SHORT TERM RENTALS IN AUSTIN
Short Term Rentals are a hot topic of conversation these days. What exactly are they? In the simplest terms, it is a residential dwelling unit that is rented for less than 30 consecutive days. Think Airbnb and VRBO. Currently, per the City of Austin (COA going forward), we have three types of short-term rentals:
Type 1 are owner occupied principal residences and they can be single family, multifamily or a duplex. Basically, you live there – you have a homestead on it - and from time to time you rent the whole thing out or just a single room. This is the most common right now.
Type 2 are NOT owner occupied. These are properties (single family or duplex) that are solely for the intent of renting out. Currently, the COA has a moratorium on issuing any new Type 2 licenses, so if you’re thinking about going this route, you can go ahead and stop. Interesting sidebar: in 2019 some Austin property owners sued the COA, saying the ordinance was unconstitutional. They won. No matter, the COA still refuses to issue any new Type 2 permits. However, they will honor Type 2 permits issued before that ruling.
Type 3 is also NOT owner occupied but is multifamily. So, anything more than a duplex. These are less common; you see them more on the larger investment house side.
Owners of STRs are required by the city to obtain a license and renew that license every single year. As of this writing, it costs $643 to apply for a new license and $355 to renew an existing license. There are also density requirements as they will only issue so many licenses for any one geographic area, so getting a license is by no means guaranteed.
Pro Tip - Make sure you’re in the City of Austin Jurisdiction because you may not be subject to these rules. Are you in the ETJ? Jackpot! Do you live in West Lake or Lakeway? They have their own STR rules and processes. Rollingwood banned them all-together back in 2010 and they have a steep penalty of up to $500 per day if caught!
Pro Tip – Avoid communities or buildings with HOAs. Most are very anti STR, and if they don’t currently have a “No STR” provision, that can change in the future.
What are the pros and cons of STRs?
Pros. In short, more money. You’re going to get a much higher per night rate as a short-term rental than you will on a long-term lease. Big weekends like ACL and SXSW bring HUGE premiums. Sometimes these events alone can make the year for an owner. Compared to a long-term rental of 12 months, STRs definitely have more upside earning potential.
The cons. There are generally more expenses and time associated with running a short-term rental. You have the cost of the license. The cost of cleaning every time the property turns over. The cost of supplies to stock the house. Maybe you need some new furniture to really make the place shine. Hotel tax. State tax. Additional CPA cost. There is also the time element involved. To effectively run an STR you need to keep up with market rates. Making sure ACL weekend is priced right, while slower times are adjusted accordingly, is critical. If you’re pricing is off, you’re going to get fewer rentals, which means less revenue. There is also all the filing and paperwork involved. Many people hire management companies to do this for them, and that may be the way to go, especially if you have several rentals, but keep in mind that management companies typically charge 20-30% of rents collected. That’s not an insignificant amount.
My Thoughts. It really is more of a personality thing. Some people like the ease of long-term rentals and not having to fiddle with it all the time. They rent it and off it goes for 12 months. Hopefully the only time they hear from their tenant is when they send that rent check in at the end of the month. Others would rather go the STR route – despite the additional time and finances - and squeeze as much profit out of the property as possible. It’s worth it to them.
What category do you fit in?
For more info, visit the COA site.