Converting a Long-Term Rental to Short-Term

You can convert a long-term rental to a short-term rental only if short-term use is legal at that address and the current tenancy ends the way your state's law allows, usually when the lease expires or after proper written notice. Cities that limit short-term rentals to the host's own home, such as New York City, rule out converting a unit you rent to tenants unless you move in yourself. Where conversion is allowed, compare net income rather than gross rent: in the example below, a condo that nets $14,596 a year from a tenant has to book about 223 nights a year as a short-term rental just to match that.

Is short-term use allowed at this address?

Check these before you give the tenant notice:

1. City or county rules. New York City allows rentals of an apartment or home for fewer than 30 days only when the host lives in the same unit with the guests, and it does not register rent-regulated apartments or New York City Housing Authority units at all. Look up whether your city requires a permit or registration, caps nights per year, or limits hosting to the host's primary residence; short-term rental regulations explains how.
2. HOA or condo rules. Read the declaration of covenants, conditions, and restrictions (CC&Rs) and the association's rules for a minimum rental term. In California, Civil Code section 4741 bars an HOA from banning rentals in general but lets it prohibit rentals of 30 days or less.
3. Your mortgage. If you bought the property as your home, the standard Fannie Mae and Freddie Mac mortgage form requires you to move in within 60 days after signing it and live there at least one year, unless the lender agrees otherwise in writing. Once you have lived there that year, the occupancy requirement is met. Check the occupancy section of the mortgage or deed of trust you signed.

How to end the current tenancy lawfully

Let a fixed-term lease run out. California's tenant guide says a landlord cannot end a fixed-term tenancy while the agreement is in effect unless the tenant breaches it, for example by not paying rent. Plan the conversion for the lease's end date, then check whether your state lets you end the tenancy then.

Give the notice your state requires. In California, ending a month-to-month tenancy takes 60 days' written notice if every tenant has lived there a year or more, 30 days if anyone has lived there less than a year, and 90 days for a tenancy with rental assistance.

Check for just-cause rules. Some states require a listed reason to end a tenancy even after the lease ends:

• California. Under the Tenant Protection Act, once every tenant has lived in a covered unit for 12 months, or any one tenant for 24 months, the termination notice must state a just cause. Covered units are generally in buildings of two or more units at least 15 years old. A duplex is exempt if the owner lived in the other unit when the tenancy began and still lives there, as are many single-family homes and condos if the tenant received the required written notice of the exemption. Converting to short-term rentals is not one of the listed causes, so if your unit is covered, ask a landlord-tenant attorney whether you can end the tenancy for this plan before you serve notice. Local just-cause ordinances can be stricter.
• Oregon. After the first year of occupancy, ORS 90.427 lets you end a month-to-month tenancy, or a fixed-term lease when its term ends, only for tenant cause or for a listed landlord reason. A landlord reason takes at least 90 days' written notice that states the reason, and landlords with five or more units must also pay the tenant one month's rent with that notice. One listed reason is converting the unit to a use other than residential use; the statute does not say whether short-term rental counts, so get legal advice first. If you live on the property and it has no more than two units, you can instead end a month-to-month tenancy without a reason on 60 days' written notice, or a fixed-term lease at its end date with at least 30 days' written notice.

If the tenant stays past the notice date, the next step is an eviction case in court. California's guide says a landlord cannot lock a tenant out or use other self-help measures.

Side by side: the same condo as a long-term and a short-term rental

The example is a two-bedroom condo with the same mortgage either way, so the loan payment is left out. As a short-term rental it books 226 nights (62% of the year) in 65 stays at $190 a night plus a $110 cleaning fee, and Airbnb keeps its 15.5% host service fee. Other figures are assumptions; use your own. Net operating income is what remains after operating costs, before the mortgage and income tax.

At 62% occupancy the short-term rental earns $430 more a year. Each booked night adds about $159 after the Airbnb fee and the cleaner, and the costs that do not change with bookings total $20,800, so matching the tenant's $14,596 takes about 223 booked nights ($35,396 divided by $159).

At 70% occupancy (256 nights in 73 stays), short-term net operating income rises to $19,786, or $5,190 more than the long-term column. If you hire a short-term rental manager, take the fee out of the short-term column before you compare. Financial analysis for short-term rental properties adds the loan payment and the return on the cash you put in.

Switching insurance and tax reporting

Insurance. The Texas Department of Insurance says landlord insurance is mainly for traditional, long-term leases and may not be appropriate for short-term rentals. Tell your insurer about the change in writing, and have a short-term rental policy, or an endorsement (an add-on) to your current one, in force before the first check-in, covering injuries to paying guests and the furniture you now own. Short-term rental insurance compares the policy types.

Income tax. Rent from a tenant goes on Schedule E, the rental income schedule of Form 1040, and short-term rental income usually stays there. IRS Publication 527 moves it to Schedule C, the business schedule, with possible self-employment tax, if you provide substantial services mainly for guests' convenience, such as regular cleaning, changing linen, or maid service. In a non-binding 2021 memo (Chief Counsel Advice 202151005), IRS attorneys found that a rental whose only service was cleaning between stays did not owe self-employment tax, because that cleaning keeps the unit fit to rent rather than serving the guest.

Lodging tax. Before the first booking, find out which hotel or lodging taxes your state, county, and city charge on short stays, which ones your booking platform collects and files for you, and whether you must still register with the tax agency yourself. The tax guide for short-term rental owners covers each filing, including when a short-term rental loss can offset your wages.

Setup budget and timeline

A sample setup budget for the condo above:

At the 70% case, the extra $5,190 a year pays back that $17,300 in about 3.3 years; at 62%, the extra $430 would take about 40 years. Furnishing a short-term rental covers what to buy.

Work through the switch in this order:

1. Confirm the rules and apply for any permit or registration; the city's review time sets the pace.
2. Serve notice or wait for the lease to end, using the notice period that applies to your tenancy (30, 60, or 90 days in California).
3. After move-out, make repairs, then furnish.
4. Put the new insurance in place, and register for any lodging tax you must file yourself, before the first booking date.
5. Photograph the unit and publish the listing once any required registration is approved.

Starting an Airbnb business covers the steps every new short-term rental needs and how the work differs from managing a tenant.