Here in Northern Michigan stories abound about people who purchased a property hoping to use it as a short-term rental only to find out it was never allowed by the municipality or the city/township/village changed the rules.
Traditionally the "cottage" owner in Northern Michigan would rent out his property to friends and family, and might even advertise it in newsletters or other websites. No one seemed to mind. But with the advent of AirBnB, VRBO, etc. and the popularity of renting out homes, it went from a cottage industry that no one seemed to mind to big business that cut into year-round housing stock. Plus it only takes a few bad apples to get the neighbors, also known as voters, up in arms. Industry sponsored bills in some states have had success in stripping the right to regulate STRs from local governments, but not in Michigan.
Some local governments allow them, some allow them in certain zones, some don't allow them anywhere, and some are completely silent. And if you are not from Michigan, you may not undertstand the concept of townships. Most states have cities and maybe villages but everything else is unincorporated and falls under the jurisdiction of the county. But in Michigan we turned a geographic designation that is six miles by six miles into an independent local government and they each control their own zoning. Bottom line, travel six miles in any direction and you are likely in a different jurisdiction with different rules. So here are the possibilities.
- What's a Short Term Rental? In Michigan an STR has been identified as any rental less than 30 days.
- STRs completely banned: It's not allowed as a use under any zones in the jurisdiction, or it is specifically banned in the ordinance.
- STR not addressed under ordinance but allowed: This always comes with risk. Generally under zoning, if it's not allowed then it's banned. However, some townships simply choose not to enforce it. It's dicey because it only takes one election, or growing neighborhood complaints, for the local government to pivot. In these cases even those who have been doing it openly for decades find that ability stripped away.
- STRs allowed through what's known as a police powers ordinance: This is also dicey, because what a government grants through police powers, it can also take away. And they don't have to allow exiting STRs, even those that are licensed by the local government, to continue. Usually they do in some capacity, but not always.
- STRs allowed through zoning: This is the safest purchase. Because even if the municipality decides to strike the zoning use, you become a legal non-conforming use that continue as long as you don't abandon the use. What you should also know, however, is that allowed by zoning means it's allowed in some zones and not in others. For example, Traverse City allows STRs in its most intense commercial zones and its hotel zones. It's banned in all residential zones, including multi-family. The city also allows up to 25% of residential units in some of its less dense commercial zones to be used as STRs. It also has a police powers ordinance that addresses licensing and inspection requirements.
- Finally make sure it's allowed by any condo or home owners association rules. Generally STRs are considered a commercial use, and are not allowed in many condo documents.
So if you are thinking about investing in an STR, make sure you find a Realtor who will do the due diligence and then make sure you speak with the local zoning administrator before finalizing the purchase and be sure to ask if there are any discussions about changing the rules and be ready to move quickly. I had a client who was delayed in taking action on a planned use only to discover too late that the zoning rules had changed underneath them.
I would also strongly recommend you work with a good real estate attorney to make sure you know the risks, review any deed or condo restrictions, and to set up the ownership to protect your other assets from liability. Short-term rentals are, in essence, a commercial endeavor and I advise all of my commercial clients to speak with an attorney before finalizing any real estate transaction.
Bottom line, things and terms are constantly in flux. This is not legal advice, and any investor should always seek advice from trained professionals and specialists, including attorneys.
As always, if you have any questions or would like to discuss any aspect of this please reach out.
