A guide to investing in short-term rentals

Written by Samantha SheltonNMLS 1647301Updated October 2026

General information only. Not tax, legal or investment advice, and not an offer to sell or a solicitation to buy any security. Take tax questions to a qualified tax professional and ordinance, licensing and HOA questions to a Michigan attorney. Align Lending is an independent mortgage broker, not a property manager, syndicator or adviser.

In Holland, Michigan, investor-owned short-term rentals are capped at 25 properties across the city’s traditional residential zoning districts, each required to sit at least 500 feet from the next, and the city’s licensing guide states there are currently no openings.¹ That sentence describes this asset better than any revenue projection can.

You are not buying a rental house. You are buying permission to run a small lodging business in a municipality that can withdraw it, and nightly rates, furnishings, cleaning crews and tax strategy all sit downstream of that. Learn how it works: verifying legality, the operating cost stack, seasonality, insurance and the 14-day and seven-day tax rules. Deciding whether to buy at all? See pros and cons of investing in vacation rental markets, our Real Estate Investing guide and the Investment Property Types hub.

Key takeaways:

• Local law is the first underwrite: Holland caps investor-owned short-term rentals at 25 citywide in residential districts, and Park Township’s board voted in November 2022 to end residential-zone short-term rental use by October 1, 2023.
• It is an operating business, not a lease: Furnishing, per-stay cleaning, consumables, owner-paid utilities, platform commissions and revenue-based management never touch a 12-month tenancy, and Michigan adds 6% use tax on any stay of one month or less, plus county accommodations excise tax of up to 5% in eligible counties.
• The tax rules are genuinely different: A property whose average guest stay is seven days or less is not automatically a passive rental activity, but that only helps if you materially participate, and a home you use personally and rent fewer than 15 days a year produces rent you never report.

Can you legally run a short-term rental at this address?

Get it answered in writing, by the municipality, before your inspection contingency expires. Because a short-term rental that is legal on closing day can be legislated out of existence. Park Township in Ottawa County proves it: the board voted 6-0 on November 10, 2022 to prohibit short-term rentals in residential zoning districts and required all such uses to end by October 1, 2023, with roughly 248 units then operating. Owners sued, and the township prevailed in circuit court in November 2024 and November 2025.

No pro forma survives that. Our guide to navigating short-term rental regulations goes deeper; here is the pre-offer sequence.

• Zoning district, in writing: Ask the zoning administrator to confirm by email whether transient lodging is permitted in that district, and whether a license transfers to a buyer or dies at closing. Holland allows investor-owned short-term rentals broadly in mixed-use districts, but in residential districts only inside the 25-property cap.
• Licensing class and caps: South Haven issues a Class I license permitting unlimited rental but no more than two stays per seven-day period, and a Class II license permitting six rental terms or 28 days per calendar year, a distinction that changes revenue by a factor of ten. Class I applicants must show $1,000,000 in liability coverage.
• The HOA or condo association: Recorded covenants can bar rentals under 30 days even where the city allows them, and associations amend documents faster than cities do, see navigating HOA regulations.

Run all of it inside real estate due diligence. A written zoning confirmation is the cheapest insurance in the deal.

What does a short-term rental actually cost to run?

Far more of the top line than a lease consumes, which is why gross comparisons flatter the nightly model and net comparisons often do not. The same property can produce roughly twice the gross revenue and land only modestly ahead on net operating income.²

• The furnish-out is a capital event: Beds, kitchenware, linens, outdoor furniture, a smart lock and photography all land before the first booking, and soft goods wear out on a guest cycle rather than a household one.
• Cleaning and management are the recurring load: Fifty turns a year means a crew that shows up on a Sunday between an 11 a.m. checkout and a 4 p.m. check-in. Long-term management is quoted off rent collected; short-term management off gross revenue, at a much larger share. Get written quotes locally.

Model both against the same price. Cash flow in real estate and cash-on-cash return hold the arithmetic; cap rates in real estate covers why nightly-revenue buildings price differently.

How do seasonality and pricing drive short-term rental revenue?

They decide it, because a short-term rental earns its year in a handful of weeks and defends the rest. A Michigan lakefront cottage may book near-solid from late June through Labor Day and sit dark through March, so the annual figure is a summer figure plus a rounding error.

• Model by season, never by annual average: Build the year month by month with separate occupancy and rate assumptions. A blended annual occupancy figure hides the two months that matter.
• Find a second demand driver: A university, hospital system, convention calendar or winter sport alongside the summer draw fills shoulder weeks a one-season market cannot.
• Know your break-even occupancy: Divide annual fixed costs, including debt service, by a realistic nightly rate, and stress-test that night count. New listings compete rate away before they compete bookings away, so watch supply too.

Treat any platform’s projection as marketing. Short-term rental market trends covers what to track; how to analyze a property’s rental potential sequences one address.

What insurance actually covers short-term guests?

Not your homeowners policy. The Insurance Information Institute states that standard homeowners policies do not provide any coverage for business activities conducted in the home, that renting a residence for short periods on a regular basis to various guests constitutes a business, and that proper coverage requires a business policy, specifically a hotel or bed-and-breakfast policy. This is the quiet failure mode: nothing goes wrong for two years, and then a guest is injured and the carrier reads the business-activity exclusion for the first time.

• Buy the policy that matches the use: A commercial or specialty short-term rental policy is written for transient occupancy; a homeowners form, and often a landlord form, is not. Booking-platform guarantees are limited programs, not a substitute, and non-disclosure of the rental use is the fastest route to a denied claim.
• Check the master policy in a condo: A condominium’s master policy and bylaws may restrict transient use or shift liability in ways a single-family owner never sees, see pros and cons of investing in condominium markets.

Quote the correct policy type during due diligence and put it in the model. It is usually a multiple of the seller’s homeowners premium.

How are short-term rentals taxed differently from long-term rentals?

Two federal rules do most of the work, and both turn on day counts rather than what you call the property.³

The 14-day rule

If you use a dwelling unit as a residence and rent it fewer than 15 days in the year, you do not report the rental income and you do not deduct any expenses as rental expenses. A unit counts as your residence when personal use exceeds the greater of 14 days, or 10% of the days you rent it at a fair rental price. Cross that line and every expense splits between rental and personal use by day count.

The seven-day average-stay test

Rental activities are passive by default, and passive losses generally cannot offset wage or business income. But an activity is not a rental activity for passive-loss purposes when the average period of customer use is seven days or less. A rule written for hotels that a nightly-stay rental can fall inside. A second exception applies at 30 days or less with significant services.

Here is where the popular version goes wrong. Falling outside the rental-activity definition does not make losses non-passive by itself. It moves you into the ordinary material participation tests, which you still have to meet: more than 500 hours, or more than 100 hours with no one else participating more, or one of the others. Taxpayers lose this on records, not law.

The details that get skipped

• The recovery period may not be 27.5 years: The IRS definition of a dwelling unit excludes a unit in a hotel, motel, inn or other establishment where more than half the units are used on a transient basis, which is why some short-term rentals are depreciated as nonresidential real property over 39 years instead. A question of fact for your CPA; see real estate depreciation.
• Substantial services move you to Schedule C: Provide services primarily for the guest’s convenience (cleaning during the stay, linen changes, maid service) and the IRS directs you to Schedule C rather than Schedule E, bringing self-employment tax into play.
• Furnishings depreciate fast: Appliances, carpets and furniture in residential rental property carry a 5-year recovery period, and per IRS guidance issued January 14, 2026 the One Big Beautiful Bill Act restored permanent 100% first-year bonus depreciation for qualified property acquired after January 19, 2025.
• Cost segregation is a study, not a switch: The IRS Cost Segregation Audit Techniques Guide notes these studies vary widely in methodology, documentation, depth and preparer expertise, and that no standards govern their preparation.

Lodging taxes sit outside all of this, applying to the stay itself. None of it is tax advice: read real estate tax benefits for investors, then take the return to a CPA. The federal rules are in IRS rules on residential rental property and vacation homes.

How do you finance a short-term rental?

By deciding honestly, before you apply, whether the property is a second home or an investment property, the two occupancy types carry different rules. Align Lending finances one- to four-unit residential property, and this is our first conversation with short-term rental buyers.

• Second home financing has a control requirement most buyers miss: Under the Fannie Mae Selling Guide, a second home must be occupied by the borrower for some portion of the year, is restricted to one-unit dwellings, must be suitable for year-round occupancy, must not be rental property or a timeshare, and cannot be subject to any agreement giving a management firm control. A mandatory rental pool breaks that.
• Investment property financing prices the risk in: An investment property is owned but not occupied by the borrower. Lenders in Align’s network generally require a larger down payment, higher reserves and stronger credit than on a primary residence, and ranges differ by lender.
• DSCR loans qualify the property, not you: Debt-service coverage ratio loans underwrite projected rental income against the payment instead of your personal income. They are business-purpose loans, so consumer protections such as the Loan Estimate and Closing Disclosure do not apply, and terms differ meaningfully between lenders.
• Occupancy misrepresentation is mortgage fraud: Calling an investment property your primary residence to get better terms is a federal crime. More in buying a home as an investment property and buying a vacation home.

A furnished, operating listing is often sold as move-in-ready income, the same pitch as a turnkey property, and it earns the same scrutiny: verify the license transfers, verify revenue with tax returns rather than a spreadsheet, and verify the furnishings convey. Refinancing an investment property follows different rules again.

What Michigan short-term rental investors should know

Michigan has no statewide short-term rental statute as of August 2026, so your township, city or village sets the rules and can change them. The Michigan Zoning Enabling Act, 2006 PA 110, leaves zoning with local government, and attempts to override it have failed.

• The 6% use tax applies to every stay of one month or less: Michigan’s use tax reaches rooms or lodging furnished by hotelkeepers, motel operators and others furnishing accommodations, excluding only accommodations rented for a continuous period of more than one month. “1 month” meaning 30 days or the calendar month of the rental period, whichever is shorter. See Treasury’s use tax page.
• Some counties add up to 5% more: Under Public Act 263 of 1974, an eligible county may levy an excise tax on the business of providing accommodations to transient guests, capped at 5% of the total charge.
• Statewide legislation is pending, not law: House Bill 4722 of 2021 would have made short-term rental a residential use permitted in all residential zones; it passed the House on October 27, 2021 and never got a Senate vote. House Bill 6026 and companion House Bill 6027, introduced May 21, 2026, would add a statewide registry and excise tax while allowing local regulation short of a total ban. Both were still in committee as of August 2026.
• Resort-town rules are the tightest: Holland’s 25-property cap, South Haven’s two-class licensing and Park Township’s prohibition are live examples in West Michigan alone. Verify the municipality every time.

Write zoning and licensing confirmation into your due diligence period, and underwrite as though the ordinance could tighten during your hold.

FAQ: Investing in short-term rentals

Here are answers to common questions about investing in short-term rentals.

Are short-term rentals more profitable than long-term rentals?

On gross revenue, often yes in a strong tourism market, though the size of the gap varies by market and season and no published index measures it. On net, the gap narrows sharply, because cleaning, utilities, furnishing replacement, insurance, platform commissions and management fees eat much more of the top line. Model both before assuming the nightly version wins, using evaluating a property’s cash flow potential.

How do I know if a market is good for short-term rentals?

Look for a demand driver that works in more than one season, a university, hospital system, lake or ski destination, or convention business. Then check regulatory posture, listing supply, occupancy and the ratio of achievable revenue to price. A great market with a hostile ordinance is not a market. See our guide for new real estate investors.

What is the short-term rental tax strategy investors talk about?

It refers to the passive-loss exception for property with an average period of customer use of seven days or less, which is not treated as a rental activity. Losses may then offset non-passive income, but only if you also meet a material participation test. It is fact-dependent and not something you elect. Work with a CPA first, and read real estate investment strategies for beginners.

Can I get a mortgage for a short-term rental property?

Yes, though terms depend on occupancy type. A property you also use personally may qualify for second-home financing, but only if you keep exclusive control and avoid management agreements controlling occupancy. A pure investment short-term rental carries investment pricing, and some lenders offer DSCR loans qualifying on projected rent. See buying a second home.

The bottom line on investing in short-term rentals

A short-term rental is a small lodging business wearing a house, and the local ordinance is its business license. As of August 2026, Holland caps investor-owned short-term rentals at 25 in its residential districts and reported no openings; Park Township voted to end residential-zone short-term rental use by October 1, 2023. Verify zoning and licensing in writing before your contingency expires, model the operating stack rather than the gross revenue, insure it as a business, and treat the seven-day average-stay rule as a test you must meet, not a switch you flip.

If you’re ready to price a short-term rental purchase or refinance, talk to Align Lending. We’ll shop your scenario across our lender network and show you second-home, investment and DSCR structures side by side. Call 248-506-5727 or start online today. Take tax questions to a qualified tax professional and ordinance, licensing and HOA questions to a Michigan attorney.

Footnotes:

1. Local and state short-term rental rules described in this article are a snapshot as of August 31, 2026, drawn from the municipalities’ and the Michigan Legislature’s own published materials. Ordinances, license caps, waiting lists, moratoria, fee schedules and pending legislation change frequently, and litigation can alter enforcement. Nothing here is legal advice or a representation that any specific property may lawfully be operated as a short-term rental. Verify the current ordinance, zoning district, licensing status and any HOA or condominium restriction directly with the municipality and a Michigan attorney before you make an offer. Return to text.

2. Example figures are hypothetical and for educational purposes only; they do not constitute an advertisement of credit terms, a rate quote, an offer of credit, or a projection of investment returns under federal or state law. The $1,900 monthly rent, $260 nightly rate, 164 booked nights, $22,800 and $42,640 revenue figures, 5% vacancy assumption, roughly 50 annual turns and the $11,900 and $14,800 net operating income figures are Align Lending arithmetic shown to illustrate how the two operating models differ. They are not observed market data, do not describe any specific property or market, and exclude financing costs, capital expenditures, lodging taxes and income taxes. Management fee levels vary by firm, market and scope of service; obtain written quotes. Actual results depend on the property, the market, the ordinance and your own underwriting. Past performance does not predict future results. Return to text.

3. This is general information, not tax advice. Whether a property is a dwelling unit, whether it is residential rental property depreciated over 27.5 years or nonresidential real property depreciated over 39 years, whether an activity is a rental activity under the passive-loss rules, whether you materially participate, whether services rise to the level requiring Schedule C reporting and self-employment tax, and how bonus depreciation or a cost segregation study applies all depend on your individual facts and change over time. Recordkeeping requirements are substantial. Consult a qualified tax professional about your situation. Align Lending is a mortgage broker and does not provide tax, legal or investment advice. Return to text.

Sources: the rule that a dwelling unit does not include a unit in a hotel, motel, inn or other establishment where more than half of the units are used on a transient basis; the definition of residential rental property as a building for which 80% or more of gross rental income is from dwelling units; the 27.5-year recovery period for residential rental property under the general depreciation system; and the 5-year recovery period for appliances, carpets and furniture used in residential rental property, Internal Revenue Service Publication 527, Residential Rental Property (Including Rental of Vacation Homes). The rule that a taxpayer who uses a dwelling unit as a residence and rents it fewer than 15 days does not report the rental income or deduct rental expenses; the definition of using a unit as a residence as personal use exceeding the greater of 14 days or 10% of the total days rented to others at a fair rental price; the requirement to divide expenses between rental and personal use by day count; and the direction to report on Schedule C when substantial services primarily for the tenant’s convenience such as regular cleaning, changing linen or maid service are provided, Internal Revenue Service Topic No. 415, Renting Residential and Vacation Property, and Publication 527. The exception providing that an activity is not a rental activity when the average period of customer use of the property is seven days or less, the further exception at 30 days or less with significant personal services, the seven material participation tests including the more-than-500-hour test and the more-than-100-hour test, and the general rule that a rental activity is passive even if the taxpayer materially participated, Internal Revenue Service Publication 925, Passive Activity and At-Risk Rules, and Treasury Regulation section 1.469-1T(e)(3). The permanent 100-percent additional first year depreciation deduction for qualified property acquired after January 19, 2025, Internal Revenue Service news release IR-2026-06, January 14, 2026, and Notice 2026-11. The statements that cost segregation studies vary widely in methodology, documentation, depth, format and preparer expertise and that there are currently no standards regarding their preparation, Internal Revenue Service Cost Segregation Audit Techniques Guide. Second home requirements including borrower occupancy for some portion of the year, restriction to one-unit dwellings, suitability for year-round occupancy, exclusive borrower control, exclusion of rental property and timeshare arrangements, and the prohibition on agreements giving a management firm control, and the definition of an investment property as owned but not occupied by the borrower, Fannie Mae Selling Guide B2-1.1-01, Occupancy Types. The statements that standard homeowners insurance policies do not provide any coverage for business activities conducted in the home, that renting a primary residence for short periods on a regular basis to various guests constitutes a business, and that a business policy such as a hotel or bed-and-breakfast policy would be needed, Insurance Information Institute, Coverage for renting out your home. Michigan use tax on rooms or lodging furnished by hotelkeepers, motel operators and other persons furnishing accommodations, the exclusion for accommodations rented for a continuous period of more than one month, and the definition of “1 month” as 30 days or the calendar month of the rental period, whichever is shorter, MCL 205.93a, Use Tax Act, and Michigan Department of Treasury. County excise tax on the business of providing accommodations to transient guests, not to exceed 5% of the total charge, Public Act 263 of 1974, MCL 141.861 to 141.867. Local zoning authority under the Michigan Zoning Enabling Act, 2006 PA 110, MCL 125.3101 to 125.3702; House Bill 4722 of 2021, which would have added section 206b making short-term rental a residential use permitted in all residential zones, as passed by the House October 27, 2021; and House Bills 6026 and 6027 of 2026, introduced May 21, 2026, Michigan Legislature. Investor-owned short-term rentals limited to 25 properties with a 500-foot separation distance in the LDR, CNR, MDR and TNR residential zone districts, the definition of a short-term rental as a dwelling unit offered for rent for less than 30 consecutive days per occupant, and the statement that there are currently no openings, City of Holland Rental Certification and Licensing Guide. Class I licenses permitting unlimited rental but not more than two rental stays per seven-day period, Class II licenses permitting six rental terms or 28 days of rental per calendar year, and the $1,000,000 liability insurance requirement for Class I applicants, City of South Haven Short-Term Rental Registration. The unanimous November 10, 2022 board vote prohibiting short-term rentals in residential zoning districts, the requirement that all such uses end by October 1, 2023, and the approximately 248 units then operating, Park Township, Michigan, board press release; subsequent Ottawa County Circuit Court rulings of November 21, 2024 and November 4, 2025 upholding the township’s position, Park Township public statements.

This article is for informational purposes only and is not intended to provide legal, financial, tax or investment advice, and it is not an offer to sell or a solicitation of an offer to buy any security. Short-term rental ordinances, license caps, zoning classifications, HOA covenants, lodging tax rates, federal tax rules and loan program requirements change and vary by property, program and locality; confirm current figures with your loan officer, confirm tax treatment with a qualified tax professional, and confirm ordinance, licensing, zoning, title and entity questions with a Michigan attorney. Figures shown are illustrative, are not a rate quote or an offer of credit, and do not constitute an advertisement of credit terms or a projection of investment returns. Past performance does not predict future results. Align Lending is an independent Michigan mortgage broker, NMLS #2041154, financing one- to four-unit residential property, and is not a property manager, syndicator, insurance agency, broker-dealer or investment adviser.

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