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What’s the Deal with Short Term Rentals?

03-27-2018About MortgagesEddie Knoell

For Arizona homeowners, sites like AirBnB, HomeAway and VRBO have sparked a surge in popularity for short term rentals. Vacationers love the ability to rent a fully furnished vacation property in popular locations like the Greater Phoenix Valley, by the day, week or month, without being limited to stay in a hotel and eat in restaurants for every meal. They’re a popular choice for families and groups of friends who are vacationing together. Owners of vacation properties like the fact that short term rentals allow them to drive income from their second homes.

But not everyone loves them. Many neighborhood advocates say that too many short term rentals can destroy the fabric of a neighborhood, and hoteliers object to the relatively unregulated and untaxed competition for the vacation dollar.

These are some of the driving forces behind the move by many municipalities in California, including popular vacation destinations like Anaheim and Santa Monica, to place restrictions on short term rentals. In fact, some destinations – including Southern California’s most popular desert vacation getaway, Palm Springs – have measures on the ballot to do away with short term rentals entirely.

Short Term Rentals and the Real Estate Market

The increasing popularity of short term rentals has been a driving factor in real estate markets in some popular vacation areas. They make vacation ownership more affordable and attractive for homeowners, and they serve to introduce potential buyers to destinations where they might like to own. In some markets, they’re contributing to strong sellers’ markets.

However, in markets where strict regulations have been introduced, such as Palm Springs, reductions in the number of properties a vacation rental owner can possess have sparked sell offs that have increased the number of homes available and suppressed prices for vacation properties. These in turn have contributed to those markets becoming a buyers’ market.

What might this mean for us here in Phoenix Valley?

Arizona Short Term Rentals

Arizona’s real estate market, actually stands to benefit from the controversy around short term vacation rentals. In January, the state of Arizona moved to protect homeowners and their ability to drive revenue from their properties, vs. going in favor of protecting neighborhoods.

This move in favor of owners may create opportunity for owners in popular vacation destinations throughout the state. Short term rentals have already been popular here in Arizona. According to AirBnB, about 53,000 visitors stayed at Arizona Airbnb properties in 2017, a 73 percent increase from the year prior. Rental incomes jumped from $5.1 million in 2016 to $8.4 million last year.

And keep in mind that some of those vacation property owners that previously might have purchased a second home in restricted markets elsewhere – particularly California – could now be looking toward Arizona where their ability to generate income from their properties won’t be inhibited by excessive regulation.

Tips for buying a vacation property

The move by the Arizona to protect vacation owners’ rights could lead some buyers who might have purchased elsewhere to choose Arizona over other similar destinations. But if they’re like the 70 percent of would-be vacation buyers that choose to buy a second property with a mortgage, they should be prepared to meet the stringent requirements for these mortgages.

What does it to take to buy a second home? Buyers must show:

  • Credit score of at least 620, and a score above 760 if they want to qualify for the best rates.

  • At least a 10 percent down payment; 20 percent to qualify without mortgage insurance.

  • Cash reserves equal to at least two months’ worth of expenses on the vacation property.

  • Income to support both properties, with a debt-to-income ratio of 45% for both properties.

Perhaps most importantly, if you want to qualify for the better rates associated with a vacation property versus a property that is intended to be an investment, you’ll need to show that you actually do intend to use it as a vacation home. That means, it should be more than 50 miles from your primary residence and it has to follow common sense (for example, even though Buckeye and east Mesa are about 50 miles apart, it would be very hard to make the case that someone would have a primary residence and 2nd home in the Valley).

If you or a buyer have questions about mortgages for vacation properties, feel free to contact the team here at Mortgage Brothers.