-generational living, a guest house, or even a work-from-home office space.
4. Value-Add Investor Opportunity: For those looking to build wealth through real estate, ADUs provide the potential for a significant increase in monthly rental income in addition to increased property value.
5. Community Benefit: ADUs increase housing availability for renters, reducing the housing crisis in Santa Cruz County.

Rules and Restrictions

Number of ADUs

• Single Family Home: One ADU and one JADU are allowed.
• Multi-Family Dwellings: On a parcel with an existing or proposed multi-family dwelling: up to two detached ADUs, which may be attached to each other, and a conversion ADU as long as it's up to 25% of multifamily units.

Dax’s Take: While the benefit of two additional structures is great for single-family homes, multi-family received an even larger benefit with the potential to add three additional living spaces to the property. That said, the restrictions listed below limit the number of properties that are eligible for multiple new living spaces.

ADU Size

• Minimum: JADU or ADU: 150 sqft.
• Maximum unit size, JADU: 500 sqft.
• Maximum unit size, ADU:
  • Conversion ADU: No maximum size.
  • New Construction ADU, Attached:
    • Parcel size less than 1 acre: 850 square feet (studio or one bedroom), 1,000 square feet (two or more bedrooms), or 50 percent of primary dwelling habitable square footage, whichever is smaller.
    • Parcel size greater than 1 acre: 50 percent of primary dwelling habitable square footage.
  • New Construction ADU, Detached:
    • 850 square feet (studio or one bedroom), 1,000 square feet (two or more bedrooms).
    • Parcel size greater than or equal to one acre: 1,200 square feet.
  • According to the County Code, regardless of the notes in this section, an ADU of at least 800 sqft feet shall be allowed.

Dax's Take: This one is confusing but I'll do my best to provide some clarity. The last note supersedes any restrictions listed above. That is to say, ADUs of at least 800 sqft are allowed. For attached ADUs, this means you can have a home that is 1200 sqft, limited by the 50% primary sqft feet rule (600 max ADU), but superseded by the last note allowing for an ADU of 800 sqft.

Setbacks

• New Construction Setbacks
  • Front setback is subject to the applicable zone district. The side and rear shall be 4 feet (or the applicable zoning district, whichever is less).
    • An 8 ft rear setback is required for any portion of an ADU over 16 feet tall.
  • Minimum separation distance between ADUs and other structures shall be three feet.
  • See County Code for all restrictions and exceptions.

Dax’s Take: Consult with County officials and building experts/architects to determine what and where you can build.

Height

• New construction detached ADUs shall be a maximum of 16 ft.
• ADUs built on top of a garage shall be a maximum of 20 feet exterior wall and 24 feet at the roof peak.
• Inside the Pleasure Point Combining zone district, ADUs that are built above garages shall be a maximum of 18 feet exterior wall and 22 feet at the roof peak.

Lot Coverage

• Parcels with ADU shall meet lot coverage and FAR standards for the applicable zone district, except that JADU and/or ADU square footage up to 800 sq ft may be excluded from Floor Area Ratio (FAR) and lot coverage calculations for both existing and new parcels.
• Zoning that does not involve a FAR standard includes RA, RR, A, AP, and CA. R-1 with 16k lot minimum.

Dax’s Take: The 800 ft that is excluded becomes an important piece when determining what you can build. Urbanized zones are more likely to already be up to max lot and FAR coverage. This may limit your ability to build multiple ADUs on your property.

Parking

• JADU have no parking requirements
• ADU: one off-street parking space per ADU.
  • ADU parking may be located in ADU setback areas.
  • NO additional parking for an ADU shall be required if the ADU is located within one half-mile walking distance of any public transit stop, within a designated historic district, or within one block of a dedicated parking space reserved for publicly available car share vehicles.
  • For areas with permit on-street parking, permits shall be offered to occupants of the ADU and/or JADU.
  • Replacement parking- When a garage, carport, or covered parking structure is demolished or converted into an ADU or JADU, no replacement parking is required for the primary dwelling unit.
  • Special Coastal Zone Parking Requirements- one space is required with no exceptions and replacement parking is required when existing parking is demolished.
  • LODA, SALSDA, DASDA, and Opal Cliff Dr between 41st and the city of Capitola.

Dax’s Take: When attempting to maximize your space, parking requirements often put a damper on your plans. That said, the exemption when located within a ½ mile of a public transit space is a critical distinction that opens up your opportunities. 

Other Rules

• New, detached ADUs must have solar.
• If the home is on septic, adding ADUs increases septic requirements. Consult with Environmental Health Services regarding feasibility.
• ADUs cannot be rented as a short-term rental. In addition, ADUs make the property ineligible for short-term rental permits.

Owner Residency

• For JADUs or ADUs not permitted between January 1, 2020, and January 1, 2025: The owner must reside in one of the properties.
• On properties with ADUs permitted during the five-year period from January 1, 2020, through January 1, 2025, owner occupancy is required only if there is also a JADU on the property.

Dax's Take: This is a critical fact that will can impact your ADU plans. I loathe this rule and frankly do not understand the reasoning for its implementation in the first place. That said, CA has passed laws, for a period, that allow non-owner occupancy. It seems likely that these new ordinances will eventually be extended given our rental housing shortage. My understanding is that if it was permitted before 2020 and is not owner-occupied, it can not be rented.

Application Processing

• Ministerial approval (approves or denies based on predetermined rules)
• Must get a response within 60 days.
• Exceptions to ministerial review: Inside a Coastal Zone or don’t meet the development standards.

Dax’s Take: The goal of ministerial approval is to reduce red tape and improve processing. If your lot and design meet the restrictions above, approval will be granted.

Permit + Processing Cost

• Cost is size dependent. ADUs under 750 sqft are exempt from both impact fees and most building permit review fees. ADUs over 750 sqft will cost you 3X ADUs under 750 sqft.
• EX: A new construction detached ADU in Live Oak will cost an estimated $5512 for 749sqft and $17,451 for 750sqft.

Dax’s Take: This is critically important to factor into design. ADUs that are less than 750 sqft are going to save you thousands of dollars.

In conclusion, understanding the local and state laws can be a vital advantage for a homeowner. Whether you're a homeowner seeking to enhance your property's value, a community member interested in addressing housing shortages, or an investor exploring Santa Cruz County opportunities, this guide aims to provide essential insights and practical knowledge when it comes to ADU benefits, requirements, and restrictions in Santa Cruz County.

Reach out if you want to explore ADU opportunities in Santa Cruz County.

Interested in learning about what areas of Monterey County allow Airbnb's? I've got you covered. 

Monterey County has 12 incorporated areas. For the sake of this post, I will focus primarily on the unincorporated portions of the county and the incorporated peninsula cities consisting of Carmel-by-the-Sea, Del Rey Oaks, Marina, Monterey, Pacific Grove, Sand City, and Seaside.

First, the unincorporated area of Monterey County. This portion is regulated by the county itself. The county has two distinctions that determine the rules applied to your property. Those distinctions are Inland and Coastal. According to the County website, In the inland areas of the County, short term rentals may be allowed by obtaining an administrative permit for transient occupancy. These permits allow short term rentals for not fewer than seven days and not longer than 30 days. These permits cost approximately $6,000. In the coastal areas of the county, short term rentals may be allowed by obtaining a coastal development permit under the category of similar use. These permits cost approximately $12,000.

Now the Incorporated areas…

Carmel-by-the-sea

Summary: STR NOT ALLOWED. According to the website, No home or subordinate unit may be rented for less than 30-days.

Carmel-by-the-sea STR website

Del Rey Oaks

Summary: Permits available and no cap!

Key notes:

24 hr. contact person required.
30-minute remedy time if issues arise.
Annual inspection for smoke detectors and carbon monoxide alarms.
Permit is non-transferrable.
10% transient occupancy tax.
Del Rey Oaks STR website

Marina

Summary: STR for hosted only. According to the website, the duplex or dwelling must be a primary residence, which is defined as an owner’s permanent residence or usual place of return for housing as documented by at least two forms of identification.

Marina STR website

Monterey

Summary: STR NOT ALLOWED. Any house rental of less than 30 days is illegal in Monterey.

Monterey STR website

Pacific Grove

Summary: STR permits are only allowed in the cities coastal and commercial areas (see map link below). Additionally, a lottery system means renewal is not guaranteed.

Key notes:

Transient Occupancy Tax rate is 12%
Number of active licenses: 77
Home Sharing (i.e. renting out a room within a Single Family Residence while owner/authorized tenant resides at the property) is permitted throughout the City subject to first obtaining a Home Sharing License
License Caps: STR Licenses are limited to 250 City-wide.
Must be 55+ feet plus away from an existing STR parcel boundary.
Map of eligible areas

Pacific Grove STR website

Sand City

Summary: STR permits are capped at 15. It is unclear whether non-hosted permits are still allowed.

Key notes:

Permits are non-transferrable.
$638 permit application fee.
$197 inspection fee.
Seaside

Summary: Seaside offers both hosted and non-hosted permits. Hosted is defined as: occupying the dwelling unit as a principal residence and must be present during the occupancy. Non-Hosted is defined as: renting out of an entire dwelling unit on a short-term basis.

Key notes:

Non-Hosted STR licenses are limited to 90 city-wide.
Exclusion of STR permit eligibility if with 55’ of an existing STR parcel.
Two adults per bedroom and a max of 9 adults for homes with 4+ bedrooms.
Subject to passed inspection by a third-party home inspector.
Seaside STR website

In summary, Monterey County has taken an excessively strong stance (IMO) on short term rentals, which has significantly limited homeowners’ ability to profit from the tourism industry. The restrictions are numerous and widespread, making it challenging to find suitable areas for short-term rentals. If you are considering Monterey County, there are a few areas that are more welcoming than others. Del Rey Oaks and Seaside provide the most clear and straightforward rules for STRs in the County. Del Rey Oaks has no cap and permits are available. Seaside provides two different permit options and straightforward permit restrictions. The unincorporated inland area provides opportunity for STRs if you are willing to accept the 7+ day rental requirements and an expensive initial permit cost. Pacific Grove is highly restrictive on location of their STR permits but do allow home sharing permits throughout the city. Marina offers hosted only permits and Sand City has limited their permits to 15. Meanwhile, Carmel-by-the-sea and the city of Monterey banned short term rentals completely.

If you'd like to learn more, reach out to me directly.

- Dax Nollenberger

Thanks for your opinion, @Michael Baum. The premise of my post was not intended to focus on "counting on appreciation as a way of cash flow". The point of that sentence both you and John pointed out was to indicate that it's difficult for traditional strategies to pencil. David Greene talks about this plenty. I always advise running the numbers and maximizing cash flow. STR is a great option because it CAN cash flow when others don't.
Historically, Santa Cruz does VERY well from an appreciation perspective (7.9% CAGR in the last 10 years). I think that will continue as coastal markets will always be in demand. I'm certainly not saying take a loss until it cash flows. 

Additionally, Santa Cruz County has already experienced significant tightening in STR restrictions and there is precedent for how they will operate if more restrictions are implemented. Owners were grandfathered in if they secured the permit before changes. That said, there is no indication that any more changes are coming.

I appreciate you reading my post. My goal is to inform and provide information that can help those seeking to implement this strategy here in Santa Cruz. 

Quote from @John Underwood:

Quote from @Dax Nollenberger:

Creativity is often the name of the game when it comes to owning Santa Cruz real estate. I’m constantly brainstorming ways that I can help my clients own this super valuable appreciating asset. Many traditional investment strategies don’t quite pencil with our housing prices. Breakeven is considered a win, especially in the short term. The highly profitable rentals- short, mid, and long- are those that have been owned for a long time (and therefore have lower costs).

The curiosity/desire to know more about owning an Airbnb in Santa Cruz is STRONG. And frankly, this is not an area of expertise for most agents. Why? Because it’s complicated! I really think intentionally so. The downside of Airbnb homeowners is that they take away long-term housing opportunities for Santa Cruz residents. The regulating bodies in Santa Cruz know this and have placed heavy restrictions on short-term rentals as a result.

Lucky for you, I’ve researched so you don’t have to (do as much).

The question that produces the biggest hurdle for prospective owners is: Where do I start?

I’ve created a step-by-step guide to help.

Step 1: Get Pre-Approval

The first step in any homebuying process. You need to know if you qualify and how much home you can afford. It makes very little sense to shop around, get super excited about properties in a certain price range, and then realize later your budget is less. This is a recipe for disappointment and inaction.

Step 2: Set your Goals & Strategy

Every person has their own reasons for wanting to purchase Santa Cruz real estate. Maybe it’s because you realize the appreciation potential of coastal markets and you want to ride the wave to long-term wealth. Maybe you just love to visit and want to supplement some of the cost. Maybe you are hoping to make it a true-cash flow strategy that generates a significant yearly return. Your goals are going to determine your strategy. Your goals will determine what location you want, what home type fits your needs, and what return on your investment you’ll accept.

This is something that I’m happy to work through with clients of mine. Clear goals and strategies help me narrow the search and focus on homes that fit your criteria.

Step 3: Find a Realtor

As noted before, this is not an area of expertise for most agents. I’ve put in the time and understand the intricacies/complexities of purchasing Airbnb’s. If you already have an agent, that’s ok too. Make sure they are well versed on the local regulations. It’s important so you’re not wasting your time on homes that you can’t (legally) Airbnb. If you have loyalty, you could even ask them to refer you out. It’s a win-win. Some questions to ask your Realtor:

• What areas in Santa Cruz County are restricted?
• Who regulates each area?
• What are the occupancy rate and nightly rate for this area?
• What are the most popular times of year for these rentals?

If they struggle with these, consider someone else.

Step 4: Analyze Deals

This is where the money is made. Determining area, price point, and potential profit will be critical to the success of your Santa Cruz Airbnb.

The first thing to discuss is what areas are ineligible. I wrote about the regulations extensively in this blog: What about a Short-Term Rental? so I won’t dive in too much here. The general premise is this:

• There are three regulating bodies in Santa Cruz County: The City of Santa Cruz, The County of Santa Cruz, and the City of Capitola. They each have their own rules.
• Capitola has a map, if you fall within it, you are eligible.
• City of Santa Cruz only offers Hosted Permits. Meaning you must live in the property for 6+ months out of the year. They no longer offer Non-Hosted so it must be a primary residence.
• County of Santa Cruz has restricted maps that all have waitlists. Areas along the coast are most likely restricted by the county. To see maps, waitlists, and restrictions, reach out. 
• The rest of the county outside of these zones is eligible for immediate permit approval (no waitlist).

The next thing you need to know is how much a house can potentially get. There are some excellent (and pricey) resources that can help estimate income.

One of my favorite experts to follow is Robuilt. He provides excellent step-by-step guides and resources for how to set up a proper Airbnb.

The go-to resource for data and projections for Airbnb is Airdna. They can provide occupancy, rates, and revenue estimates for the property. The cost is significant. Another (free) resource is awning.com. If you would like me to do a quick Airdna search for you, reach out!

In the next blog/video, I’ll dive into how to analyze a specific property. Be on the lookout for that.

Alright, let’s look at some valuable Airdna data that gives us an idea of how the Santa Cruz market operates.

A couple of takeaways from the data above. The rate and occupancy fluctuate depending on the time of year. The summer months are by far the most popular for Airbnb. Also, performance revenue is highly varied as it’s dependent on the host, property condition, property presentation, location, and overall experience. More on this in a coming blog.

Step 5: Identify a Property and Submit an Offer

If you get to this stage, congratulations you have overcome paralysis by analysis. So many get stuck in the what-if stage. What if the numbers are wrong? What if this isn’t a desirable property for guests? What if the market for Airbnb changes?

Those fears and anxieties will exist no matter how long you have been in the game. Having that fear and taking action anyways is a commendable step that requires courage.

Submitting an offer that makes sense based on the numbers is the key to long-term wealth in Airbnb’s. This means you may have to submit many offers. I am not condoning lowball offers; those lead to anger and distaste from the seller side. I am condoning submitting offers that are right (mathematically) for you.

Step 6: Remodel and Prepare for List

In an ideal world, the home that you just purchased is ready to list right away. In all likelihood though, some work will need to be done. In some cases, more than a little. Often times homes that present poorly when placed for sale (poor photography, no staging, and cosmetic issues) are the homes that you can get the best deals. Make sure you are aware of the condition of the property with proper inspections and ensure the rehab cost is factored into your overall budget.

You’ll also need to furnish the place. Experts like Robuilt suggest better quality furniture. You don’t want something breaking during every guest’s stay. He estimates $10 per sq foot as a furnishing budget.

Another stage in this process is submitting a permit application. Get on this ASAP because the processing can take some time.

Reach out for resources on how to apply. 

All three areas require Transient Occupancy Tax payments (14%).

Step 7: Professional Photography

DO NOT SKIP THIS STEP! This is critical. Potential guests are choosing your house based almost exclusively on the pictures. You want it to look good, right? Professional Photography provides an immediate return on your investment and the cost is reasonable ($300-$1000). Think of it this way, when you shop for homes on Zillow, which ones are you most attracted to? My guess is 95% would say the ones that are professionally staged and photographed. On average, quality staging and photography earn the seller an extra 5%.

Step 8: List and Earn!

You’ve (almost) made it! The final step before you start earning cash is to place on sites like Airbnb & VRBO. Make sure to set your rate appropriately. If you have made it this far, you probably have a pretty strong idea of what the home can get on a nightly basis. Tinker and adjust as you go to ensure your getting the ideal combination of rate and occupancy.

This, of course, is not all. It’s not a set-and-forget approach. There are many more decisions to be made and things to learn along the way. But, rest assured, the best way to learn is to dive in. If you have taken action, congratulations, you now own an incredibly valuable, appreciating asset. One that, if you did your homework, your guests are going to pay for.

Interested in owning a Santa Cruz Airbnb, let me be your guide.

Thanks for reading. – Dax

I don't consider breaking even a win.

Thanks for reading, John. California is a different animal. The margins just aren't there from an immediate return perspective. That said, historically, California far outperforms most of the country in terms of appreciation. If you maintain a long-term strategy and get tenants to pay your expenses, you're going to win. I certainly understand those that prefer the cash-flow strategy though!

Creativity is often the name of the game when it comes to owning Santa Cruz real estate. I’m constantly brainstorming ways that I can help my clients own this super valuable appreciating asset. Many traditional investment strategies don’t quite pencil with our housing prices. Breakeven is considered a win, especially in the short term. The highly profitable rentals- short, mid, and long- are those that have been owned for a long time (and therefore have lower costs).

The curiosity/desire to know more about owning an Airbnb in Santa Cruz is STRONG. And frankly, this is not an area of expertise for most agents. Why? Because it’s complicated! I really think intentionally so. The downside of Airbnb homeowners is that they take away long-term housing opportunities for Santa Cruz residents. The regulating bodies in Santa Cruz know this and have placed heavy restrictions on short-term rentals as a result.

Lucky for you, I’ve researched so you don’t have to (do as much).

The question that produces the biggest hurdle for prospective owners is: Where do I start?

I’ve created a step-by-step guide to help.

Step 1: Get Pre-Approval

The first step in any homebuying process. You need to know if you qualify and how much home you can afford. It makes very little sense to shop around, get super excited about properties in a certain price range, and then realize later your budget is less. This is a recipe for disappointment and inaction.

Step 2: Set your Goals & Strategy

Every person has their own reasons for wanting to purchase Santa Cruz real estate. Maybe it’s because you realize the appreciation potential of coastal markets and you want to ride the wave to long-term wealth. Maybe you just love to visit and want to supplement some of the cost. Maybe you are hoping to make it a true-cash flow strategy that generates a significant yearly return. Your goals are going to determine your strategy. Your goals will determine what location you want, what home type fits your needs, and what return on your investment you’ll accept.

This is something that I’m happy to work through with clients of mine. Clear goals and strategies help me narrow the search and focus on homes that fit your criteria.

Step 3: Find a Realtor

As noted before, this is not an area of expertise for most agents. I’ve put in the time and understand the intricacies/complexities of purchasing Airbnb’s. If you already have an agent, that’s ok too. Make sure they are well versed on the local regulations. It’s important so you’re not wasting your time on homes that you can’t (legally) Airbnb. If you have loyalty, you could even ask them to refer you out. It’s a win-win. Some questions to ask your Realtor:

• What areas in Santa Cruz County are restricted?
• Who regulates each area?
• What are the occupancy rate and nightly rate for this area?
• What are the most popular times of year for these rentals?

If they struggle with these, consider someone else.

Step 4: Analyze Deals

This is where the money is made. Determining area, price point, and potential profit will be critical to the success of your Santa Cruz Airbnb.

The first thing to discuss is what areas are ineligible. I wrote about the regulations extensively in this blog: What about a Short-Term Rental? so I won’t dive in too much here. The general premise is this:

• There are three regulating bodies in Santa Cruz County: The City of Santa Cruz, The County of Santa Cruz, and the City of Capitola. They each have their own rules.
• Capitola has a map, if you fall within it, you are eligible.
• City of Santa Cruz only offers Hosted Permits. Meaning you must live in the property for 6+ months out of the year. They no longer offer Non-Hosted so it must be a primary residence.
• County of Santa Cruz has restricted maps that all have waitlists. Areas along the coast are most likely restricted by the county. To see maps, waitlists, and restrictions, reach out. 
• The rest of the county outside of these zones is eligible for immediate permit approval (no waitlist).

The next thing you need to know is how much a house can potentially get. There are some excellent (and pricey) resources that can help estimate income.

One of my favorite experts to follow is Robuilt. He provides excellent step-by-step guides and resources for how to set up a proper Airbnb.

The go-to resource for data and projections for Airbnb is Airdna. They can provide occupancy, rates, and revenue estimates for the property. The cost is significant. Another (free) resource is awning.com. If you would like me to do a quick Airdna search for you, reach out!

In the next blog/video, I’ll dive into how to analyze a specific property. Be on the lookout for that.

Alright, let’s look at some valuable Airdna data that gives us an idea of how the Santa Cruz market operates.

A couple of takeaways from the data above. The rate and occupancy fluctuate depending on the time of year. The summer months are by far the most popular for Airbnb. Also, performance revenue is highly varied as it’s dependent on the host, property condition, property presentation, location, and overall experience. More on this in a coming blog.

Step 5: Identify a Property and Submit an Offer

If you get to this stage, congratulations you have overcome paralysis by analysis. So many get stuck in the what-if stage. What if the numbers are wrong? What if this isn’t a desirable property for guests? What if the market for Airbnb changes?

Those fears and anxieties will exist no matter how long you have been in the game. Having that fear and taking action anyways is a commendable step that requires courage.

Submitting an offer that makes sense based on the numbers is the key to long-term wealth in Airbnb’s. This means you may have to submit many offers. I am not condoning lowball offers; those lead to anger and distaste from the seller side. I am condoning submitting offers that are right (mathematically) for you.

Step 6: Remodel and Prepare for List

In an ideal world, the home that you just purchased is ready to list right away. In all likelihood though, some work will need to be done. In some cases, more than a little. Often times homes that present poorly when placed for sale (poor photography, no staging, and cosmetic issues) are the homes that you can get the best deals. Make sure you are aware of the condition of the property with proper inspections and ensure the rehab cost is factored into your overall budget.

You’ll also need to furnish the place. Experts like Robuilt suggest better quality furniture. You don’t want something breaking during every guest’s stay. He estimates $10 per sq foot as a furnishing budget.

Another stage in this process is submitting a permit application. Get on this ASAP because the processing can take some time.

Reach out for resources on how to apply. 

All three areas require Transient Occupancy Tax payments (14%).

Step 7: Professional Photography

DO NOT SKIP THIS STEP! This is critical. Potential guests are choosing your house based almost exclusively on the pictures. You want it to look good, right? Professional Photography provides an immediate return on your investment and the cost is reasonable ($300-$1000). Think of it this way, when you shop for homes on Zillow, which ones are you most attracted to? My guess is 95% would say the ones that are professionally staged and photographed. On average, quality staging and photography earn the seller an extra 5%.

Step 8: List and Earn!

You’ve (almost) made it! The final step before you start earning cash is to place on sites like Airbnb & VRBO. Make sure to set your rate appropriately. If you have made it this far, you probably have a pretty strong idea of what the home can get on a nightly basis. Tinker and adjust as you go to ensure your getting the ideal combination of rate and occupancy.

This, of course, is not all. It’s not a set-and-forget approach. There are many more decisions to be made and things to learn along the way. But, rest assured, the best way to learn is to dive in. If you have taken action, congratulations, you now own an incredibly valuable, appreciating asset. One that, if you did your homework, your guests are going to pay for.

Interested in owning a Santa Cruz Airbnb, let me be your guide.

Thanks for reading. – Dax

I wrote a blog recently about how Appreciation has historically compared by region and then zoomed into my market in Santa Cruz County. The results were quite fascinating. A 7.98% Compound Annual Growth Rate since 2010 is absurd. An abbreviated version is below:

In an ideal world (from a calculation perspective), homes would turnover yearly and you could easily calculate the change in value by calculating the percentage change in prices sold by year. Unfortunately, homes don’t turnover quickly. We CAN quickly measure individual appreciation of homes that have sold twice during a period of time. This doesn’t really help to measure entire market appreciation though… The best solution for calculating market appreciation is a change in median home price over time. I’m going to use the following measurements to determine the value of the growth by area:

Compound Annual Growth Rate (CAGR): It is the measure of an investment’s growth rate over time, with the effect of compounding taken into account (Investopedia). This is the primary tool for measuring past appreciation and predicting future appreciation- DN

Percentage Change: Total percentage change in median price over a specified period.

Dollar Change: Total dollar change in median price over a specified period.

I will be comparing National, Regional, State, and Local data going all the back to 1989 to show just how valuable Santa Cruz Real Estate is.

Enough with the buildup, let’s dive in with a visual BANG!

Let me say it again. REAL ESTATE IS AN INVESTMENT FAVORED BY TIME! Sorry, didn’t mean to yell but… isn’t this a great representation of the natural trend of real estate? Even with one of the largest housing recessions in US history, the trend of upward pricing is clear. What is also clear is that not all areas are created equal. While slightly flawed because we are comparing regions, states, and a locality, the general premise is not flawed, Santa Cruz Real Estate is a historically strong appreciation market. Zooming out, California and the West region are as well.

Side note: I wish I had local data going back another 20+ years. Then we could capture just how strong an investment many of our parents/grandparents made when they settled and invested in Santa Cruz. My parents bought their home for $119k in 1981 (Unreal, right?). That home has appreciated around 1076%!

For reference, here is how the regions are broken down by state.

A great way to measure the favorability of the investment is the Compounding Annual Growth Rate. As noted prior, this gives us an investments growth rate over time, with the effect of compounding taken into account. Below is the CAGR by area and timeframe.

To better understand this chart, let’s dive into a comparable example:

Let’s say the year is 2000. You’re considering every region in the US for a home purchase. You have $300,000 to spend and intend on spending that where ever you buy (even if it means multiple homes in one region). This is a buy-and-hold strategy. So, how much would it be worth today?

Northeast: $300,000 at 4.52% compounded over 22 years (start year not included): $793,429

Midwest: $300,000 at 3.74% compounded over 22 years (start year not included): $672,881

South: $300,000 at 4.72% compounded over 22 years (start year not included): $827,510

West: $300,000 at 5.27% compounded over 22 years (start year not included): $928,587

California: $300,000 at 5.73% compounded over 22 years (start year not included): $1,022,074

Santa Cruz County: $300,000 at 5.06% compounded over 22 years (start year not included): $888,677

Depending on where you invested you’re looking at a significantly higher (7% – 50%+) return on your investment in the Western States.

Quick note: California is higher than Santa Cruz County because counties such as Santa Clara (#1) and Orange (#2) drew up the gains for the state significantly. Santa Cruz was very strong though, ranking high in both dollar and percentage growth since 1990.

Santa Cruz County, California, and the larger West region have a couple of things going for when it comes to appreciation. Not only has it performed better than most of the country in terms of Compound Annual Growth Percentage, but it also did so with a much higher price point. This runs contrary to the expected outcome (see the law of diminishing returns). As the prices go higher, it should be more difficult to get a similar return as in previous years or other, less expensive, areas. And yet, Santa Cruz County, California, and the larger West region continue to outpace most of the country… widening the gap in home value and (un)affordability.

In 1998, the median home price in Santa Cruz County was 124.26% higher than the US Median Home Price. Since then, it has nearly doubled to 231.6%!

Some additional value needs to be placed on the rate of return given the original price point. After all, entering at a higher price point got you rewarded much greater than entering at a lower price point area. Revisiting the example above, it’s much more likely that you bought one house in an area than buying at a fixed amount of $300,000. Let’s look at the impact given this fact.

Let’s say the year is 2000. You’re considering every region in the US for a home purchase. You intend on buying a house at the median price point for the area you’re purchasing. This is a buy-and-hold strategy. So, how much would it be worth today?

Northeast: $161,200 at 4.52% compounded over 22 years (start year not included): $426,000

Midwest: $125,600 at 3.74% compounded over 22 years (start year not included): $281,900

South: $130,300 at 4.72% compounded over 22 years (start year not included): $359,500

West: $199,200 at 5.27% compounded over 22 years (start year not included): $617,100

California: $241,350 at 5.73% compounded over 22 years (start year not included): $823,000

Santa Cruz County:$305,000 at 5.06% compounded over 22 years (start year not included): $1,302,532

That extra $100k-$150k investment made you a return of $500k-$1M in 23 years!

I think I’ve made my point that, historically, the West is king when it comes to appreciation. Santa Cruz specifically has seen incredible price/appreciation growth. But how does this help you know? Well, for one, history is the best predictor of the future.

It’s not my style to leave it with a phrase and call it a day. Instead, I’ll leave you with a hypothetical to ponder. You are deciding if you really can invest in a CA home or look to purchase elsewhere. You ultimately decide to bite the bullet and become a homeowner of a highly valuable (likely leveraged) asset. We assume a highly conservative 4% (it was 7.98% since 2010). The purchase price is $1,200,000.

5 years of home ownership: New Home Value: $1,403,830 Appreciation: +$204k

10 years of home ownership: New Value: $1,707,974 Appreciation: +$508k

15 years of home ownership: New Value: $2,078,012 Appreciation: +$508k

30 years of home ownership: New Value: $3,742,381 Appreciation: +$2.55M

That last number sure does give a sense of urgency for buyers. While it seems like a ludicrous number, that same sticker shock would be felt if I told a buyer in 1990 their home would appreciate by over 300% in 30 years. And in my parent’s case… over 1000% in 40 years.

A primary home is not a liability if it builds your wealth over time. I can say with high confidence that real estate, over the long run, will continue to rise (and California real estate will likely rise more).

Hi Matt, 

Thanks for the note! Commercial multi is beyond my scope of expertise at this point.

I can speak on 2-4 multi-family more thoroughly because I have access to all of the data on the MLS. I'd like to know more though... do you have any thoughts?

Speaking in generalities, we still have a significant shortage of rental and buying opportunities. I think demand is going to continue to be strong over the long run. We are fairly fixed in our supply due to our topography. This imbalance may very well accelerate over time. 

Let’s start with a summary of the year that was. A truly historic run of ever-increasing real estate prices continued into 2022 which was the result of an extraordinary constellation of influences. A stock market run, federal stimulus, and never before seen savings due to COVID lockdowns. Despite some clear signs of heating inflationary pricing midway through 2021, the Federal Reserve was reluctant to increase rates for fear of triggering a recession. This provided incredibly cheap buying opportunities for a populous that still had more money than ever before. Everyone just kept shopping. March, the same month that the FED announced their first of what would become a series of rate hikes, real estate pricing in Santa Cruz County hit an all-time high. The median home price in March ’22 was $1.6M. Homes were selling 9% over the asking price, on average.

Despite rate hikes, inflation continued to rise forcing the FED to take a more aggressive approach. Realizing that the FED rate isn’t the only factor contributing to mortgage rates, its impact was significant. According to data pulled from freddiemac.com, mortgage rates jumped from 3.11% in January to 5.81% in June to 7.08% in November before leveling out at 6.42% at the conclusion of the year.

On a million-dollar loan, each percentage point increase adds around $600 to your monthly payment. The mortgage rate of 3.11% in January would amount to a $4276 monthly payment. The mortgage rate of 6.42% at the end of 2022 would amount to a $6268 monthly payment. 

More costly borrowing put significant downward pressure on real estate pricing. Demand dropped resulting in less activity, lower prices, and longer sales.

Buyer’s expectations changed in a hurry as, finally, a “deal” could be had. Seller’s expectations took a lot longer to adjust. The combination of fewer buyers and longer Days to Sell resulted in fairly significant increases in Active Inventory, another contributor to downward price pressure. At the same time, this change in mortgage rates and the market as a whole had a similar sluggish impact on sellers. For many, if they didn’t want to sell in 2021, why would they now? Especially to trade their historically low rate for a much pricier one. While the prosperous 10+ year real estate run was hugely valuable for wealth building, it also created a county of immobile homeowners. Many sitting on their hands wondering how to avoid the government taking a significant split in the form of capital gains.

2022 had the second lowest number of sales for Santa Cruz County on record, behind only 2008. Dueling forces of decreased buyers and sellers was a theme of 2022. I expect that to continue in 2023.

You’re probably saying “sounds pretty doom and gloom to me”. Like a cognitive shift from an astronaut experiencing the Overview Effect, it’s time to zoom out for perspective.

From a price perspective, Santa Cruz Real Estate has never been stronger. The median home price in 2022 was $1.302M, 8.5% higher than the historically strong 2021. It’s also 115.3% higher than ten years ago (2013)! Homes that went on the market in 2022 sold in an average of 24 days. That is over twice as fast as they did in 2013, three times faster than they did in 2006, and four times faster than in 2008. They also sold over the asking price, on average. That only occurred one other time since that data became accurately available in 2006 (occurred in 2021, also).

Ignoring other metrics besides price does turn a blind eye to the fact that the market has changed. This is not the historically strong real estate market we saw from March ’20 to March ’22. Median price peaked in March ’22 at $1.6M and concluded the year at $1.149M. Days on Market peaked in May ’22 at 13 and ended the year at 37. The Price to List Ratio went from 109.8% in April ’22 to 93.7% in December ’22… partially the result of sellers holding onto price expectations of yesteryear. The pendulum has clearly swung from seller leverage to buyer leverage.

From that perspective, we have seen a significant downturn. However, if we are able to overcome our Recency Bias, we realize it’s more “correction” than “crash”. Prior to August ’20, Median Home Price had never exceeded $1M in Santa Cruz County. It has exceeded $1M every month since. Supply is seriously suppressed. In 2006, there were the number of new listings was 4130. Over the previous 10 years (2012-2021), the average number of new listings per year was 2322. In 2022, the number of new listings was 1899!

So, where do we go from here? In the short term, Santa Cruz’s supply and demand will continue to be suppressed due to seasonality, mortgage rates, and (in the short short-term) extreme weather. The step-up buyer (selling to buy a larger home) will continue to be fairly non-existent and the majority of sellers will be trust sales, downsizing sellers, or those moving away. Downward pressure on pricing will continue while mortgage rates remain elevated.

In the medium term, the market players will adjust. They always have. This is the least predictable time period. We essentially have two paths. The first is that some additional pain occurs in the medium term, especially if we do enter a recession where the tech industry takes on additional losses. Even then, the market for Coastal Real Estate should remain fairly strong. You can read about how Recessions rarely result in reduced housing prices in my blog “How Recessions Impact Real Estate”. The second scenario will likely occur in some fashion whether a recession occurs or not. At any point, we will reach an inflection point where the new, “improved” pricing will create a surge of interested buyers (putting opposing upward pressure on pricing). Low inventory will remain systemic as long as there is little external pressure to sell (like going under on a mortgage). Interest rates will eventually cool and when they do, buyers will come roaring back. We’ll see another surge. It likely won’t be to COVID levels but more so a steady increase in the value of Santa Cruz Real Estate.

The long-term is easily the most predictable. We have decades and decades of evidence on how local and national real estate behaves. Over time, prices will continue to rise. Santa Cruz Real Estate will become an even more precious and rare commodity. Homeowners will have a remarkable path to long-term prosperity. Why? Because real estate is an investment favored by time and it’s especially favorable on the coast. They’ll benefit from debt paydown, incur great tax benefits, and gain significant equity in the form of appreciation.

So, if you are considering becoming a Santa Cruz homeowner, reach out! As always, thanks for reading.

You have probably heard about a magical bill that allows more flexibility in usage for your lot and potentially provides more available housing for California residents looking to rent. That bill, of course, is Senate Bill 9 or SB9 for short. In 2021, Governor Newsom signed the bill into law to help address California’s housing shortage. The goal was to streamline the process of lot splits and/or develop two primary units on one parcel.

The opposition of the bill argued it would be the end of single-family zoning as we know it as SB9 allows streamlining of multiple primaries (or duplexes) on a single lot.

The proponents of the bill argued it would help solve the ever-increasing housing shortage in California.

For Santa Cruz, both of those predictions turned out to be quite fanciful.

Before I dive into why it’s turned out to be less impactful than expected, I do want to discuss the benefits of the bill… for those eligible. There are opportunities for those that understand the bill. For local investor-savvy buyers, you can identify properties that have eligibility and create forced equity through lot splits or increased housing. For multi-generational families looking to create a family compound, now you have the potential to find one lot and turn it four primary homes (lot split required in this case).

Another major benefit is less red tape. Streamlined processes, especially as it relates to government, is always welcome. If your property meets all the eligibility requirements, there should be less friction to get approval on development or lot splits. That decreased friction comes in the form of no hearing and local government approval.

Less red tape doesn’t mean no red tape…

What becomes clear after adding all of the eligibility requirements is that not many parcels qualify for SB9 and even fewer make sense as an SB9 candidate.

To avoid boring you with a breakdown of each eligible category, I’ll summarize here.

For a property to be eligible: it must be within an urbanized area that is zoned residential, not in a historic district, no Ellis act, no affordable housing or rent control, no occupied tenants the last three years, not in a protected area, and no natural hazards.

To develop using SB9: you must make sure your septic is up to current standards, have no renters the last three years (or you can’t demolish more than 25% of existing structural walls), it can’t be used as a short-term rental once built (Airbnb or otherwise), and must have enough parking and standard setbacks.

You can develop two primary units per parcel and no more than four units per project (two primary units + ADU + JADU)

To lot split using SB9: the property can’t already be split (by SB9) nor can you split a property adjacent to a property you already split, the properties must be relatively even in size (40/60 split threshold) and at least 1200 sq ft for parcels served by sewer or at least 1 acre for parcels with septic systems, the new lots must be residential, can’t have more than 4 total units per project, and the owner must occupy one of the lots as their principal residence for a minimum of three years from the date of approval.

So, you can either do:

No lot split: two primary units + ADU + JADU

Or

Lot split: two primary units each or one primary and one ADU each

Wrapping up, this bill can be impactful for residents that have an eligible property or can identify eligible properties. A split and/or additional home can be a significant value add. That said, the touted impact of SB9 on available housing in Santa Cruz was overstated. The laundry list of eligibility requirements wrapped into this bill don’t mesh with Santa Cruz topography, zoning, protected areas, natural hazards, and available inventory.

To learn how to determine if your property is eligible, reach out!