It used to be that “home is where the heart is” but increasingly home is also a place where spare rooms mean instant cash. The “shared housing” era has begun and with it new ways to look at real estate values.
What we’re seeing is not a minor blip on the financial radar. According to Airbnb, the leader in the field, it has found private-home accommodations for more than 60 million guests since 2008. At a time when many households face rising expenses and sagging incomes, fluffing a few pillows and filling an empty bedroom in exchange for real money has become increasingly welcome.
The Battle For Short-Term Rentals
In the same way that car owners have increasingly been able to raise cash through Uber and Lyft, homeowners have begun to see that a few rentals here and there through Airbnb and such competitors as Flipkey, HomeAway and VRBO can add up. In fact, a study by Busbud.com found that private accommodations in such cities as Austin, Nashville and San Francisco are actually priced higher than nearby hotel rooms.
The quick and speedy growth of private rentals has not gone unnoticed. The country has five million hotel and motel rooms, facilities worth billions of dollars – but only if they’re rented. Each time travelers choose a private room it potentially means less revenue for the traditional lodging industry, less incentive to invest and lower asset values.
In a general sense it’s becoming harder and harder to tell where the traditional hospitality industry ends and the private rental market begins. According to a 2014 study by the New York state attorney general:
- Between 2010 and 2014 “revenue to Airbnb and its hosts from private short-term rentals in New York City is expected to exceed $282 million.”
- “State and local laws in New York – including the Multiple Dwelling Law and the New York City Administrative Code — prohibit certain short-term rentals. During the Review Period, 72 percent of units used as private short-term rentals on Airbnb appeared to violate these laws.”
- “Six percent of hosts dominated the platform during that period, offering up to hundreds of unique units, accepting 36 percent of private short-term bookings, and receiving $168 million, 37 percent of all host revenue.”
Translation: Private rentals reduced hotel revenues by nearly $300 million and some homes have effectively been turned into small-scale, unregulated hotels.
The Legal Battles
Short-term residential rentals for less than 30 days are officially banned in New York state. In addition, the state has just passed legislation which makes it illegal to advertise such rentals, including fines that can run as much as $7,500 per violation.
You can see the problem with the new law: It bans communication, something rarely allowed under the First Amendment, and it undermines the Communications Decency Act of 1996, federal legislation designed to protect website owners from the liability which can arise from unlawful advertising. Also, the 30-day requirement is rarely enforced: think of the fancy private-home rentals in the Hamptons which are widely advertised by the week and even by the weekend.
Airbnb, for its part, instantly filed suit to stop enforcement of the NY legislation.
It’s not just New York. According to Nolo.com, New Orleans “prohibits property owners from renting their homes or apartments to anyone for less than 60 days in the French Quarter or less than 30 days elsewhere in the city.”
Nolo also says that “other cities utilize their zoning laws to limit short-term rentals. For example, in San Luis Obispo County, California, a short-term rental home may not be located within 200 feet of a similar rental on the same block. Others impose occupancy limits – for example, in Isle of Palms, South Carolina there is an occupancy limit of two people per bed plus an additional two people.”
The concerns raised by short-term residential rentals are not just local. In Washington, Senators Brian Schatz (D-HI), Elizabeth Warren (D-MA) and Dianne Feinstein(D-CA) have asked the Federal Trade Commission to look into the issue.
“On one hand,” they wrote in a letter to the FTC, “these firms have sparked innovation, increased competition and provided a new means by which our constituents can earn extra income. On the other hand, we are concerned that short-term rentals may be exacerbating housing shortages and driving up the cost of housing in our communities.”
Should You Offer A Short-Term Rental?
Given the huge number of homes which have now entered the short-term rental business it might seem as though a few rentals here and there represent little risk. However, the rules as they are now written often say something different. If you’re interested renting a room or two there are a number of important issues to consider.
First, is it legal? Laws against short-term rentals are largely unenforced – look at the very large number of rentals that were found in New York state and the very few prosecutions. Just as the once iron-clad cab company monopoly has been broken the same will happen to hotels for the very simple reason that growing armies of residential owners can outvote the lodging lobby.
“Internet companies such as Airbnb and VRBO pay no mind to such ordinances,” alleged RealtorMag last year. “They’ve swamped the market in California and elsewhere with thousands of STR (short-term rental) listings, making the rules difficult or impossible to enforce. These rental sites appeal to home owners who need additional income. Then the companies use those owners as examples to coax cities into making STRs legal. Even though there’s clear demand on the part of home owners, that doesn’t justify the many problems STRs cause for the larger community.”
While the hotel lobby and the shared-rental industry fight over zoning laws, it’s important to say that many jurisdictions now limit or ban short-term rentals and such restrictions should be taken seriously. For specifics in your area speak with an experienced real estate attorney.
Second, what about insurance? The great presumption of “homeowners insurance” is that the property is a residence and not a commercial facility. Some insurance plans cover short-term rentals, others do not. Airbnb has a $1 million “Host Guarantee” program to protect against certain losses, however it points out that “the Host Guarantee should not be considered a replacement or stand-in for homeowners or renters insurance.” For coverage details speak with your insurance broker.
Third, what about taxes? According to TurboTax, if you rent a room “fourteen days or less, you don’t even have to report the income on your taxes, but you cannot take any deductions either.” In other words, if you want to rent a room when the big game is in town that might bring in short-term income which will be untaxed. See a tax specialist for the latest rules.
Fourth, will you be able to refinance? Lenders traditionally see residential properties as less risky than commercial units, but is a property which has short-term rentals a residence, a hotel, or something in between? In an abundance of caution some lenders will simply not refinance units which include short-term rentals or they might want a higher rate.
Fifth, if buying can you use room rentals to qualify for a mortgage? Not likely. Lenders traditionally dislike boarder income because they regard it as uncertain. For instance, to get an FHA-insured mortgage HUD says “rental income from boarders is only acceptable if the borrower has a two-year history of receiving income from boarders that is shown on the tax return and the borrower is currently receiving boarder income.”
Sixth, is your property set up to maximize short-term rentals? For instance, do you have a separate bedroom suite, an “English” basement (a basement which can be rented as a separate unit), or an accessory apartment (a unit not attached to the main house, sometimes called a casita). Will you offer a private room, a shared room (think of some hostels) or the entire house? What is comfortable to you in terms of privacy and security?
What About Values?
In some cases, such as in New Orleans, a city with a constant stream of unique events, rental units are being lost as owners turn increasingly to overnight guests. The Los Angeles Alliance for a New Economy said in 2015 that the city was losing 11 rental units per day and estimated that as a result of fewer units for lease area rents had increased by $464 million.
Higher rents are not good for tenants but if rents are up then property owners are ahead because they’re getting more income. If short-term rental properties can generate more revenue then sale prices are also likely to get a boost. And – to complete the circle – if residential rentals sell for more money it means bigger property taxes and transfer tax collections.
There’s no doubt that short-term rentals are becoming more common and as a result increasingly acceptable. That said, there’s evidence that they can also cause long-term rental rates to rise and property values to increase, bad news for tenants and prospective home buyers but a great result for owners.
About the Author:
Peter Miller is a contributing writer for Ten-X and Auction.com as well as a nationally syndicated newspaper columnist. He is the author of the 2016 edition of The Common-Sense Mortgage.
