So, you’re exploring the possibility of renting your vacation home, primary residence, second home, or spare room on a short-term basis—the Airbnb way. Many real estate blogs and articles are written on the lucrative business of short-term rentals, or STRs for short, as opposed to long-term rentals with leases of a year or more. However, very little is written about the objectives of local governments when enacting short-term rental regulations affecting this sector.
This article will focus on the business aspects and the regulatory issues a property owner needs to understand. Before offering your property to the short-term rental market, please consider the contents of this article to know the business side of short-term rentals. The rental of one dwelling unit can be subjected to licenses, registrations, and restrictions at all levels of state and local governments.
These jurisdictions have realized the precarious balance between the neighbors’ interests and property owners’ rights. Some jurisdictions and community HOAs have prohibited any form of short-term rental.
This guide will present the overall standard definitions within the short-term rental industry, along with the local laws, ordinances, and zoning regulations commensurate with a location type.
What is a Short-Term Rental?
It is a universal statement that a short-term rental is a dwelling unit, or a portion of a unit, rented for no more than 30 days per occupancy agreement.
In addition to the length of stay, the type of structure is also regulated. There are many jurisdictions where a property offered as a short-term or a vacation rental must be the owner’s primary residence. This, by default, enforces the short-term concept. The offering of tiny homes, mobile or manufactured homes can be prohibited.
Overall, the structure needs to be built and designed for residential occupancy.
Regulations for STRs
The canned statement from local jurisdictions regarding its regulation of short-term rentals is “to protect the interests and safety of owners, visitors, and neighbors.” However, the real reason is the appeasement of the tax-paying neighbors and the community associations that bear the brunt of bad experiences. The rights of the property owners offering short-term rentals are not as weighted with equal importance.
Primarily, zoning codes and ordinances clearly define the difference in short-term rentals from bed and breakfast properties and other lodging options. Short-term rentals will be restricted to specific zones and subject to operating licenses, permits, and rules for hosted and non-hosted units.
Some locations cap the number of short-term licenses issued within a jurisdictional boundary.
Why Regulate STRs?
The presence of short-term users does alter the character of a neighborhood. Residential communities can become transient. Homeowners and stable renters have a sense of community buy-in that a short-term renter would not.
The opportunity for “party houses” in affluent communities with high-end amenities will come to fruition without regulation. The tensions between short-term rental property landlords and the neighbors will also surface. So much for property values—so say the neighbors.
Then, there are the social aspects that negatively affect the availability of affordable housing or the driving up of rental rates for long-term renters.
There are also the voices of the established businesses of the regulated lodging industry on the unfair competition of local service jobs brought by short-term rentals when left unregulated and untaxed.
The reality of these circumstances is that the local municipalities enact the regulations and rules without the infrastructure for enforcement.
Licenses and Permits for STRs
It is safe to say that city and county jurisdictions will require at least one permit to operate a short-term rental business to comply with codes and ordinances. Many jurisdictions will require several. These may include a:
- general business license; often referred to as an occupational or a business tax license;
- short-term rental license; and/or
- certificate of occupancy for the unit.
The licensing process could involve the eligibility of local ordinances; submitting the required documents like property and liability insurance; a certificate of occupancy or possession; a completed application, and, of course, the fees.
Other business requirements may involve obtaining an EIN from the IRS and a sales tax permit from the state and local levels.
It is the property owners who will bear the responsibility of maintaining the unit in a safe and code-compliant manner.
Short-Term Policies in Specific Areas for STRs
When considering the offer of your property to the short-term market, you must also consider the area and type. Is the unit a single-family home in a community near a theme park? Is the unit located in an affluent neighborhood in the suburbs? Is the unit a high-rise apartment in a vibrant downtown core?
You can be sure that the rules and regulations will be commensurate with the neighbors’ location and political clout.
This section will focus on each identified area’s typical policy objectives.
The Affluent Community
In these communities, short-term property owners can be afforded the right to generate income. These properties are the owner’s primary residences that offer the property for rent while on vacation. The local government will enforce codes to minimize the potential for party houses, parking problems, noise, and trash. There is a delicate balance between maintaining property values for the neighborhood and the property tax revenue for the local government.
The Urban Setting
The local governments with a vibrant urban setting understand the rights of the property owners to lease their units to generate extra income. The units in a downtown core are often transient but not on the 30-day short-term period. Most likely, the local governments are also dealing with a competitive affordable housing inventory.
Therefore, do not be surprised that a prohibition on conversions to short-term rentals as a permanent use. The dwellings offered for short-term or vacation rental could be the mix of an entire unit, or a portion of a unit, with the owner-host present.
These units will very likely be taxed as that of traditional lodging for an even playing field and to maintain local service jobs. The risks of noise, parking, trash, and other burdens to the local public service departments are a consideration, but to a different extent than that of a suburban location.
The Suburban Working-Class Neighborhood
This area may be the best for short-term rentals where property owners need extra income for living expenses. The availability of short-term rentals will drive business to local establishments and the downtown core. The local government will be sure to incentivize the additional tax revenue to invest in the needed services of the permanent residents.
Tourist Areas and Beach Towns
The focus and attention of these areas differ from local jurisdictions of neighborhoods and places in the city core. In tourist areas and beach towns, the focus is on the property values of second homes where the owner-residents are not permanent.
The local public departments are geared toward tourists, visitors, and short-term rentals. The goal is to boost the tax base and stabilize the local economy.
The extra visitors will encourage business at local shops, service providers, and restaurants, translating to increased sales tax revenue and security for the service labor base.
The guide to the codes and regulations adopted by Scottsdale, a destination city for visitors and conventions, is a good resource for both the owner and the renter. This guide is an excellent example of equal weight being given to all sides in the short-term rental sector.
Local STR Laws: The Conundrum Between Adoption and Enforcement
For owners considering listing their properties as short-term rentals, do not interpret this section as presenting local laws without teeth. This may have been the case a few years ago. Still, local jurisdictions have learned to adopt codes and ordinances within their ability to enforce.
There was a time when vacation and short-term rentals were local and contained. But, with the birth of rental platforms like Airbnb and VRBO, the popularity and growth of this part of the real estate industry exploded.
Take San Francisco, the birthplace of Airbnb, with a dedicated staff to enforce its short-term rental inventory, which has achieved a compliance rate of 10%-15%. There are other cities where the compliance rate is less than 5%.
In the quest to appease the permanent residents and the public service departments, the codes and regulations have become so complicated and cumbersome that many landlords do not bother with an attempt to comply.
In specific ways, the local government needed to understand how the websites for short-term rentals work. While these websites work well for those offering and seeking locations to rent, the platforms are virtually useless to code compliance officers. Unfortunately, local codes were adopted to collaborate with listing sites.
Viable Local Approaches
The local municipalities have realized that a database of short-term rentals needs to be built from the ground. There are records of the permit and license holders. Still, cities need to adopt policies for licensees to maintain their business records for at least three years and make them available for audit.
The fines imposed upon an owner who does not comply should be commensurate with the actual financial gain of not playing by the rules. Hefty fines sound ominous but have no teeth when there is a lack of enforceability.
However, with the expansion of the short-term rental market, thanks to rental platforms like Airbnb and VRBO, also comes cost-effective outsourcing for local governments to utilize for code compliance and enforcement in the short-term rental space.
There are compliance companies with domain expertise and data technology to reduce management and compliance costs to a minimum. This outsourcing has little impact on the current staffing of local government departments and has proven to be revenue positive.
From another perspective, an interesting white paper published by a compliance firm advising local governments on effective regulation. This makes for an interesting read to know the advice and guidance for local governments.
Closing thoughts on STR Regulations
It is the responsibility of local governments to enforce their codes and regulations uniformly across their business and public sectors. An equal amount of attention and weight must be given to a property owner’s right to rent their property for the short term, along with the rights of the neighbors to enjoy their property and community in the setting expected at their purchase.
Short-term rentals are a business; like any other business, there is a duty to hold all permits and licenses, pay taxes and maintain books and records available for audit.
Many municipalities are working with compliance firms and property management companies to bring uniform enforcement to the short-term rental sector. With this, look for rules with streamlined processes to benefit the owners and the local governments.
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