Rental Arbitrage in Charleston | What You Should Know!

What is Rental Arbitrage?

Rental arbitrage is when you rent a property as a short term vacation rental that you have rented for a longer term. This allows you to list, manage and operate a short term vacation rental without purchasing and/or owning property. Rental arbitrage is an increasingly popular business model because it is low risk but can reap high profits.

Charleston as a Tourist Destination

It’s no surprise Charleston, South Carolina was voted #1 Best US City by Conde Nast Traveler Readers’ Choice Awards for 10 years in a row. Offering beauty, history, fantastic food, arts, romance, culture, adventure, festivals, special events, and so much more, the waterfront city is a favorite among visitors. In 2018, nearly 7.3 million tourists flocked to Charleston, with visitors arriving through air, land, and sea routes. In the same year, over 15,000 travelers passed through the gates of Charleston International Airport each day while approximately 225,000 entered the city through its cruise terminal that year alone.

Rental Arbitrage Opportunity in Charleston

According to premier short term rental analytics enterprise AirDNA, Charleston is one of the top 5 cities in the US for rental arbitrage. For the year 2021, in Charleston,

• Effective rent is $1,326
• STR premium is 223.6%
• and it takes 5.5 nights to cover rent.

Furthermore, in July 2021, according to AirDNA, Charleston recorded an

•      Average daily rate of $302
  

•      Occupancy rate of 90%
  

•      Average monthly revenue of $6,273
  

Meanwhile, of the over 2,100 active short term rentals, 90% are entire homes with 50% on Airbnb, 17% on VRBO, and 33% on both.

The average short term rental size in Charleston is 2.4 bedrooms and 5.9 guests.

The best submarkets for rental arbitrage in Charleston are Downtown, Mount Pleasant, Islands, North Charleston, and Goose Creek.

Rental Arbitrage Rules in Charleston

Since 2018 the City Council of Charleston has permitted short term vacation rentals under certain regulations.

###Definition

According to Charleston’s Short Term Rental Ordinance, a short term vacation rental provides “sleeping accommodations” for a period of 1-29 consecutive days. The ordinance recognizes 2 types of short term rentals:

• Residential Short Term Rental

When the property owner on record who is also a resident of the property rents out 1 or more rooms on the property to provide sleeping accommodations to no more than 4 people aged 18 or older for not more than 29 consecutive days.

• Commercial Short Term Rental

When a dwelling unit is converted into a fully functioning, private accommodation use which includes cooking, living, sanitary, and sleeping facilities within one dwelling unit, and is rented to 1 family for not more than 29 consecutive days. (A family constitutes not more than 4 unrelated people.) A commercial short term rental can only be located in a commercially zoned property and have a limited number of short term rental units if more than one is provided.

###Zoning

Short term vacation rentals are only permitted in specifically outlined zones. The type of permit to be applied for is dependent on the zone that the property is located.

• Category I - All properties located within the city’s Old and Historic District that are individually listed on the National Register of Historic Places

• Category II - All other properties located on the Charleston peninsula, as long as they are outside the Short Term Rental Overlay Zone

• Category III - All other properties in the city of Charleston including incorporated areas of West Ashley, James Island, Johns Island, Cainhoy, and Daniel Island.

• The STR Overlay Zone - A pre-existing area in Cannonborough-Elliotborough. Commercially zoned properties within the existing Short-Term Rental Overlay District are eligible for the commercial short term rental permit.

Permit Application

All short term vacation rentals must register with the city and obtain a permit for their operation. Applications for residential short term rental permits require:

• Floor plans drawn to scale
• A site plan
• Photographs of the structure
• A signed statement from the owner

Once the application is received, the zoning administrator will post a notice on the property taking 15 consecutive calendar days to approve the application after which another 5 business days are allowed for appeals and issuance of the permit.,

Each permit permits only one short term rental unit.

The application for commercial short term vacation rentals can be found here.

Permit Renewal

Permits must be renewed annually within the month of issuance. All documentation must be submitted anew:

1. Residential short term rental renewal application
2. Commercial short term rental renewal application

Business License

The city of Charleston requires all short term rentals to obtain a business license. Business licenses expire each year on December 31 and must be renewed.

Obtain a Fire Inspection & Life Safety review

The city of Charleston inspects short term vacation rentals for fire and life safety. Short term vacation rentals are required to have:

• Working smoke alarms
• Carbon monoxide detectors
• An operable window or door from each bedroom
• Fire extinguishers
• Visible address numbers
• No visible electrical hazards

Penalties

Violations of any of the city’s short term rental regulations can result in fines, revoking of the permit, and even incarceration.

Pay Tax

Short term residential rentals are liable for taxes on the state, county, and city levels. These include:

• State sales tax of 5%
• State accommodations tax of 2%
• Local option sales tax of 1%
• County transportation tax of 1%
• School district/Education tax of 1%
• City of Charleston accommodations tax of 2%

For those located in Charleston County, a county accommodation tax of 2% is imposed.

Berkeley County does not impose a reciprocal tax.

Other rules

Verification of the property being the owner’s full-time primary residence must be verified by the receipt of the county’s 4% Legal Residence tax exemption. Investment properties are only eligible for commercially zoned rentals.

• A host does not have to be present for the complete duration of their guests’ stay. However, a host must be “generally available”.

• Residential short term rentals cannot contain signs advertising their use as short term rentals.

• Owners are only permitted to provide breakfast if they provide meals to paying guests.

• A general liability insurance policy with a company authorized to do business in the state of South Carolina insuring against personal injury including death and property damage with limits of no less than $1 million per occurrence must be obtained.

• The resident owner must maintain a guest register including names, addresses, telephone numbers, and dates of occupancy of all guests.

Conclusion

Rental arbitrage is a fast-growing business model in the short term vacation rental space, allowing more players to enter the market and operate at a swifter space without being bogged down by the obligations of large capital outlays. As one of the top cities for rental arbitrage in the US, Charleston is a great place to set up a rental arbitrage business. Check out our other articles on rental arbitrage in markets worth investing: Orlando, Nashville, Houston, Austin, Myrtle Beach, Fort Lauderdale, Boston, and Jacksonville.