Short-Term Rental Ordinance

What is a Short-Term Rental Ordinance?

A Short-Term Rental (STR) Ordinance is a local law or set of regulations enacted by municipal or county governments to govern the operation of properties rented out for short periods, typically less than 30 days. These ordinances are designed to address various concerns arising from the proliferation of STRs, such as neighborhood character, housing affordability, public safety, noise complaints, and parking issues. For real estate investors, understanding and complying with these ordinances is crucial, as they can significantly impact property eligibility, operational costs, and overall profitability of an STR investment.

Key Components of STR Ordinances

STR ordinances vary widely by jurisdiction but commonly include several key provisions that investors must navigate:

• Registration and Licensing: Most ordinances require property owners to register their STRs with the local government and obtain a specific operating license or permit. This often involves an application process, fees, and regular renewals.
• Occupancy Limits: Regulations frequently impose limits on the maximum number of guests allowed per property, often tied to the number of bedrooms or square footage, to prevent overcrowding and maintain neighborhood peace.
• Zoning and Permitting: Some areas restrict STRs to specific zoning districts or require a conditional use permit, meaning not all properties are eligible for STR operation, even if they meet other criteria.
• Health and Safety Standards: Properties must often meet specific fire safety codes, provide smoke detectors, carbon monoxide detectors, and have adequate insurance coverage, similar to traditional hotels.
• Taxation and Fees: Many jurisdictions levy a Transient Occupancy Tax (TOT), similar to hotel taxes, on STR bookings. Investors may also be responsible for collecting and remitting sales tax or other local fees.
• Enforcement and Penalties: Ordinances typically outline penalties for non-compliance, which can range from significant fines and citations to the revocation of operating licenses, and even legal action.

How STR Ordinances Impact Real Estate Investors

STR ordinances introduce a layer of complexity and risk that traditional long-term rentals do not. Investors must conduct thorough due diligence to understand the regulatory landscape before acquiring a property for STR purposes.

Investment Strategy Adjustments

• Market Selection: Investors must prioritize markets with favorable or stable STR regulations, avoiding areas with outright bans or highly restrictive rules that could jeopardize profitability.
• Property Type and Location: Certain property types (e.g., single-family homes vs. condos) or locations (e.g., residential zones vs. commercial zones) may face different regulatory hurdles.
• Financial Projections: Increased costs from licensing fees, taxes, and compliance measures must be factored into cash flow analysis and return on investment (ROI) calculations.

Operational Considerations

• Compliance Costs: Beyond fees, investors may incur costs for safety upgrades, noise monitoring devices, or professional property management services specializing in STR compliance.
• Guest Management: Ordinances may require specific guest communication, such as posting rules or emergency contacts, and can hold owners responsible for guest behavior.
• Dynamic Regulatory Environment: STR laws are frequently updated. Investors must stay informed of changes, which can necessitate adjustments to their business model.

Navigating STR Ordinances: A Step-by-Step Approach

Successfully investing in STRs requires a proactive approach to understanding and adhering to local regulations:

1. Research Local Regulations: Begin by identifying the specific municipal and county regulations for your target investment area. Check official government websites, planning department pages, and local tourism boards.
2. Assess Property Eligibility: Verify if your chosen property's zoning allows for STR use and if it meets all physical requirements (e.g., safety features, parking). Consider consulting with a local real estate attorney.
3. Apply for Licenses and Permits: Complete all necessary applications, pay fees, and obtain the required licenses before listing your property. Ensure all documentation is accurate and up-to-date.
4. Ensure Ongoing Compliance: Implement operational procedures to maintain compliance, such as collecting and remitting taxes, adhering to occupancy limits, and addressing guest issues promptly.
5. Monitor Regulatory Changes: Stay informed about proposed and enacted changes to STR ordinances. Join local investor groups or subscribe to government updates to anticipate future impacts.

Real-World Example: Investing in a Regulated Market

Consider an investor, Sarah, looking to purchase a property for STR in two different cities, each with distinct STR ordinances.

City A: Highly Regulated Market

• Ordinance: Requires a $2,000 annual license fee, limits rentals to 90 days per year, and levies a 12% Transient Occupancy Tax (TOT). Only properties in specific commercial zones are eligible.
• Property: Sarah finds a suitable property in a commercial zone for $550,000. She estimates annual gross revenue of $80,000 if rented year-round.
• Impact: Due to the 90-day cap, her maximum gross revenue is reduced to approximately $20,000 (90/365 * $80,000). After the $2,000 license fee and 12% TOT ($2,400), her net revenue is significantly impacted, making the investment less attractive.

City B: Moderately Regulated Market

• Ordinance: Requires a $300 annual registration fee, no rental day limits, and a 6% TOT. All residential properties are eligible.
• Property: Sarah finds a property for $400,000. She estimates annual gross revenue of $65,000 with an average 70% occupancy rate.
• Impact: Her annual costs include the $300 registration fee and 6% TOT ($3,900). While these add to expenses, the absence of rental caps allows for higher potential gross revenue, making the investment more viable than in City A.

This example highlights how critical it is to thoroughly research and understand STR ordinances, as they directly influence a property's income potential and overall investment viability.