Buying Palm Springs Area Investment Property for Vacation Rentals
Your ULTIMATE Guide to Investment Property in the Palm Springs Area and the Coachella Valley
A Palm Springs investment property can be a lucrative asset to any real estate portfolio. However, there is significant risk to owning and managing any vacation rental property. This guide is built for both the savvy entrepreneur looking to expand their interest in the Palm Springs Area and the first-time investor interested in understanding the risks, pitfalls and advantages of owning a vacation rental property in the Coachella Valley.
Is Palm Springs Real Estate a Good Investment?
The short answer? Yes! The Palm Springs Area (the Coachella Valley) can be quite lucrative for those renting residential income-producing properties. There are two types of vacation rentals that investors look for in the Coachella Valley: short-term (under 30 days) and seasonal (over 30 days). This guide will help you decide the type of Coachella Valley vacation rental property that works for you to maximize returns and minimize risk.
Short-Term Rentals vs. Seasonal Rentals
Short-term rentals are generally specified as any rental that lasts under 30 days, while seasonal rentals are defined as any rental that lasts between 30 days and six months. Most Airbnb, VRBO, or ‘Homeshare’ rentals are usually under 30 days and therefore are considered short-term rentals; however, some cities have special provisions specifically for Homeshares. Determining what type of rental you wish to have will help you decide where your income-producing property should be located.
Advantages of Short-Term Rentals in the Palm Springs Area
- Coachella Festival and Stagecoach Festival bring in over 100,000 people in April each year causing a surge in rental rates unmatched nearly anywhere in the US.
- The climate is great in the winter months. Every year, snowbirds from across the country visit the Coachella Valley and stay for up to three months at a time.
- The Palm Springs area is a touchstone for both golf and tennis, with hundreds of events courses and courts to choose from. The area also boasts both PGA/LPGA Tour events and the BNP Paribas Open tennis tournament, bringing thousands to the area.
- Compared to coastal cities in California, residential homes in the area sell for significantly less.
The Risks of Short-Term Rentals
Every seasoned investor knows that investing in rental properties can have its pitfalls. Everything from managing permits, to changing city noise ordinances, to unusually high vacancy rates can seriously affect the profitability of any investment property. Another challenge: Coachella Valley cities have transient occupancy taxes (also commonly referred to as bed taxes, lodging taxes or tourist taxes), which apply to rentals under 30 days.
What is the best city in the Coachella Valley to own a Short-Term Rental?
The first factor investors may look at is the location of a potential investment property. Understanding the local laws, taxes and amenities of a city can make or break a rental property. Each of the nine cities in the Coachella Valley (Palm Springs Area) has its own laws and taxes that affect short-term rental properties. It is important to note that individual community HOAs may have restrictions beyond what is listed below. Here is a summary of the regulations and permitting issues facing each city:
Table 1.1 City Regulations for Short-Term Rentals (STRs):*
|City||Type of Short-Term Rental Property Allowed||Rental Duration Limits||Fees & Transient Occupancy Taxes||Other Info Impacting Rentals|
|Palm Springs||Single-family dwellings. No apartments (unless grandfathered in).||Owners may only rent up to 32 times a year, plus four more times if all four rentals are during the third quarter of that calendar year.||11.5% TOT Tax.
Vacation Rental Fee: $923/year.
Land Use Permit: $136.
|There are many fees, taxes and regulations for vacation rentals. ‘Homeshares’ have slightly lower fees. No amplified music is allowed in outside areas at vacation rentals. There are also rules for advertising short-term rentals.|
|Indio||Any dwelling unit (cannot rent outdoor areas separately).||No Limit||13% TOT Tax.
Business license $129.-$729+/year – usually no more than $200 & Includes Permit Fee
|There is a prohibition on “illegal loud parties” at vacation rentals.|
|La Quinta||Privately owned residential dwellings.||No Limit||10% TOT Tax.
Business License: $22-$59.
|La Quinta has hired independent firms to help crack down on unregistered short-term rentals in the past.|
|Palm Desert||Privately owned residential dwelling unit not in a R-1 or R-2. No apartments.
SEE MAP OF ALLOWED AREAS>>
|No Limit||11% TOT Tax.
|As of Dec. 31, 2019, there is a moratorium on Short Term Rentals (STRs) in R-1 & R-2 Residential Zones, meaning there will be no longer allowed in these areas.|
|Rancho Mirage||Privately owned residential unit. No apartments. Renter must seek permission to sublet for short-term rentals.*||No Limit||10% TOT Tax.
Business License: $31.
|There is a 2014 provision that requires at least one renter to be at least 30 years old and sign the lease agreement.|
|Cathedral City||ONLY EXISTING PERMITS
NO NEW Short-Term Rentals ALLOWED
|Effective July 24, 2019, Ordinance #825 was adopted by the City Council to establish a moratorium on issuing new Business License applications for Short-term Vacation Rental (STVR) permits. An uncodified urgency ordinance of the City Council of Cathedral City, California, continuing the moratorium on the issuance of new licenses, certificates or permits for short term vacation rental uses in the city established by ordinance no. 825.||12% TOT Tax.
No new STRS allowed (ordinance #825)
|Effective July 24, 2019, Ordinance #825 was adopted by the City Council to establish a moratorium on issuing new Business License applications for Short-term Vacation Rental (STVR) permits.|
|Indian Wells||Residential dwelling units (may not be under 29 days unless specified).||29-night minimum by default. Certain HOAs have exceptions to this rule.||12.25% TOT Tax.
Business License: $89.
|Around the PNB Paribas tennis tournament in March, certain permitted/ licensed STRs are allowed a 7-night minimum.|
|Desert Hot Springs||Privately owned residential dwelling||No Limit||12% TOT Tax.
Business License: $87.
|If you live in the home you plan to rent and you lease for less than 10 days, your home is not counted as a short-term rental.|
|The City of Coachella||Any dwelling unit*||No Limit||9% TOT Tax.
$60 License Fee.
$100 Business License Fee.
|In 2018, Coachella reduced inspection requirements and fees for short-term rentals designed to encourage tourism revenue in the city.|
|Bermuda Dunes*||Any dwelling unit*||No Limit||10% Riverside County TOT Tax.
First Time Registration Fee: $250.
Renewal Fee: $100.
Exempt from Business Licensing.
|As an unincorporated area, Bermuda Dunes is regulated by the County of Riverside. Many homes rely on septic tanks for sewage. Bermuda Dunes Country Club HOA does not allow short-term rentals.|
All cities require landlords to keep records of all stays for taxes, business licenses and safety purposes. Also, landlords need to ensure tenants receive a copy of the “good neighbor’ brochure that outlines the rules for renters. Some cities also require an approval letter from the community’s homeowner association (HOA) where the rental is located.
Top Cities for Vacation Rental Properties
Based on taxes, events and amenities, we have ranked the top five cities in the Coachella Valley for short-term rental properties:
- Indio, California
Home to both Coachella and Stagecoach, it is easy to see why this is a top pick for investors in the Desert. Despite having the highest TOT tax rates in the Desert, the lower entry price point for homes in the area and fewer municipal restrictions give Indio a distinct advantage for short-term vacation rental properties.
- La Quinta, California
When searching for an investment property, don’t overlook La Quinta. Here, certain communities and homes may be closer to the festivals than some Indio properties. Also, the low 10% TOT tax and fees make a return on your investment much easier. While La Quinta homes are generally priced higher than Indio homes, the city also has the advantage of better amenities and a more central location.
- Palm Springs, California
Palm Springs is the flagship city for tourism in the Coachella Valley and is a great choice for investing in a short-term rental. With a strong LGBT community providing a steady stream of clients, as well as events based around festivals, shopping and Modernism Week, Palm Springs can be a great choice, despite slightly higher fees and additional restrictions.
- Rancho Mirage, California
Rancho Mirage is a beautiful city worthy of consideration. If you can navigate some of the restrictions, an investment here can lure snowbirds, festival goers, golfers and tennis enthusiasts by the trove.
Honorable Mention – The City of Coachella
While not yet a top choice for investors, this city’s low price point for homes combined with the lowest TOT taxes, proximity to the festivals and low restrictions could prove to be a lucrative investment in the future.
Seasonal Rentals in the Palm Springs Area
Advantages of Seasonal Rentals in the Palm Springs Area
- Many of the headaches, regulations and fees involved with short- term rentals can be avoided.
- Some cities in the Coachella Valley only allow rentals longer than 30 days.
- Seasonal renters tend to care more about the property, and there are lower maintenance costs.
- The Palm Springs area has many 55+ communities where snowbirds visit, often for months on end.
- Lower cleaning costs.
- Reduced turnover.
Risks of Seasonal Rentals
- You can potentially miss out on surging nightly rental rates for festivals and other events.
- Seasonal renters tend to be pickier than short-term renters.
Best of Both Worlds: Mixed Seasonal and Short-Term Rental Scheme
Combine the advantages of short-term and seasonal rental properties while minimizing the risks by creating a strategic schedule of when to offer short-term vs. seasonal rentals. It is possible to choose certain months (during the festivals or major events is your best bet) to switch your rental property to a short-term rental and offer seasonal rentals the rest of the year. This option may yield the best result and minimize the TOT taxes you owe each month. With this option you may have to spend more on marketing, as some short-term rental websites may not offer longer term stays, and longer-term stays are much less visible on most ‘homeshare’ or rental sites. This option may be more feasible in your second or third year when you have a stable base of return clients.
The Importance of Repeat Business
Your clients are some of the best marketing tools you have. If they have a great experience, they will tell other potential clients, give you positive reviews and return time and again to the same rental property. This will help stabilize your rental income and reduce online booking fees. This is why the service level you offer clients is one of the most important parts of managing a rental property.
Top Communities for Vacation Rentals
Once you have determined if you want your vacation rental property to be a short-term, seasonal or a combination of the two, choosing the community within a city is one of the most important decisions you’ll need to make. Often this consideration is even more important than the price of the property! The HOA rules (CC&Rs) can restrict vacation rentals in a number of ways. Therefore, investors need to ensure that the community allows vacation rentals, can provide a letter to the city for verification (not all cities need this) of the rules, will allow changes (if any) you require to the property and will allow certain ages into the community to stay on the property.
Here is our recommendation for the top communities for vacation rentals in the Coachella Valley, and why:
- Indian Palms Country Club, Indio, CA – See homes for sale >
TYPE OF RENTAL SUGGESTED: Combined Short-Term & Seasonal Rental | PRICE RANGE: $95,000 – $575,000+
This community is the perfect location for a rental property in the Coachella Valley. This HOA allows short-term rentals with minimal restrictions and is within walking distance to the festivals. Indian Palms also has a golf school that people from all over attend. Many of the homes and condos have varying HOA fees, so be sure to be aware of the HOA fees of a particular property. Also, there are no age restrictions, and the community is accustomed to rental properties in the area. In addition, the community has a very affordable golf course, community pools, a restaurant, a hotel, tennis and much more, making it even more attractive to tourists.
- Montage at Santa Rosa, Indio, CA – See homes for sale >
TYPE OF RENTAL SUGGESTED: Combined Short-Term & Seasonal Rental | PRICE RANGE: $500,000 – $900,000+
If you are looking to give your clients a more upscale experience, Montage at Santa Rosa a great choice for a vacation rental property. This community comprised of single-family homes has no restrictions on short-term rentals and has many other active rentals within the community. If clients have stayed at one of these homes, they will recognize the quality and choose this area time and time again. Relatively close to the festivals and other events, this community has low HOA fees and no age restrictions.
- PGA West, La Quinta, CA – See homes for sale >
TYPE OF RENTAL SUGGESTED: Combined Short-Term & Seasonal Rental | PRICE RANGE: $250,000 – $1,200,000+
With one of the most incredible golf experiences anywhere, proximity to the festivals and tons of amenities. With a huge selection of both condos and single-family homes, investors will have no trouble homing in on a perfect vacation rental home.
- Indian Canyon Golf Course, Palm Springs, CA – See homes for sale >
TYPE OF RENTAL SUGGESTED: Combined Short-Term & Seasonal Rental | PRICE RANGE: $515,000 – $2,250,000+
An iconic Mid-Century Modern home in Indian Canyons Golf Resort can fetch tourists, the LBGT community, festival goers and golfers in one fell swoop. With no HOA, the proximity to the downtown area, hiking and tons of events a home here, while often more pricey, can be a great investment for years to come. However, many of the homes here, but not all, can be on leased land owned by the local tribes and can anywhere from cost $3,500 – $9,000 a year. Be sure to find home either not on leased land, or ensure that the lease on the land will not expire or increase anytime soon and build the cost into your buiness plan for your rental.
- Sun City Palm Desert, CA (55+ Community) – See homes for sale >
TYPE OF RENTAL SUGGESTED: Seasonal Rental ONLY! | PRICE RANGE: $250,000 – $900,000+
While short-term rentals are not allowed by the Sun City Palm Desert Homeowners Association, there is a huge seasonal rental market for snowbirds, semi-retired and retired individuals and couples looking for a winter escape in the Desert. Sun City’s legendary amenities and social scene for this demographic is unparalleled in the Coachella Valley. With two 18-hole golf courses, tennis, fitness, over 100 clubs, three clubhouses, catch and release fishing and so much more, this community is the perfect location to entice snowbirds and tourists looking to winter in the warm desert air. Also, with an aging baby-boomer population, homes in this gorgeous development have the recipe to have great returns with resale value (of course, this is always market-dependent). While the community association restricts the age of the renters/occupants to 55 or older, it still allows owners and investors of any age, making it a great place for income- producing properties for all people.
Return on Investment (ROI) for a Vacation Rental Property in the Palm Springs Area
Once you have determined the perfect city and community for your income-producing property, you may need to determine the return on your investment. Investors typically use a ‘Cash-on-Cash’ return calculation to determine the feasibility of a particular real estate investment. This calculation takes into consideration all the costs and income of a property to measure the annual return in relation to the mortgage payments. Cash-on-Cash return is considered one of the most important ways to understand ROI of a real estate investment. Investors need to determine what a good Cash-on-Cash return would be. Some consider a 6-8% ROI a great investment while others will not event consider a property with less than a 15% Cash-on-Cash return.
Click here to contact a Jelmberg Team Agent with the knowledge and experience to help you with your income-producing or vacation rental property in the greater Palm Springs area.
* All information in this guide and Table 1.1 was gathered on or before July 30th, 2019, and all regulations in this guide are subject to change. While believed to be accurate, the information is not guaranteed to be accurate by the Jelmberg Team, Inc, Keller Williams Realty or any agent, employee or contractor thereof. Real estate investment carries significant risk, and all information and advice from any source should be independently verified.