In Morro Bay, the Rental Income Doesn't Transfer With the Deed

"A short-term vacation rental license shall not be transferred from a seller to a buyer of real property."

That line sits inside the draft short-term rental ordinance on file with the City of Morro Bay, and it answers a question a lot of buyers never think to ask until they're already in contract: does the Airbnb income printed in the listing packet belong to the house, or to the person who currently owns it? The ordinance is unambiguous. The license belongs to the operator, not the property. When the sale closes, that license does not close with it.

For a buyer weighing a coastal cottage near the Embarcadero against one three blocks up in Morro Heights, this matters more than square footage. A listing that shows twelve months of rental receipts is showing you a business the seller built and holds a permit for. It is not showing you a right that transfers at the notary's table.

What Non-Transferable Actually Means at the Closing Table

Buying a currently licensed short-term rental in Morro Bay does not put you next in line to run it. You start the process from the beginning: a new STR permit application, a business license, a Transient Occupancy Tax account, and a city inspection to confirm the property meets parking, occupancy, and signage standards. None of that carries over from the previous owner, no matter how clean their compliance record or how consistent their rental history.

The only exception written into the ordinance is a transfer to a designated beneficiary, which covers estate situations, not real estate sales. A buyer is not a beneficiary. A buyer is an applicant, and applicants join a system that is already close to full.

The Cap, the Buffer, and Why the Waitlist Has Real Names on It

Morro Bay's ordinance caps full-home, non-hosted short-term rentals in residential zones at 175 citywide, and it requires each of those rentals to sit at least 175 feet from the next one, measured property line to property line. Once the 175 slots are filled, a new applicant does not get a permit. They get a position on a waitlist, maintained in the order applications arrive, and they wait for density and buffer rules to open a spot near their specific address.

This is not a hypothetical queue. The city's June 2026 waitlist document lists actual applicants at actual addresses: Eric Westbrook at 939 Pacific Street, Eric Wang at 3150 Tide Avenue, and entries for KK Properties LLC under Lisa Kristofferson and for David and Mindy Gosvener. Whatever position a buyer would inherit depends entirely on when they apply, not on what the previous owner did with the property. If you buy a home that was licensed under the seller's name and your application lands behind twenty others, you own a house with a rental history and no rental permit, for however long that queue takes to clear.

Why Only Five Spots Opened This Year

At the close of its audit year in January 2026, the Morro Bay City Council authorized staff to review five properties for potential permit eligibility, based on the 175-foot buffer calculation against existing licensed rentals. Five, citywide, after a full year of review. Spots open when an existing permit lapses through non-renewal or is revoked for noncompliance, and even then, eligibility is filtered through the buffer rule before anyone waiting can be offered the slot.

That pace tells you something about the shape of this market that a listing's income history cannot. The scarcity is not seasonal or cyclical. It's structural, tied to a fixed cap and a geometric spacing rule that has not moved since the ordinance was adopted in 2020. A buyer treating STR income as a near-certain feature of ownership is pricing in a permit that may not exist for them for a long time, if the cap in their part of town is already full.

The Hosted Exception That Doesn't Show Up in Listing Copy

There's a second track that changes the calculation, and it rarely appears in marketing materials. As of January 2025, Morro Bay places no limit on hosted short-term rentals in residential zones. Hosted means the owner is present during the guest's stay. The cap and the 175-foot buffer apply only to unhosted, full-home rentals, the kind where the owner is away and the entire property is turned over to guests.

For a buyer planning to live in a Morro Bay home part of the year and rent a room or an accessory space while present, the waitlist problem doesn't apply the same way. That's a materially different acquisition strategy than buying a home to run as a full-time, owner-absent vacation rental, and it's worth having explicitly on the table before you write an offer built around an income assumption. The two paths are governed by different rules, and only one of them is capped.

What to Verify Before Rental Income Shapes Your Offer

If a Morro Bay listing includes rental income as part of its pitch, a few documents are worth requesting before that number influences your offer price or your financing plan:

• A copy of the seller's current STR permit or registration, along with the business license and TOT account, so you can see whether it is active and in good standing
• Historical TOT filings, which show what was actually remitted to the city rather than what a listing sheet claims was earned
• Written confirmation from the city on whether the property's address would be eligible for a new permit today, and if not, where a new application would land on the waitlist
• Clarity on whether the current use is a full-home unhosted rental or a hosted arrangement, since only one of those is subject to the cap

A purchase contingency tied to written confirmation of permit eligibility gives you time to get real answers from the city before you're locked into a closing date. It also protects you from a scenario where the rental income that justified the price disappears the day the deed changes hands.

Financing and insurance carry their own version of this same friction. Loan programs built around owner-occupancy, including FHA and VA products, can restrict short-term rental use outright, and lenders generally underwrite STR income differently than long-term rental income. Standard homeowner insurance policies often exclude short-term guest activity entirely, which means a seller's existing coverage may not be something you can simply keep in place. Both are worth confirming with your lender and insurer early, before the rental income becomes part of your debt-to-income math.

A Few Questions Worth Asking Directly

If the home I'm buying is a licensed STR today, can I keep renting it the day escrow closes? No. The license stays with the seller. You would need to apply for your own permit, and if the residential cap in that part of the city is full, you would join the waitlist rather than step into an active permit.

What happens if the seller's permit lapses before the sale closes? Under city rules, a permit that isn't renewed before its expiration results in the STR's closure, and the property goes to the back of the waitlist rather than keeping its place. A seller's lapsed renewal can cost a buyer real time.

Does the cap apply if I plan to be on-site and just rent a room or a separate space? Not in the same way. Hosted rentals, where the owner is present, have not been subject to a citywide cap since January 2025. The 175-unit cap and the 175-foot buffer apply specifically to full-home, unhosted rentals.

A rental income figure on a listing sheet describes what the current owner has been able to do with the property under a permit that belongs to them. Whether you can do the same thing starts as a separate question, answered by the city, not by the escrow file.

If you're weighing a Morro Bay property where rental income is part of the appeal, it's worth walking through the permit and waitlist details before that number becomes part of your offer. Leslie Dougherty can help you get clear answers early, while there's still time to adjust the plan. Let's Connect.