I had a client who was in her Advanced Individual Training coaching session. She and her husband had found a condo in a nice beach side location. The Price was $600,000 and HOA dues were $400 per month. Based on the due diligence we did for market rents, it seemed that they could rent it out for $2,800 (PITI of $3,600 not including the management fee or wear and tear on the unit). When I asked why they wanted to buy this and carry such a big ($800+ per month) negative cash flow, they said because the realtor said it would make a great Airbnb rental! Ahhhh. Yes. Ok.
She wanted me to look up the AirBNB rates to confirm, then the VRBO rates, and sure enough, she could get $250 per night. So possibly $7500 per month. Well now I get why he was so excited!
But here the problem. More and more cities and Home Owner Associations are passing laws, or amending their HOA CC&R’s (Covenant Conditions and Restrictions), to limit short term rentals (i.e., AirBNB and VRBO for example).
People who live year-round in these condo complexes are noticing that the guests who are there for just the weekend, or even a week, are loud, careless and tend to use the facilities like the pool and laundry room with no consideration for the long term residents, who are often owners.
For example, a friend of mine lives in a condo by the beach and has for the last 25 years. There were AirBnB renters staying one floor up and across the hall who did laundry at 5am, banged around slamming hall doors, and dragging baskets and strollers downstairs early in the morning. They played music with their screen door open, and used the pool to entertain six kids during the day. When she tried to approach them about the rules in the building, they ignored her.
It’s very likely that someone renting for just the weekend is going to read the CC&R’s and HOA by-laws. It’s also very unlikely that the owner of the unit will go over all the rules or post them in the condo for the renters to see.
When we did our due diligence, we found that there wasn’t anything stating that owners couldn’t do short term rentals in the CC&R’s. However, when we went through the minutes of the last 12 board meetings we found something different.
The condo membership had recently, in the last 6 months, voted to amend their CC&R’s to restrict any owner from renting out their condo for less than 1 month. Guests who were there for less than 1 month had to be reported to the HOA and had to be staying with the owner.
Unfortunately, the only way this client could do the the AirBNB was if she stayed in the condo with them.
Upon doing your due diligence, when you go through the minutes and you notice a motion to open the discussion to change the rules regarding short term rentals, I would be careful of investing. The fact that it’s being discussed by the membership means it’s only a matter of time before the rules are changed.
This little bit of coaching saved my client a lot of pain, aggravation, and money lost. When you make $60,000 per year you cannot afford a negative cash flow of $800+ per month or the fines from a city government for breaking their laws.
Quote: “I never put my money n a position in which votes or intents of other people will affect my net worth. This is why stocks and condos do not fit into my portfolio.” Jimmy Napier, re-known note investor