This article is an excerpt taken from our comprehensive guide to hosting on Airbnb

Thinking about purchasing an Airbnb investment property?


Before you get too excited about the prospect of making money on Airbnb, you should check whether it is legal to do so where you live. This is a very important section and not one you should take lightly. This is especially true if you are considering investing in a property specifically for the purpose of using it for short-term rental income.

Airbnb is a game changer and it’s moving so fast that most regulatory bodies have no idea how to respond. Regulatory authorities tend to be very conservative and many have reacted to this new business category by placing tight restrictions on it.

You may say: “I don’t care what the local authorities think, I own the property and I’ll do whatever I please with it!!”, you should first understand the motivations behind the legislation being passed.

 

Short-term Rentals and the Effect on Rental Rates

While the motivation behind regulating short-term rentals may be collecting tax dollars, the reason given by city councils is usually the adverse effect Airbnb growth is having on house prices, rents, and availability of accommodation for residents. In cities where residential housing that was once used for long-term residents is now being used for short-term rents, this is a major issue. Lower available long-term housing supply in metropolitan areas such as New York City, San Francisco, and many other popular destinations is contributing to skyrocketing house and rental prices.

Owners of second properties, who typically rent to long-term residents, are seeing the opportunity to make two to three times the rental income by using their second property as a short-term vacation rental. The reduction in available long-term rental units has increased rental rates on the remaining properties. The demand for long-term rentals remains the same but the supply has dropped, leading to an increase in average monthly rents.  

Exacerbating the problem are investors who have seen the opportunity to make money from Airbnb and are buying up properties in order to use them as short-term rentals. While this may seem like market economics and perfectly fair, it does have social consequences. Many lower-income residents can no longer afford to live in the area where they work.

Most local authorities feel it is in the best interests of their cities to make sure that there is a supply of affordable housing to lower-income workers. And as such, they are placing restrictions on the use of properties for short-term stays. At the time of writing, no city has banned Airbnb but many have implemented legislation regulating the use of properties for this purpose.

 

Regulations by Location Type

There are three broad categories of locations when it comes to the regulation of short-term rentals.

  1. Vacation towns where short-term visitors outnumber year-round residents
  2. Cities/urban areas where year-round residents outnumber short-term guests
  3. Everything in between

Vacation Towns

Vacation towns such as beach and ski resorts tend to be very hands off when it comes to regulating short-term rentals. Some may require a business license and collect occupancy taxes but none will limit the number of rental days allowed.
 

Cities/Urban Areas

Cities with housing shortages are placing tighter restrictions on short-term rentals. If your property is located in a city that has experienced sharp increases in rental rates, then expect the city to enact tighter controls on the use of the use of the property for short-time rentals. They may have done so already.

Most cities are leaning towards a policy of limiting the number of allowable rental days. The number is usually 90 days – i.e. you can rent out your property for short-term stays (less than 30 days per stay) up to a cumulative maximum of 90 days per calendar year. This policy is intended to stop investors buying up available property for the sole purpose of using it as a vacation/short-term stay rental and thus reducing the availability of long-term rental units. It also prevents owners of existing rental properties from converting them from long-term rental units to short-term ones.

 

All Other Areas

If your property is not located in either a holiday destination or a major city, then you probably fall into a gray area where no specific legislation has been implemented to govern Airbnb-type rentals. In areas with no specific legislation, the general rule of thumb is that short-term rentals are fine unless a complaint is filed.

Complaints are typically filed by neighbors for one reason or another. In such cases, local authorities will likely fall back on rules governing hospitality businesses, tell you to cease your short-term rentals, and possibly levy a fine against you for operating an illegal business. So be nice to your neighbors!!

 

Licensing

I’ve yet to discover any place that didn’t have some sort of licensing rules that could be applied to short-term rental properties. I know that I’m asking for trouble by including that line as I’ll be inundated by messages from people claiming there are no licensing rules where they live. But let me explain.

In most areas, there are no specific licensing rules governing short-term rental properties. This is because most areas have never had to address the concept of private homes being used for short-term rentals. It’s a whole new category. Before companies like Airbnb, VRBO and others allowed the sharing of private space, most short-term rentals were offered by corporations (executive stay apartments), hotel chains such as Extended Stay America, or in vacation areas where people would rent out their second homes.

As a corporation, you need a business license. As the owner of a second property, you probably should have had some sort of local tourism business license, even if many people choose to ignore it.

In response to the emergence and massive growth of Airbnb, many authorities have created licensing requirements to regulate short-term rentals. This is happening mainly in cities where rental rates have spiked but it’s also being discussed in smaller town across the United States.

New York, San Francisco, Portland, Denver, and Vancouver are among the major cities to have implemented specific rules in response to rapid growth of short-term rentals on Airbnb. Expect more to follow soon.

I won’t list the rules for each city here in this book but you can check our website for updates as they happen. We’ll be providing weekly updates on new regulations.

 

Common Standards for Regulations Short-term Rentals

Most cities seem to be gravitating towards a common set of rules to regulate short-term rentals. Their main goal is to stop investors from converting existing long-term rental units into short-term rentals, and also to stop the purchase of available properties for the sole purpose of using them as short-term rentals.

To achieve this objective, regulations will allow short-term renting only in primary residences and for no more than 90 days per year. The economics of buying a property solely for short-term rental income no longer makes sense if you are capped at 90 days of income per year.  

Whether cities can enforce these new laws is open to debate but if you do get caught, there are some hefty fines to pay. San Francisco issued more than $1 million in fines to hosts caught breaking their short-term rental regulations. Portland’s fines were between $1,000 and $5,000 per occurrence. Get caught renting illegally in Berlin, Germany and you could be facing a fine of up to 100,000 Euros (over $100,000)!

It’s extremely important to understand the rules and regulations in your area. This is especially true if you are planning to invest a lot of money in a second property and want to rent it on Airbnb.

For more information on the rules and regulations in major destinations across the United States, check out our Airbnb Short-term Regulations section and subscribe below for regulatory updates.