November 9, 2019
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Post type:
Industry & Regulations
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Author:
Boris

A Comprehensive Guide for Short Term Rental Regulations

A Comprehensive Guide for Short Term Rental Regulations


If there is a single challenge that we’d describe as the most difficult and complicated one no matter for beginners who just start looking into STR or seasoned  real estate investors, it would be the STR (short-term rental) regulations that affect virtually every significant U.S. market.


Especially if you’re based on the East or West Coasts, in a market with particularly expensive real estate and rent costs, such as New York, Boston, Miami, San Francisco, it would seem that virtually all of them pretty much ban investor-owned short-term rentals. Over the last few years, they’ve all passed regulation that has made it pretty much impossible for non-owner occupied properties to be rented short-term.


So what does it mean? How to understand the changing landscape? And, most importantly, where to go from here?


In this article, I'll provide a framework on how to think about the STR (short-term rental) regulations, what the trends and causes are, as well as what options are available to pursue from here.


The Fundamentals - What's Going On?


When Airbnb first entered the cities, it’s been able to operate quietly under the radar for a number of years. Most cities didn’t quite know what to make of it or how to regulate it, so they largely left it alone.


However, in the last 3 to 5 years, that began to change. We have started to see city after city pass ordinances that would begin to regulate short-term rentals, such as Airbnb. This has been especially the case in expensive real estate cities.


The typical justification falls in one or all of the following camps:

  • Property prices and rental costs are rising - in part as out-of-state owners buy up houses to turn them into short-term rentals.
  • There is a shortage of housing available for local residents - for the same reason as listed below.
  • People don’t like short-term guests coming and going in their neighborhoods.


On the other camp are people that defend the short-term rentals as follows:

  • As a property owner, you should have the right to do what you want with your property as long as it follows the laws.
  • Property costs and rents are rising for many different reasons. Airbnb is a factor, but it’s negligible compared to other causes.
  • Short-term rentals can have a positive impact on a neighborhood through investments in property renovations and better maintenance.
  • Being able to do short-term rentals helps offset mortgage costs and helps build wealth for many residents.
  • Short-term rental guests add a lot into the local economy by staying in diverse neighborhoods, interacting with local retailers, and eating at local restaurants.


There are legitimate and overblown points on each side of the debate, but you can see why this becomes a very hot issue and why local politicians frequently jump on the bandwagon. 


All that said, that’s the reality, so what we need to do is understand it and learn how to navigate it. After all, in challenge, there is opportunity. 


How to Research and Analyze Short-Term Rental Regulations

Unfortunately, finding information about short-term rental regulations is not very easy. 


While there is a lot of news about regulation changes in some major cities like San Francisco, New York or Los Angeles, it becomes much harder to find a single source of truth of STR regulations in all major cities in the US. Government websites are not updated frequently and the language that’s being used can be very confusing. There’s conflicting information coming from different sources - even on Airbnb’s own website, the details are oftentimes outdated or inaccurate. 


There are two reasons why the STR regulations are hard to track:

  • It changes all the time. A city has positive regulation or not regulated today might pass a negative law towards STR 6 months later, and vice versa. 
  • It’s complicated. The STR regulations are usually not black or white, so understanding the details and caveats becomes very important.

When we research and analyze short-term rental regulations, we do it by:

  • Pouring over the government websites and all of the documentation they put out
  • Keeping a close eye on the news, so we know how the regulations are being discussed and what direction they are going in even before they are passed


Types of Regulations


There are many different ways that a city can regulate short-term rentals. Some outright ban it. Some have a laissez-faire approach. And then there’s anything in between.

To help make sense of it all, we can typically divide the regular into 3 broad categories from our perspective, as an investor: Positive, Neutral and Negative.

Positive regulation is one where non-owner occupied rentals are allowed with no cap on dates that the property can be rented out. If there is a license fee and occupancy taxes, even better. It’s good if there is a clear and defined legal process for getting, we want to be properly registered and we want to contribute taxes - these are all good things.

One example is Cincinnati, Ohio. The city is generally friendly towards short term rentals, however, there are still some guidelines regarding the type of properties you can use for STR. For buildings with 4 units or less, there are no limits on how many STR units you can have. For buildings with more than 4 units, you're allowed to rent out the first 4 plus 1 more for every 4 additional units you have in the building.

Negative regulation is such that pretty much bans non-owner occupied short-term rentals. You may still be able to rent out private bedrooms in your primary residence, but it’s impossible to scale beyond that. So for our purposes, these markets are a no-go.

For example, in Berkeley, CA, short-term rental law regulates temporary stays that are less than 14 days. Short-term rentals are only permitted in certain zones (which tend to be the downtown area which is too expensive) and primary residence only - which typically is a no-go for investors.

Neutral is something in between. Sometimes regulations allow non-owner occupied short-term rentals but cap the number of days that you can rent out a property. Sometimes it’s allowed but with specific zoning requirements. Sometimes there’s a cap on how many properties can be done as short-term rentals. It’s worth a look, but it’s not ideal.

For example, in Philadelphia, you are allowed to have a non-owner occupied short-term rental, but the city caps the number of days that you can rent it out to 180. It’s not ideal, but it’s not an outright ban either - so for all intents and purposes, we’ll consider it as neutral.  Another example would be Kissimmee, Florida. In this area, vacation rentals are only allowed in what’s called the STRO (short-term rental overlay district) which concentrate rentals in designated zones within two particular areas.

In 2019, we’ve analyzed about 320 cities with a population of over 100,000 people, as well as 100 top vacation markets in the U.S. 

Our findings show the following:

  • 38% of the markets are listed as Positive for short-term rental investors. 
  • 10% are Negative. 
  • 52% are Neutral or require a closer investigation.

Trends That We’re Seeing & Next Steps

There are two fundamental things that are worth considering:

  • Short-term rentals are here to stay.
  • Cities will continue to tighten up regulations on them, as property prices continue to go up.

Both of these elements are important because they define the strategy beyond that. Essentially, short-term rentals will continue to develop a lucrative asset class, while simultaneously it’ll require more work to set this up and scale it.

Looking at the market over the last few years, there are a few more things worth noting.

Smaller Cities: While large, expensive cities are likely to continue to give short-term rentals a cold shoulder, smaller cities - especially in the Midwest - are quite welcoming to it. After all, it does attract significant investment, improves properties and makes it easier and more affordable for people to travel to that city, thus boosting the tourism economy. Many of the smaller cities develop smart, clear frameworks that we can follow and operate within. And, not to mention, property prices are reasonable and the economics actually work a bit better.

Extended-Stay Rentals: Not all is lost when it comes to the Tier 1 cities either. While short-term rentals aren’t allowed, we’re seeing increased demand and supply in properties designed for  furnished, extended-stay (ranging from 1 to 12 months) corporate rentals, as well as an important trend of co-living (where the landlord provides flexible, furnished, all-inclusive room rentals and handles the roommate coordination in exchange for a higher premium on rent). Both of these approaches allow to maximize the return above and beyond traditional long-term rentals.

As an investor, this means two things.

If you’re in a city with a Negative STR regulation, it may be necessary to widen your search radius to find areas with Positive regulation. 

If that’s not an option, then the next course of action would be to explore focusing on extended-stay furnished rentals that yield somewhere between the short-term and long-term revenues.

Additional Resources

We’re investors facing the same issues and challenges as you.

In 2019, we’ve spent about 300 hours doing an analysis on over 400 U.S. markets - researching regulations, real estate trends and prices, as well as combining it with the short-term rental performance data. 

The result is a single, up-to-date database that you can use to quickly research and discover potential markets to invest in, as well as easily compare them side by side. 

You can sign up for the Short-Term Rental Market Investor Report to get access to the entire database, as well as regular updates so that you’re always up to date.



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