Tip #5: Understand rules and regulations for short-term rental and other restrictions for the area.
As with most industries, there are certain rules and regulations that will need to be followed so that you don’t find yourself in trouble. Miss something here and it could cause a lot of stress and anxiety, and possibly cost you your entire business. Depending on where you’re looking, there may be government entities that regulate short-term rentals. Your Homeowners Association most likely also has language in the covenants and restrictions about this.
Hotels don't like vacation rentals.
The vacation rental industry is growing like crazy. People who own vacation homes are coming out of the woodwork to rent their properties to make extra cash. With the help of major online booking companies like Airbnb and HomeAway/VRBO, it has never been easier to hang a for-rent sign on your door and open for business. This means a lot more competition for the big hotel chains and the hotel industry as a whole. As a result, the hotel lobbyists are constantly pushing local authorities to invoke restrictions or outright bans on short-term rentals in cities all over the world. Sometimes they are successful, other times they are not.
Vacation rentals can impact the housing supply and impose other problems.
In other cases, city governments and state regulators sometimes view short-term rentals as a threat to the supply of (long-term rental) housing. They fear that landlords will give-up signing marginally profitable long-term leases in favor of converting their properties into more lucrative vacation rentals. This is especially problematic in cities like San Francisco where the cost of real estate is so exorbitant that most people have to find rental housing.
Other efforts to ban short-term rentals stem from community action to thwart raucous partying and other less than desirable activity that is thought to come with a transient population. I've read stories about lavish "party homes" being built or purchased with the sole intent of renting out for entertainment purposes. One such story described a multi-million-dollar oceanfront mansion in Malibu that was often rented and used by celebrities to throw over the top mega-parties.
Local governments are cracking down.
According to a July 2019 article in Investopedia, cities like Paris, Barcelona, and Santa Monica, CA have some of the strictest policies in place. Short term rentals are mostly banned in Los Angeles, New York City, Las Vegas, and San Francisco unless you meet certain requirements. In the city of Miami Beach, FL, rentals under six months plus a day are mostly banned and illegal. The law against short-term rentals has been in place for years, however, the modest $1,500 penalty for owners who were caught violating the law was not much of a deterrent. In 2016 the city raised the fine to $20,000 for the first violation, and on the fifth violation it can cost as much as $100,000! I’m sure that got some attention.
Another glaring example of the regulatory crackdown on short-term rentals can be found in New York City which is one of Airbnb’s top destinations. In the city, it is illegal to rent your entire property for less than 30 days. Anything less than 30 days requires that the homeowner be staying there as well throughout the entire rental period and the number of guests is limited to just two. In 2016 a law was signed that makes it illegal to advertise short-term rentals in buildings with three or more units. Get caught violating this law and it could cost you up to $7,500 according to sources.
A growing number of cities across the U.S. are requiring that short-term rental property owners must be registered with local and/or state authorities. Some require you to have a special permit or license to legally operate a vacation rental, which of course comes at a cost. Some cities like Key West, actually limit the number of licenses that are issued to help balance the supply of long-term housing with vacation rentals.
Don't forget about bed tax.
In almost every market, there are special taxes levied on vacation renal revenue, similar to what hotels pay, in the form of “bed tax.” In our area, we pay both a local (county) tax as well as a state tax that total 11-percent. Depending on how the rental revenue is received, it may be your responsibility to remit the taxes to the local and state governments. This can be a very daunting and confusing task so I recommend that you find a service to manage this for you. We use a company called Avalara MyLodgeTax www.avalara.com and it has saved us a ton of time and stress. At the time of this writing, most of the major Online Travel Agencies (OTA), including Airbnb, HomeAway/VRBO, and TripAdvisor/FlipKey, collect these taxes and remit on behalf of the owner so there's nothing more to do on your part.
The best way to thwart short-term rental restrictions and bans in your market is to help create an opportunity cost in doing so for the local authorities. I'm talking about paying your bed taxes, people! Rules and regulations don't just pop up out of thin air- they are generally well-researched and supported by evidence. If the local authorities are weighing the decision on whether or not to impose restrictions on short-term rentals, they will most certainly consider the potential lost revenue collected from bed taxes. This is their opportunity cost.
Every market is different so do your research.
Before you even begin your home search, start at the state level and look for any statewide restrictions on short-term rentals and vacation rentals. Next, dive deeper and do more research at the city and county level. Because each municipality is different, you may find drastic differences between neighboring cities or towns which may better guide your property search. Finally, after you've exhausted your regulatory search with the appropriate state and local government agencies, look at the community level.
Check with Homeowners Associations for rental restrictions
If you plan to buy a home in a community with a property or homeowners association, you better know what the rules are. Before you jump in your real estate agent's car and spend the day looking at houses and condos, be sure that he or she has checked the rental restrictions for every house on the list. Make them earn their commission by doing the legwork for you. This is generally done by simply contacting the management company that handles the HOA and asking them the simple question- "are short-term rentals allowed in this neighborhood?" Your agent should ask for a copy of the HOA covenants, restrictions, and bylaws and thoroughly review them. It's also a great idea to get an email from the selling agent confirming that short-term rentals are indeed allowed, along with any pertinent details. This way there's a paper trail and accountability should they get it wrong and you end up in court.
Even if short-term rentals are "allowed", the rules and restrictions can vary greatly. Be sure that you have a clear understanding of the fine print. It's very common for an HOA to only permit rentals that are at least 30 days in length. Others may require a minimum of seven nights. In more drastic cases, rentals may not be allowed that are less than six months.
Understand that the rules are subject to change.
In my opinion, the biggest risk facing the vacation rental industry right now is the rapidly changing regulatory environment. While you can conduct hours of research and have all your i's dotted and your t's crossed, the rules are always subject to change. The best hedge you can have for future restrictions on your vacation rental will be the ability to rent it long-term if the rules change not in your favor. This means choosing a home that you will most likely be able to rent on an annual basis should the bottom fall out.
We recently experienced this challenge with the second property we purchased. Despite verifying that there were currently no restrictions on short-term rentals prior to purchasing the home, the HOA later decided to try and change the rules. About six months after we purchased the home and started renting it, we received word that the HOA board was proposing a change to the covenants and restrictions that would require all short-term rentals to be at least 30 days. This change would have crippled our business since most guests stay on average 4-7 nights. The board announced that a vote would take place at the next annual meeting for the proposed amendment. It would require at least 75% of the property owners' support to invoke the change. We spent nearly six months stressing over this and I had many sleepless nights. Fortunately, it did not pass.
While rules and regulations might not be the most exciting aspects to consider during your location search, they are probably the most important. You may have the best home in the perfect location already picked out, but if short-term rentals aren't permitted you are hosed from the beginning. Don't try and operate your business under the radar because eventually you will get caught and the consequences can be very costly. By doing your research ahead of time, and having an exit strategy should the rules change one day, you will be well positioned for success long term.
I hope you've enjoyed this five-part series on choosing the best location for your vacation rental business. As always, I would love to hear your feedback. Please comment and post your questions below or email me info@StartAVacationRental.com. If you haven't already done so, please subscribe to the blog so the posts land in your inbox every week.
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