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April 23, 2017

A Grander Vision for Short-Term Rentals

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A Grander Vision for Short-Term Rentals

Investors renting out property on sites such as Airbnb could generate more income by getting into the world of special-events leases. But there are a number of hurdles to clear in order to make this a winning investment strategy.
dining tables set up for outdoor event

Real estate professionals have found their place in the short-term rental trend, helping investors purchase properties they can then rent out by the night to travelers using sites such as Airbnb and VRBO. But there might be another way your clients could make money off STRs—if they have the right space. It’s an interesting twist that’s just beginning to emerge: leasing a residence for special events.

It might look like this: A quaint farmhouse with a picturesque barn could be the perfect venue for a country chic wedding; a historic mansion or contemporary penthouse could serve as space for corporate meetings or parties. Few have tried this investment strategy, so it can’t be called a trend. But some practitioners say they expect interest in such an investment model to build. One agent has even tried it himself.

Brian Copeland, CRS, GRI, a team leader at Village Real Estate Services in Nashville, Tenn., and his partner, Greg Bullard, turned their 5,200-square-foot home, which they built in 2007, into a short-term rental property when they moved to the countryside after adopting a son several years ago. Copeland discovered that the home’s features—including antique whiskey barrel floors, 20-foot coffered ceilings, and a dramatic skyline view—appealed not only to travelers but also individuals and businesses seeking a unique event space. So he began renting the property to groups of up to 150 people for events such as weddings and corporate retreats.

Copeland typically charged between $1,000 and $1,500 a day for special events, while his average nightly rate for individual visitors was $400. But certain issues prompted him to stop leasing for special events. Large groups are harder on a home than individual overnight guests, Copeland says, and corporate clients can be demanding about specific furniture arrangements. “We have hardwood floors, a dining room table that seats 18, and a grand piano,” he says. “They always want to move the furniture, so we have to bring in a crew to move everything and reset it when they leave. They tape things to the walls. We were constantly repainting the walls and refinishing the floors.”

Because doorknobs and toilet handles kept breaking from heavy use, Copeland installed commercial-grade replacements. “Commercial grade is ugly, but they [can take a beating],” he says. The hassles and upkeep became too much, and now, he and Bullard lease their home exclusively as a short-term vacation rental with a three-night minimum stay. “We said, ‘We can’t do this anymore.’ Even a three-month renter can’t do as much damage as a corporate retreat.”

Still, he says, special events can be a good income generator for investors who are looking for creative ways to build wealth. “For someone who has the right temperament and the right property, it can be a good deal,” he says. Help your clients explore their options with the following caveats.

Understand local zoning regulations. You and your client may already know that many municipalities are cracking down on short-term rentals, but there’s more to be aware of when marketing space for special events. In addition to making sure your local ordinances don’t make STRs impermissible, your client must also contend with zoning restrictions, stricter building codes governing commercial property, and local business ordinances, says Michael Schaffer, broker-associate at LIV Sotheby’s International Realty in Greenwood Village, Colo. Business licenses and expensive retrofits, such as adding a sprinkler system, might also be required, he adds.

Be prepared for financing delays. Investors who plan on financing the purchase of an investment property to rent out for special events may have to jump through extra hoops to get lender approval. Bruce Ailion, CRB, CRS, a broker at RE/MAX Town & Country in Woodstock, Ga., helped buyers who had trouble securing financing to buy a foreclosed clubhouse in 2011 that they wanted to use as a wedding and special-events venue. “We looked around at probably 20 lenders,” recalls Ailion, who is also a real estate attorney. Though it wasn’t an STR, the lender wanted to survey the property to better understand how it would be used. An “oddball project” sometimes falls under more lender scrutiny, Ailion notes. His buyers ended up paying nearly double the average interest rate because of the unusual nature of the project, he says.

Know what kind of property works best. A big house with many rooms may work as a meeting space where the agenda calls for small-group sessions. But large, open spaces that can accommodate a crowd are more appropriate for festive dinner parties, galas, or corporate gatherings. “We built our home for social reasons,” Copeland says. “We could clear out the living and dining rooms and seat 80 people comfortably at round tables for dinner.” Ideally, the property will provide multiple scenic views, as well as fountains, arbors, fireplaces, or grand staircases where people can take pictures. Copeland also recommends locations near an airport to ease accessibility for out-of-town guests. His rental property is five miles from Nashville International Airport.

Keep parking in mind. Rural and suburban properties are likely to have the acreage necessary for multiple cars and delivery trucks. In the city, you may have to be more creative or limit the size of groups you’re hosting. “Maybe you can make some kind of partnership with a valet and a nearby church or synagogue that would like to make some extra money,” Copeland says. But be aware of any requirements your municipality might have for commercial properties to provide their own parking.

Make sure insurance is sufficient. Traditional homeowners insurance won’t cover all the damage and accidents that can occur when you use personal property for commercial purposes. The insurance policy you’ll need depends on the nature of your property use. Protect yourself as well, advises Dawn Thomas, CRS, broker-associate at Golden Gate Sotheby’s International Realty in Palo Alto, Calif., who also owns a two-bedroom rental home. She advises setting up an LLC so there won’t be liability attached to your personal assets and consulting an attorney to draft lease agreements.

Neighborhood pushback can derail the deal. If nearby residents are opposed to residential property being used for commercial purposes in their communities, their collective voices could put an end to an investor’s plans. Unfortunately, in that situation, there’s not much your client can do. “The larger the groups and higher the traffic that will be generated, the more difficult it will be to make a noncommercial property legally usable for commercial purposes,” Schaffer says. “You’re fighting an uphill battle when 500 neighbors show up at a city council meeting.” Investors should have alternate income streams, he adds, so their livelihood doesn’t rest on making an STR work if it doesn’t.

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