Santa Cruz Real Estate  Digest,  Ed. 23

June, 2017 - In This Issue:
In This Month's Issue

Have you always wanted to explore the possibility of building an additional dwelling unit on your property, but are discouraged by the minimum lot size requirement in Santa Cruz City? GOOD NEWS! The State just made it possible to build an ADU on ANY lot size. Read below to find out more. 

Are you interested in investing in Santa Cruz County. Before you get started, read these mistakes that investors typically make and set yourself up for success.

If you're considering renting out a spare room to vacationers, or buying an investment property and using it as a vacation rental, this Digest is for you. We give a summary of the vacation rental programs within the County , along with a special Christine's Corner, focused on upcoming changes to the Vacation Rental Program in Santa Cruz City.

Real Estate Market Statistics 
For Santa Cruz, Santa Clara, and  Monterey

The reports contain median home prices, real estate price statistics, valuable information about mortgage rates and much more.

Santa Cruz City Eliminates 
Lot Size Requirements for ADU's

Previously, you needed a 4,500 square foot lot, or larger, to build an Additional Dwelling Unit (ADU). Now, any legally built unit within the existing footprint of your home can be turned into an ADU under new state law.

This applies to new projects and conversions, so long as the unit is within the pre-existing structure and is build legally (meaning it was permitted and build to code).

Due to some confusion in the City Planning Department about the interpretation of state law, the City's Law did not appear to conform to the new statewide regulations. Fortunately, according to this  Sentinel Article , the city attorney confirmed that, under state law, property owners have the right to build an ADU within an existing structure regardless of the lot size.

Note: if you are building a brand new structure or making an addition to a pre-existing structure, you still need a minimum of 4,500 square feet. The state law only exempts ADU construction within an existing house or an existing accessory building.

To find out what it takes to build or convert an ADU in the City of Santa Cruz, visit the Planning Department during normal business hours.

Typical Mistakes when Buying your First Investment Property

Investing in California Real Estate has long been a profitable venture. However, if you are just starting off, it's important to avoid the common mistakes of novice investors. Here are a few of the biggest mistakes first-time investors make in Santa Cruz, County.

Jumping in Without a Plan

You may be tempted to scan Zillow, looking for a good deal, or a fixer-upper that you can transform into a lucrative rental. The truth is, without a plan, you may end up overspending and leaving your profitability up to chance. We suggest asking yourself the following questions:
  • Are you planning to invest in land, residential or commercial properties?
  • Who is your ideal tenant and will you need to upgrade the property to attract them?
  • How much extra capital do you have access to for unforeseen expenses?
  • What neighborhoods are most lucrative?
  • What is your risk tolerance?

When investing in Santa Cruz County, it's important to understand that each neighborhood is unique, and just a few blocks can mean hundreds of dollars more in rent each month. Additionally, home values can fluctuate widely from one city to the next.

Conduct thorough research on the Santa Cruz Real Estate Market and reflect on your abilities and aspirations. Use this information to make a strong investment strategy. Throughout this process, working with a Broker who know this market well will prove to be invaluable.

Underestimating the work and time involved

For many, investing in real estate is a full time job. If you own a home, you understand how much time and energy it takes to upkeep a property. The same goes for any investment you make. While property manager can oversee daily operations, any successful investor will reiterate, you must still keep a watchful eye over your properties.

It's important to realize, real estate investing is not a get-rich-quick strategy. Some think real estate investing is as simple as buying a property and putting a "for rent" ad on Craigslist. In a rush to buy, these new investors don't consider the acquisition costs and complicated regulations that can dictate how you use your property. For example, are you hoping to make an addition to your beach-property investment? In that case, are you aware of the special and sometimes onerous process of getting approval by the Coastal Commission?

If you are planning to invest in real estate, consider it a long-term commitment and tool yourself with knowledge, resources, and a great team.

Shoddy Financing

The housing bubble of 2008 served as a stern warning to investors: don't underestimate the dangers of unconventional financing. While the variable-interest loan may seem attractive today, they can be risky, especially when rates are rising.

Make sure you have enough financial flexibility to support these loan options and always have a backup plan.

A mortgage broker and financial planner you know and trust should be a part of your investment team. Make sure these people understand your finances well and cover a large range of scenarios with you before you commit to any financial instrument.   

To read more common mistakes, check out these articles:

Everything You Need to Know about Creating Vacation Rentals in Santa Cruz County

Have you ever considered Vacation Rentals?
Are you considering purchasing a second home, or currently own one? Do you have an extra room or portion of your house or duplex available?
Santa Cruz County, with all of its many splendors ranging from gorgeous coastlines and legendary surf spots, to majestically scenic redwood drives and hikes, to iconic landmarks and family-friendly entertainment, provides a great opportunity to venture into the proposition of gaining extra income from or investing in vacation rentals.
A vacation rental, also known as "short-term rental" or "transient rental use", is defined as an entire or a portion of a residential home rented for a maximum of 30 days.
In Santa Cruz County , vacation rentals can include single-family houses, multi-family dwelling units (such as duplexes and triplexes), condominiums or townhouses. Apartments, mobile homes and Additional Dwelling Units (often referred to as "granny units") are not accepted.
All residential use zoning areas of the county allow vacation rentals, with the exception of Live Oak, and Seacliff/Aptos, and Davenport/Swanton, Capitola and Santa Cruz, which have limited designated areas where the rentals are allowed.
Note that there are additional limitations including distances between vacation rental and number of rentals allowed in specific areas inside these designated areas, and it is important to contact the County Planning Department or City Planning Department to determine eligibility before buying a home to be used as a vacation rental or submitting your applications.
Page two of this downloadable document, describes the limited designated areas as:
  • The "Live Oak Designated Area", called "Yacht Harbor Special Community" is "that portion of Live Oak that lies east and south of East Cliff Drive and Portola Drive from the intersection of 9th Avenue and East Cliff Drive to the intersection of Portola Drive and 41st Avenue".

  • The "Sea Cliff/Aptos Designated Area" is "that portion of the Aptos Planning Area bounded on the west by the Capitola city limit, on the north by Highway 1, and on the east and southeast by Bonita Drive, San Andreas Road, and the Urban Services Line from San Andreas Road to Monterey Bay"
  • The "Davenport/Swanton Designated Area" is "that portion of the North Coast Planning Area bounded on the south by Riverside Ave and San Vincente Street in the unincorporated town of Davenport, and extending north along Highway 1 to include the areas of New Town and Davenport Landing south of Highway 1, and bounded on the north by the intersection of Swanton Road and Highway 1, and including all parcels within one-quarter mile of Swanton Road, but excluding any parcels that abut Last Chance Road".
  • Capitola's designated area is known as the "Transient Rental Use Overlay District", as found on their Community Development page here, "This area consists of the Capitola Village, Riverview Avenue as far north as city hall, as far west as El Camino Medio, as far east as Cliff Drive and as far south as Capitola Beach". A visual map can be viewed here.
  • Santa Cruz currently does not have designated areas, but is reviewing possible new limitations and designated areas, and it is recommended to contact the city's Short Term Rental Planning Department for further information.
Santa Cruz Country requires a permit and monthly report and payment of Transient Occupancy Tax, also known as "hotel tax", as well as abiding by specific rules and regulations.
Applying for a Santa Cruz County permit includes submitting a Vacation Rental Permit Application and a Transient Occupancy Tax Application.
The county's Vacation Rental Permit Application, is found here .
The county permit application includes a list of required information, which includes, among other details:
  • A copy of the current Rental/Lease Agreement that includes specific rules regarding maximum number of guests and vehicles, noise limitations, trash and prohibition of illegal behavior
  • A Site Plan and Floor Plan (instructions for Measuring your Vacation Rental and Drawing Scaled Plans are here)
  • Safety Verification Checklist
  • Proof of Transient Occupancy Tax Payment (instructions for obtaining proof is included)
The county's application fee is $964.50 for dwellings of 0-3 bedrooms.
A public hearing is required for new applications for properties that have four or more bedrooms, and will include additional permit fees, to a total of $2800 or more.
County permits are valid for five years. To obtain a renewal permit, three out of the five years must have had significant rental occupancy, and the owner/operator and property must be in good standing in regards to abiding by the rules and regulations. It is specified that there is no vested right to a renewal permit.
A permit can be withdrawn at any time due to noncompliance with permit conditions, and then a new permit cannot be obtained for a year or longer.
The Transient Occupancy Tax Application is located here .
The County tax rate is 11% of the rental rates received every month. The tax must be paid monthly, along with submitting a monthly report, found here .  
If renting only through Airbnb, you are not required to submit the monthly report. For Airbnb tax Frequently Asked Questions pertaining to Santa Cruz County, see here .
For Frequently Asked Questions regarding the transient tax, click here .  
Click here for the tax ordinance information.
The cities of Santa Cruz and Capitola each have additional rules and regulations. Pajaro Dunes has a special permit already established with existing resorts and managed associations.
The City of Santa Cruz is reviewing possible modifications and new limitations for vacation rentals and has put a freeze on accepting new permits until May 18, 2018. However, the planning commission is currently allowing renewal of permits for existing vacation rentals in good standing, and new permits for "hosted rentals" of owner-occupied houses and duplexes are exempted from the freeze (see more in Christine's Corner).
Also, if a vacation rental property, referred to as a Transient Occupancy Tax (TOT)-registered Short Term Rental, is sold, the new owner and property is exempt from the city's freeze, whether it was previously owner-occupied or not.
The City of Santa Cruz requires you first to fill out the Transient Occupancy Tax Eligibility Checklist form, as found here .  If the city approves this checklist, they will notify you in two weeks to a month and send you a packet with the rest of the forms.
To view Santa Cruz city's Transient Occupancy Tax Return, click here , with instructions here , and a list of rental charges subject to the tax is located here , and Frequently Asked Questions are here . The city does require a monthly tax return for Airbnb rentals.
To find the fees for the Transient Occupancy Tax Eligibility Checklist and other permit forms fees, see contact information here .
The City of Capitola has its own permit and transient occupancy tax application forms, as well.
In addition, Capitola requires a business license.
Capitola's Transient Rental Permit Application document can be downloaded here .
The permit application document requires different information than the County's application, including:
  • Dwelling Space:
    • Number of Bedrooms:
    • Dwelling's square footage
    • Number of maximum occupancy
  • Parking:
    • Number of parking spaces on the property
    • Number of Pacific Cove Parking Passes
    • Pacific Cove Parking Pass ID#(s)
To obtain a Pacific Cove residential parking pass, you must provide proof of residency and current registration showing the rental address for all vehicles. Regardless of the number of people living at the property, two permits are allowed for residents if there is no available off-street parking, and only one permit is allowed for non-residents, although non-residents can get one transferable pass. There is additional parking allowed for those with passes for Capitola Village behind the police department and in some neighborhood parking areas, and for special events, up to 25 temporary permits may be granted.
The permit document also includes:
  • Capitola's "Standard Conditions of Approval", similar to the County's rules and regulations, with additional requirements
  • A map of the Transient Rental Use Overlay District which consists of Capitola Village and parts of Riverview Avenue
Permits in Capitola are valid for one year, instead of the county's five year period. The permit fee is $500 with a 5% Tech Fee.
There is no separate Transient Occupancy tax application. Click here to see Capitola's required monthly tax report.
And Capitola's Business License Application is found here . Capitola will approve your new business permit after the approval of the permit. The license must be renewed yearly.
There is a lot of information to digest, but undoubtedly, if you are interested in profiting from a vacation rental in Santa Cruz County, understanding the ins and outs of each program is well worth your time.

Christine's Corner

Upcoming Changes to Vacation Rental Laws

On June 29 th , at 7:00 p . m . the Santa Cruz City Planning Commission (the Commission) considered new rules to govern short-term vacation rentals (including Airbnb and VRBO properties). The meeting lasted past 12:00 midnight, largely due to the passionate response of the public both for and against vacation rental restrictions. Property owners and renters alike are paying close attention to this topic because the City's decision will impact property owners' ability to take part in the City's vacation rental program in the future and renter's ability to find long-term rentals.

In response to growing concerns that rental housing is diminishing through the conversion of long- to short-term rentals, the Commission elected an 11-member Subcommittee to research short-term rentals in Santa Cruz county. This Subcommittee made recommendations, which were presented to the Commission during a public meeting held on June 29 th . Staff in the Planning Department have modified the subcommittee's recommendations and worked with the Commission to draft an ordinance . The next public meeting will be in July, where the Commission will largely focus on the topic of capping the total vacation rental permits issued for both hosted and non-hosted units.

Once in agreement, the Commission will make recommendations to Santa Cruz City Council in September or October. With a new draft ordinance in hand, the City will go to the Coastal Commission to get their blessing, which may take several more months. So, don't expect to see the new rules until well into 2018, if not later.

New regulations, offered by both the Subcommittee and City Planning Department staff working on this issue include:
  • Capping all new vacation rentals in both hosted and non-hosted units
  • Requiring permit renewal every five years
  • Limiting the number of permits to one person/entity
  • Imposing large fines for violations

According to the Santa Cruz County Association of Realtors, vacation rentals account for less than 1% of housing in the city. Furthermore, most vacation and Airbnb rentals would not be "affordable" units if converted into long-term rentals. On the other side of the argument, argues that short-term rentals such Airbnb units push up rental costs by reducing long-term rental inventory. They also state that short-term rentals are closer to 5% of all housing when accounting for unregistered short-term rentals.

If you are interested in attending the public meetings that will dictate the future of the vacation rental program in the City of Santa Cruz, you can get the meeting details here.