Masters Title & Escrow

DC, MD, VA, PA & FL real estate settlements

Tom Gimer

By

Overview: DC’s new short term rental (STR) laws

Many of our investor clients are in the short term rental (STR) business. Rather than leasing to tenants on a yearly basis, these investors rent out their properties for a few days or weeks, often with the assistance of a booking service such as AirBNB or VRBO.

There are several advantages and a few disadvantages to this REI business model, which we’ll discuss in another article.

Because STRs compete directly with hotels, and because they tend to change the neighborhood within which they operate to a more transient population, they have experienced resistance (both from the hospitality industry and the residents) in many locations around the country. The issue of whether a jurisdiction or community should allow or restricts STRs in some way produces heated debates. Facing pressure to act on this subject, DC in 2018 set out to establish laws regarding the operation of STRs within the city. The stated purpose of such laws were as follows:

To require the Department of Consumer and Regulatory Affairs to license the operation of short-term rentals, to establish duties and enforcement powers for the department, to provide for the establishment of enforcement procedures for short-term rental requirements, to require short-term rental hosts to obtain a license endorsement to operate a short-term rental, to create a new license endorsement for short-term rentals, to create a new license endorsement for vacation rentals, to establish health and safety requirements and other restrictions for hosts, to establish requirements governing the booking of short-term rentals, to permit limited vacation rentals, to require short-term rental hosts and booking services to maintain records, to require booking services to submit a monthly report of short-term rental booking information, to require hosts to pay transient lodging taxes, to require booking services to collect and remit transient lodging taxes, and to establish penalties for violations of this act.

Here are the most important aspects of the “Short-Term Rental Regulation Act of 2018”, which is just now in 2022 beginning to be enforced now that the structure of licensing and enforcement has been implemented:

  • The Act (and recently-promulgated regulations) establishes two (2) classes of licenses — Short-Term Rental and Short-Term: Vacation Rental. The license comes as an endorsement to the Basic Business License and lasts two (2) years. The fee to obtain each type of license is currently $104.50. A property can have both licenses.
  • The first hurdle to overcome with STRs is permitted use. A license is not obtainable if STRs are prohibited by the HOA, condo association or cooperative association within which the property is located.
  • The second hurdle to overcome is that a property used as a STR with either or both license types must be the owner’s primary residence. In other words, the property must be owned by an individual or individuals who have applied for and obtained the homestead exemption.
  • With a Short-Term Rental, the host rents out a portion (or portions) of the property such as a bedroom, an English basement, or an accessory dwelling unit, and the host remains present on the property during the occupancy, which must be thirty (30) or fewer continuous nights. There are no daily limits for the calendar year with respect to this type of rental.
  • With a Short-Term: Vacation Rental, the host rents out what is advertised as exclusive use of the property. The host does not remain present on the premises. This is your basic “whole house” rental. There is a ninety (90) day limit (within a calendar year) on this type of rental.
  • Fines for violating the law: $250 for the first violation; $500 for the second violation; and $1,000 and automatic revocation of the license endorsement for the third violation

DC has certainly put up some roadblocks to STRs with the new laws. Feel free to reach out to us with any questions about purchasing investment properties of any type, including those intended to be used as short-term rentals.

By

Investor Exit Strategies

Real estate investors have a number of exit strategies they can pursue with a property. Many use a combination of these strategies, depending on market conditions, their needs, and their goals. In this article we will give an overview of the strategies. In later posts we will go into more detail regarding each.

Wholesaling: There are a couple of primary ways to wholesale real estate… both of which involve getting a property under contract and finding an end buyer.

The first method is via an assignment of the sales contract. Using the assignment method the investor (B) enters into a contract with the seller (A) and then assigns the contract to the end buyer (C). The assignment fee is paid by the end buyer to the investory/wholesaler at settlement. The result is an A–>C transaction where only one Deed is required and thus only one set of closing costs is incurred.

The second primary method of wholesaling is a double-close. Using this method the investor enters into a contract with the seller and goes to settlement on the A–>B transaction. The property is then re-sold to the end buyer in a B–>C transaction. While this method does require two sets of closing costs, it is often preferred in certain circumstances such as when an end buyer has not been located yet or requires additional time to close or when the spread between the original contract purchase price with the seller and the price with the end buyer is significant.

Flip: Using this method, a property is acquired by an investor who plans to do some level of improvements to it before reselling it. These could be minor improvements such as repairs, paint, flooring and appliances, or major improvements such upgrading systems and undertaking larger renovations.

Buy and hold: It may not sound like an exit strategy, but it is. This is a long-term investment strategy where an investor purchases a property and holds on to it for an extended period of time. The owner typically intends to sell it down the road but will rent it out in the interim. The rents collected recoup some or all of the investment during the hold time; and in some areas appreciation is a factor.

BRRRR: A very popular buy and hold method used by investors is known as the BRRRR strategy. BRRRR stands for Buy, Repair (or Rehab or Renovate), Rent, Refinance, Repeat. By doing the repairs/renovations the investor’s initial investment can be recovered in a cash-out refinance which is based upon the after repaired value (ARV) of the property. By cashing out the initial investment, the investor can move on to the next property to be BRRRRed. This is a proven method for growing a portfolio of cash-flowing rental properties.

We’ll go into significantly more detail on each of these investment strategies, including how they are financed, in the near future!

By

DC offers reduced recordation tax for first-time homebuyers

It took a while to get this done but as of October, DC now has a first-time homebuyer incentive on the books. They do this by reducing the recordation tax (the tax on the new deed) paid by the buyer.

For deeds recorded on or after October 1, 2017, the recordation tax rate for a “first-time District homebuyer” purchasing “eligible property” will be reduced. For houses and condominium units, the recordation tax rate is 0.725% (transfer taxes owed by the seller of 1.1% or 1.45% are unchanged). For transfers of economic interests in a housing cooperative unit (co-op unit), the recordation tax rate is reduced from 2.2% to 1.825% for units under $400,000, and from 2.9% to 2.175% for units $400,000 or greater (there is no transfer tax). An application for the reduced rate must be made at the time the deed is offered for recordation. The reduced rate cannot be applied for after the deed is recorded.

You noticed the “” marks in the above paragraph.

“First-time District homebuyer” — To be eligible for the reduced rate of tax, the buyer must be a District resident or intend to immediately become a District resident at the time the deed is offered for recordation and also never owned a house, a condominium unit or an economic interest in a co-op unit that qualified for the District’s homestead deduction as the applicant’s principal place of residence. Nevertheless, an applicant can still qualify as a “first-time District Homebuyer” if the applicant’s only such prior residence was jointly owned with an ex-spouse from whom the applicant is divorced or separated and the applicant relinquished ownership under a court order or a separation agreement.

An “eligible property” is essentially a residential property including condos and co-ops.

Not every first-time homebuyer will qualify for the reduced recordation tax. There are also income requirements… this part of the equation gets pretty complicated because the City will take into account not only the grantee/buyer income but also the incomes of non-grantees who will reside in the property.

Documentary evidence is required when claiming the reduction so be sure you qualify or your deed will not be accepted for recording until the proper transfer taxes are paid.

By

About This

We’re going to start posting real estate-related articles on our website.

You’ll find things here in the News section such as proposed state and local law changes that affect real estate transactions, news and information concerning the real estate industry, and so forth.

Hopefully you’ll find this useful! If you have a topic you’d like us to write about, please feel free to contact us.