For the last year, a moratorium in Laguna Beach has halted the issuance of new short term rental permits. On Oct. 1, new short-term rental rules go into affect. The new rules prohibit short-term rentals in neighborhoods, but allow them in commercial areas, mostly on or near Coast Highway. We asked Danielle Purcell of Team Laguna, known for specializing in rental properties, about the rule’s impact.
Q: Will there be a stampede by investors to buy in the commercial area?
A: Personally, I don’t think there will be any difference in the market even though the city has passed new short-term rental rules. Most of the investors for short-term rentals are out-of-state owners who can’t afford to keep the homes and rent them out illegally. And then there are the tenants that have decided to make money for themselves renting out the owner’s property. It’s all a big mess. As for the commercial people and the international sect that invest in vacation homes, they don’t normally participate in the weekly rentals.
Q: But the rules now state no short-term rentals in neighborhoods.
A: They will never stop. Nobody in the short-term rental is ever going to stop. They make money from it. Most of those owners can’t afford to make the house payments. But by renting out as short-term rental, they actually profit from the home, making up to three-times the monthly mortgage rate. Sure you have rules in effect, but they’re not enforced. I just sold a home that had $100,000 in penalties from illegal short-term rentals. I watched the title change hands and the penalties, poof, disappeared, never got paid, never landed in escrow.
Q: Why would there be rules in place if they can’t be enforced?
A: I don’t know about can’t, but they just aren’t. Nobody has been shut down yet and I have yet to witness a fine paid. I know the city is doing its best to address the issue. These owners, they feel it is their property and they can do whatever they please with it.
Q: But it is their property.
A: I understand that. I hear more and more people saying they can’t afford to keep the house without renting it out. The economy isn’t getting any better. But the worst is an agent still selling houses to be vacation rentals that are not zoned for it.
Q: So you are saying the rules are ineffective.
A: If you look deeply, it starts with the agents and brokers who sell the home as short-term rentals, many of them unaware of the short-term rental rules in place. They are not trained properly by their brokers. Yet many do know the rules, but don’t care. It really is difficult to stop those who illegally rent out short-term because there is so much money to be made from it.
Q: What percentage of the rental market in the commercial area will be converted to short-term rentals in the next year?
A: Again, it will stay the same, what is out there is already there. We have enough legal rentals to satisfy the market; the illegal ones are not needed. It’s true the illegal short-term rentals are taking away from the local businesses that are permitted to handle transient hotel rentals. As for converting, most investors realize renting long term unfurnished is better. There is no vacation rate, no utilities and lower commission; only 6 percent versus 15 percent for vacation rentals. The investor you see renting out short-term are out-of-state homeowners that can’t really afford to own the home so take advantage of it by renting them out. Because they don’t live there, they don’t care about the effect it has on the town.
Q: Has the cost of rental property in the commercial area changed or will change due to the new ordinance? By how much?
A: I do not believe that the commercial prices will change. I believe the properties that are best for vacation rentals are being used for that now. Most of these properties are in the commercial district on the ocean side of Coast Highway near businesses and hotels. Anyone that would buy a property next to the business or hotel knows the consequences.
Q: Does short term-rentals hurt the value of homes?
A: Personally, I think the city has it under control. If not, the value of homes would have gone way down by now. If you really want to know what will drive down the cost of homes it’s the drug rehab homes. The sell-out for drug rehabilitation is huge and growing. The money to be made is incredible. They can get $10,000 a month from the insurance company per person, with about six to seven people residing in the home.
Q: Do you yourself participate in illegal rentals?
A: No, I don’t like it. But nothing is black and white. There have been a few select high profile clients that have asked to rent a luxury home for two or three days. One recently in Bluebird Canyon was for $200,000 and yes I made a nice profit. I stipulated it had to be a 30-day contract even though it was for just one night. A 30-day contract makes it legal and keeps the constant turn-over away. So yes I have rented out a short-term rental, so to speak. I’ve also rented out to people who are between homes for a couple of weeks, but again, they sign a 30-day contract. I do feel the homeowner has a right to do what he wants with his property within reason and the laws of the city. Allowing up to two short-term rental opportunities a year would be fair. But this constant turnover of strangers showing up week after week is way out of hand.
By Gina Dostler