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.

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

Money (i.e. tax revenues) is obviously one motivation for authorities wanting to regulate short-term rentals. Taxes paid by hotels, guest houses, and B&Bs are called occupancy taxes and they typically range from 5% to 15%. As a hotel alternative, it’s only fair that Airbnb hosts pay the same taxes. More on this below.

 

Short-term Rentals and the Effect on Rental Rates

But the main motivation behind regulating Airbnb rentals is the adverse effect it is having on house prices, rents, and availability of accommodation. In cities where housing, once used for long-term residents, is now being used for short-term rents, this is a major issue. Lower available housing supply in metropolitan areas such as New York City, San Francisco and even in my hometown of Boulder, Colorado, has caused rents to skyrocket.

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 property 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 acquiring 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.

Cities with rules designed specifically for short-term rentals require you to obtain a short-term rental license. In most cases, these licenses won’t be hard or expensive to acquire. In my case with Boulder, Colorado, obtaining a short-term license required two home inspections, one for safety and another for energy compliance.

See our section titled AIRBNB SHORT-TERM RENTAL REGULATIONS & LAWS FOR REAL ESTATE INVESTORS for the latest information on municipal regulations. 

 

Occupancy Taxes

Local governments are motivated by money – i.e. tax revenue. Tax revenue from hotels is a major source of income for many cities and states. Airbnb could threaten that source of income if hosts don’t pay the same taxes as hotels. Despite the fact that Airbnb has not yet caused a major drop in the occupancy rates at hotels, nor the price they charge, many local governments have mandated hosts pay the same hospitality tax that hotels pay.

In my opinion, that’s fair as Airbnb really is a hotel alternative. You are accepting payment in return for accommodation. Occupancy taxes typically range from 5% to 10%. In some states and cities, Airbnb will collect the taxes on your behalf should you elect to have them do so. In other areas, the hosts must collect the taxes and remit them to the city. This is usually done by adding them in as an additional charge at the time of reservation.

For more information on where Airbnb can collect and remit taxes and your behalf, see this page on the Airbnb website: Taxes.

 

Taxable Income

Airbnb will not report your earnings, nor issue a Form 1099-K, unless you earn more than $20,000 and complete more than 200 transactions in a calendar year. While many hosts earn more than $20k per year, very few complete more than 200 reservations.

This does not mean that the government doesn’t want its share. It still expects you to include this rental income in your annual filings. Assuming you plan to play by the rules, you should keep track of all expenses associated with renting your property. These can be used to offset the income received. Please consult an accountant for professional advice on allowable deductions.  

 

Hosting as a Tenant

For a large number of people, Airbnb makes living in expensive places possible. Periodically renting out a spare room or the entire place helps people cover part or even all of their monthly mortgage or rent payments, something that might not be possible otherwise.

Most cities seem to agree with this position and allow tenants to rent spare rooms or sub-lease under the same rules they apply to homeowners. By limiting short-term renting to primary residences and capping the rental days to a maximum of 90 days per calendar year, cities can prevent the unwanted behavior of people renting apartments on long-term leases and then re-renting them on Airbnb.

There are a few municipalities, such as Boulder Colorado, that have banned the short-term rental of a property that is already rented on a long-term lease.

 

Landlord/Tenant Lease Agreements

The main rules governing whether a tenant can rent out rooms (or the entire property) are not controlled by city regulations, but by property leases. Almost all residential leases include a clause prohibiting subleasing or making it subject to the permission of the landlord.