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Short Term Rentals in the Shenandoah Valley What You Need to Know

Let’s go back in time for a moment, shall we? It’s March 20, 2020, and you have been stuck at home for about a week now and have been meticulously studying the stock market. You noticed Ford stock is down, but with over $125,000,000,000 (yes, that is billion) in revenue, you know it won’t stay down for long. So, you decide to invest in 1,000 shares of Ford stock for $4.33 per share for a total of $4,330. Next thing you know, the stock is trending up and you decide to invest in an F-150 to share your investment, so to speak, with your family. In December 2021, Ford stock is now trading for $19.61 a share. If you sell your 1,000 shares you stand to have a gain of a little over $15,000! This sounds great, but keep in mind you now must pay capital gains on that profit. The truck you bought will instantly lose value the moment you drive it off the lot, it will depreciate over the years due to the miles you rack up on it and the normal wear and tear of a vehicle. If after a year or two or ten or twenty you decide you want to sell or trade in this vehicle and invest in a new one, the profit you stand to make will most likely be $0 or in the negative. Chances are, you will never get out of it what you have put into it (gas, maintenance, taxes, etc.)  Making the decision to buy a company’s stock or buy a company’s products are two quite different things and types of investments. 

So, the big question: What can you invest in that will generate cash flow, is tax-deductible, is an appreciating asset, and allows you to enjoy it with your family and friends? The short answer (pun intended) is a Short-Term Rental or an STR. Throughout this article, I am going to focus on the key factors to consider when investing in an STR: How, Where, and Why. For the How I will discuss what to look for regarding local government regulations that allow STRs to thrive, the Where coincides with the How, but I will focus more on what the property and area need in order to make a good STR, specifically in and around the Shenandoah Valley, and the Why will be all about the numbers!

How

When starting your search for a great STR, the first two things you must consider are the How and the Where. Let’s start with the How. How local governments regulate STRs will determine a lot about the area. If they have friendly regulations, it typically means the area has something that would attract tourism of some sort, but that may not always be the case. I will get into attractions later when I discuss the Where. There are several counties and cities throughout the state of Virginia that have limited regulations, but also have limited reasons for visiting. The key is to find the area(s) that have both limited regulations and an abundance of attractions. This brings us to those cities and counties in and around the Shenandoah Valley.

Before I dive deeper into the how, where, and why, let me give you a quick geography lesson. The Shenandoah Valley can be a little confusing for people who aren’t from the area. The “Valley” runs north and south through Virginia with Interstate 81 starting just north of Winchester and continues south until you reach Lexington. There is a town called Shenandoah and there is also Shenandoah County however, the town of Shenandoah is not in Shenandoah County. One big attraction in the area is the Shenandoah Caverns which are in Shenandoah County, not the town. Confusing right? The Shenandoah River runs through most of the Shenandoah Valley which encompasses 8 counties in total, 2 of which are in West Virginia. The counties of Rockingham, Page, and Shenandoah are within the Shenandoah Valley and bring millions of tourists a year for many varied reasons, including the Shenandoah National Park. The park itself borders mostly the eastern portion of the Shenandoah Valley. Now that you understand the location of the Valley, let’s get back to the How.

  First up are local government regulations. Big question, why do we even want regulations? There is a happy medium here between too little and too much regulation. You would think too little regulation would be a good thing, right? Wrong! This typically means the local governments have not even discussed the topic of STRs, which may not be the best scenario for you as the investor or buyer. You could invest in a property and then within a brief period get hit with a ton of regulations after the local government decides to address their STR policies. Not only could this negatively affect your cash flow, but it could also decrease the value of your property. Some of the stricter regulations you could see include an 8% transient occupancy tax, the owner (you) having to occupy the residence for 180 days per year, reapplying every year for a provisional use permit, limiting number of occupants, and special permit fees ranging up to $500 per permit with a public hearing per permit. As you can imagine, these regulations really put a damper on your ROI (Return on Investment). Some of the cities and counties in the Valley that may adhere to these stricter regulations are Albemarle County, Harrisonburg, and Charlottesville. Now, this doesn’t mean these are areas you should shy away from, it just means you must be willing to follow those rules that are set and make sure your proforma numbers reflect your desired ROI. On the flip side, local governments that have already discussed STRs put in place favorable regulations which allow your STR to thrive, thus allowing their area or city to benefit from the tax revenue. These more favorable regulations include a 5% transient occupancy tax, no limit on number of days rented, occupant limits based on home size (typically 2 occupants per bedroom plus 4 occupants), minimal permit & licensing fees, and no minimum required stay by the owner. The cities and counties in the Valley that may adhere to these more lenient regulations include but are not limited to Rockingham, Shenandoah, Page, Greene, Madison, and Nelson County. 

Regardless of where you choose to purchase your STR, there could be some upfront and potential time-consuming start up processes. Let’s look at a hypothetical scenario. Now that you have purchased your property, you may have to apply for your business license with the Commissioner of Revenue for a small fee and receive your business licensure checklist. This checklist leads you to the Planning and Community Development department which will help facilitate a number of inspections and could have a small fee to initiate that process. The inspections could include, but are not limited to, building, zoning, VDOT, fire, and health department. These will most likely be individual inspections by different inspectors so could all require individual appointments. Once these inspections are complete, the final reports need to be submitted back to their respective agencies/departments. Some inspectors will handle submitting the necessary items themselves, some you may be required to handle, it all depends on the county/city and the locale of the department. Keep in mind, this entire process could potentially take a few months. You want to make sure you have factored that period into your numbers for startup time and your reserves before your STR can officially hit the market.

Where

Second up is the Where for the Shenandoah area. This is just as important as the How because the How allows you to really decide your Where based on the regulations I just covered. Let’s talk about what people want in their STR that allow them to then pick the location of their property.

There are several defining characteristics that truly make an STR great. Some may seem obvious, but they aren’t always easy to find. So, what are some of the requests I get for the Shenandoah Valley and surrounding areas when it comes to the “Must Haves” for someone’s STR? View! View! View! This is the number one most requested criterion that I get when it comes to a STR in the Valley. There are an abundance of views in and around the Shenandoah Valley from Massanutten Resort to the Shenandoah National Park to the winery and brewery trails, but sometimes the tall oaks and thick pines can make seeing those views extremely difficult. No matter where you are in this area, you will get some type of view of the mountains, the sunrise, and the sunset. The location you choose will just depend on the type of view you want. 

Another top request I get is privacy. Again, this can be tough. You could have a cleared lot that allows you to enjoy the amazing view that was the number one request, but you are now left vulnerable to others having you and your property as their view which in turn allows you to see them as well. There is a level of privacy on the Shenandoah River or near the Shenandoah National Park or in Wintergreen or Massanutten resort or along the brewery and winery trails, it just depends on your levels of desired privacy.

The next big request I get is a water feature of some sort, whether it be a pool, river, pond, or lake. This request adds a great attraction for your STR but could potentially put your property in a flood plane depending on how close you are to that specific body of water. You see this primarily with rivers or streams. With the Shenandoah River running right through the Valley, it makes any property on the river a hot item but could potentially add additional insurance to the property for being in a flood zone. 

Next up, bedroom count. Ideally, 4 or more bedrooms can get you the most bang for your buck from an occupancy standpoint, but this will more than likely increase your purchase price. Some properties have rooms they are currently using for different things other than a bedroom such as an office or a storage room. These rooms could be used as another bedroom with your STR, thus adding value. Another option that can allow you to market a higher number of occupants for your rental are pull out couches in your living room. Typically, counties view the occupancy count as 2 people per bedroom plus an additional 4 people. By having another sleeping space, you are adding to the total number of occupants accepted in the property.

Finally, attractions. This could easily be interchanged with the most important item because you want to invest in a property that is in a location that brings as much foot traffic and tourism as possible. People want to be near Shenandoah National Park for hiking or near a Four Seasons Resort like Massanutten, Wintergreen, and even Bryce Resort. However, being close to the National Park makes typical travel time longer and being closer to the Four Seasons Resort can be accompanied by high HOA fees. Not so easy, is it?

Why

Congratulations! You have found the location and the property type of your STR, you know the regulations for the area you are buying in, now it is time to find out what your buying power is and look at the numbers. This is where the Why comes in. When reaching out to secure financing for an STR, there are a few things to keep in mind. First is whether you are purchasing this as a Secondary Home or as an investment property. If you are buying this property as a secondary home, a secondary home loan tends to be accompanied by a similar interest rate to that of a primary residence and could result in as little as 10% down. It is usually best to consider using a local lender regarding the property you are purchasing. The local lender typically lives in the area and understands the market, which could help get you a more competitive interest rate, a timelier appraisal, and result in an overall more streamlined process. However, a secondary home is not an investment property, even though you will be renting it out. I will dive into secondary homes vs investment properties in a later article. 

Let’s look at some example numbers. For our example, we will assume you are purchasing this property as a secondary home and got an interest rate of 3.5%. You have $35,000 for a down payment. Since you will be putting 10% down on the property you purchase, you have buying power of up to a $350,000 property. Next, we will look at the Cash-on-Cash return. Cash on Cash Return is the ratio of annual before-tax cash flow to the total amount of cash invested. We want this to be a minimum of 15%. Next, we want to look at the occupancy rate and rental rates for the area. We will focus on Shenandoah for this example (not to be confused with Shenandoah County). A typical occupancy rate for Shenandoah, VA along the Shenandoah River is around 75% according to AirDNA. The Average Daily Rate is $219 for a 3-bedroom 2-bathroom property. Now we get into management. You have the option to manage yourself or find a company local to the area who will handle that for you. Again, that will be an added expense that you will want to factor in. For this example, we are going to assume you choose to self-manage. Now it is time to add up your monthly expenses. You have your basic utilities of $400, taxes and insurance of $200, and miscellaneous expenses of $600 which could include cleaning service, maintenance, booking fees, etc. This example property would bring a 58.12% Cash on Cash Return (absolute grand slam!). For this example, we evaluated the numbers on a monthly basis, however, to obtain the best results, I always recommend evaluating numbers on an annual basis. When running the numbers, yourself, PriceLabs, and AirDNA are great resources for the specific areas you are wanting to purchase in. To determine your potential cash flow, I would recommend using either The Short-Term Shop for their interactive cash flow calculator or AirDNA’s rentalizer. 

There are a few things to keep in mind when purchasing a secondary home. First is the 65-mile rule. What this rule states is that for the home of purchase to qualify as a secondary home, it must be 65 miles or further from your primary residence or in a “vacation destination”. With the number of attraction spots in and around the Shenandoah Valley, you could certainly make the case that there are homes in the area that are within a “vacation destination” should your primary residence be less than 65 miles from any of these attractions or locations. This should be on your list of items to discuss with your lender.

Second rule of thumb when evaluating a deal is to know the STR management options available to you in the area where you are purchasing. Some companies will only handle bits and pieces of the STR, so you could have one property management company and another company who is responsible for the maintenance and a third who is responsible for the cleaning and preparation of the property for the next guests. Specific areas may not have one company that manages and specializes in STRs, so it is best to do your homework on that area before purchasing if you are not interested in self-management. 

Next rule is to understand that the numbers of STRs may not be as pretty in a spreadsheet as what a Long-Term Rental (LTR) would be. When you have a LTR property, let’s say a single-family home or an apartment with a renter, you have them signed into a lease for a designated period, usually one year. You know for that year what your rent will be, and you can estimate a percentage for repairs, but overall, you have a good handle on the income you will generate from that LTR for the year. STRs are so fluid with peak seasons for the attractions based on your location that it makes it a little tougher to guestimate what your numbers for the year could look like. Do not let that stray you away from STRs, just know the numbers and your spreadsheet aren’t going to look the same since you must take so many variables into account.

Another rule to keep in mind will again compare LTRs and STRs. With LTRs you have the 1% rule. What that means is that if your gross rent per month is 1% of your purchase price, you are setting yourself up to have a successful LTR. For STRs it is a little different due to the turnover rate of occupancy and other variables. For STRs, your gross annual income should be 10%-20% of your purchase price. This gives you the best chance of having a successful STR.

So why invest in STRs? The investment can allow you to share something you own with your family and friends, just like the F-150, but it allows you to make money off your investment, unlike the F-150, as this property is going to maintain its value over the years. It allows you to have passive income and use that income to potentially make another investment for you, your family, and your friends to enjoy for years to come. With its four-season resorts, its hiking, its rivers, its caverns, its forests, its National Parks, its breweries and wineries, and most importantly its million-dollar views, it should come as no surprise that the Shenandoah Valley and surrounding areas is one of the top places for people to invest in STRs!

Interested in Secondary Homes? Contact Us:
Michael Cook
Michael@bpgreal.com
(540) 487-3434

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