Changing rental rules mid-stream
Remember when you were a kid and someone wanted to change the rules of the game mid-stream? Anna Maria homeowners dodged a major bullet in January that would have changed the rental rules in the city; the question is what’s next.
In case you’ve been spending too much time on the beach and haven’t heard, Anna Maria commissioners voted 4-1 to enforce a code that has been on the books restricting short term rentals in the city only to rescind it less than a week later. According to the city’s comprehensive plan and zoning code, rentals of 30 days or less of residential properties are prohibited. This ruling has never been enforced and, therefore, short term rentals have become common-place especially since the proliferation of super-size homes designed specifically for this purpose.
So how much value does the ability to rent a property add to its net worth? On an island like Anna Maria or any other beach community the answer is a lot. In season, rental fees have escalated in recent years to an all-time high, and even out of season rates are higher since the financial crisis has attracted visitors who are within a one-day drive of Anna Maria.
There is an actual financial calculation used to determine property value when purchasing or selling income producing property such as single-family homes, condos and duplexes similar to what we have on the Island. The method is called the Gross Rent Multiplier (GRM), and although it is not precise, it is the formula that is generally used.
To use this method, you first need to gather the recently sold income producing properties in the comparable area and determine the annual gross rental income for these properties. Next you divide the sales price for each of these comps by the annual gross rental income. For example, if the property sold for $500,000 and the annual rental income is $120,000, the GRM is 4.17 percent.
After determining the GRM for each of the comps, calculate the average by dividing the number of GRMs used. By using this average you can then get a good idea of the market value of the property you are either purchasing or selling. For example, if the income is $110,000 and the GRM multiplier is 4.09 percent, the estimated market value is $449,900.
Anna Maria in its attempt to tighten rental regulations is certainly not alone. Towns and subdivisions in Florida and around the country are trying to institute tighter rental regulations ranging from limiting the percent of properties available to rent to asking for a nonrefundable fee payable to the city before landlords could rent a property.
Property owners in the city of Anna Maria who do not rent their properties are understandably concerned that the quality of life is being negatively impacted. However, the owners of rental properties who have made a significant financial investment also have rights which, thankfully, the commissioners ultimately recognized.
Sometimes long-held policies do need to be changed, but this isn’t a game of stick ball; the financial consequences are real to homeowners and businesses. Some creative thinking is in order that will protect property owners and not hurt the character of the community before absolutes are declared.