Residents and property owners are encouraging local governments to start regulating short-term vacation rentals. Much of the hype is due to widespread rumors of damage to the community. Regardless, Cities, counties, and other local government agencies must appear to be responsive to this local minority of property owners who are demanding action. One of the most interesting things is that I have never been to a city council meeting where anyone complaining has any facts to present about actual issues. Elected officials need to get ahead of this by assuming it is only a matter of time before the issue of regulating short-term rentals arises.
So many things have happened recently in the short-term rental market that most residents do not know about. First and most important, the peak of purchasing for short-term rentals has already arrived. The market is going down the back side of the bell curve. Bookings are way down, as much as 50%.
Foreclosures are already underway and some will cause bankruptcy filings. Investors late to arrive into the market have found they can not make a profit with their properties. The entire short-term rental industry is having severe pains with the lack of revenue.
Lack of revenue and fees are too much for some
Add to the lack of revenue and the fact that many communities have decided to implement short-term rental regulations with fees, a you have a recipe for many investors to sell out. As the fees and requirements that cost money to implement are forced upon investors, the reason to keep their property starts to disappear. As a broker, I have seen several vacation properties come to the real estate market fully furnished. Some with reduced prices, none with prices that would recover the losses by giving away the furnishings.
It’s ironic that just as the marketplace is in the process of self-correcting local and state laws begin to affect investors. Everything from a short-term rental license to requiring sprinklers for properties is already forcing a big change to the hosting platform.
Short-term rental property is no longer highly sought by investors willing to overpay. The negative impacts of these foreclosures will affect the local housing market. The last thing a community should want is to make it worse for investors who are just trying to hold on.
Many of these short-term properties will come to the market and this will be a good opportunity for families to buy homes at a discount. This process will help with providing affordable housing in some areas. Housing prices are dropping in areas with large numbers of vacation rentals, a good sign for economic growth as it allows people who want to buy a primary residence to jump in. Let’s get into the nuts and bolts of regulating short-term vacation rentals.
The myths
Residents are passing around bad information they may have picked up on the internet about that one bad guest who had a party in New York. As I mentioned above, I have never found anyone who has complained about a specific issue, or if they have heard of one, that the owner has not fixed. Even hotels have to throw out guests for violating their rules. People are not perfect. What about that neighbor who parties all the time?
neighbor in Califonia who had parties until two or three AM many times. We called the police who stopped it but they would do it again the next week. My point here is that even that person was an aberration, the only one in the entire neighborhood.
Fortunately, there is something you can do about it when it is a vacation rental and the local government has implemented common sense rules to deal with rule breakers. This is what I want to talk about but before we move on, it’s important that at any public meeting discussing short-term rental units, the truth be told.
Separate fact from fiction when investigating complaints
Any complaint should be investigated, fact must be separated from fiction. It is not satisfactory to say, “Well, I heard of a bad vacation rental”. What, where, when, how and why? Flush out the details. In my experience, this will call the person who makes the statement creditability into question.
The City of Ocean Springs, MS started with a single vacation rental problem before they created new regulations. They decided to limit the number so they issued rules that a limited number be approved in residential districts. A few years went by and no problems so they increased the number. Again, they increased the number a while later because, well you guessed it, no problems.
Recently, they increased the number once again. I spoke to one of the Alderman (Same as the City council member) and he told me that the city is very pleased. The residents are satisfied because in part the property owners maintain the properties in great condition.
Some common myths about short-term rentals in neighborhoods:
- Myth: Short-term rentals are noisy and disruptive.
- Fact: Responsible short-term rental hosts take steps to minimize noise and disruption to their neighbors. This includes setting clear rules for guests, providing amenities that encourage guests to stay on the property, and being responsive to any complaints from neighbors.
- Myth: Short-term rentals attract crime.
- Fact: Studies have shown that short-term rentals are not associated with increased crime rates. Some studies have even shown that short-term rentals can lead to decreased crime rates, as they bring more people into the neighborhood and can help deter criminals.
- Myth: Short-term rentals reduce the availability of affordable housing.
- Fact: Short-term rentals can help to increase the availability of affordable housing. This is because short-term rental hosts often invest in renovating and improving their properties, which can make them more attractive to long-term tenants. Additionally, short-term rental income can help homeowners to afford to keep their properties and avoid foreclosure.
- Myth: Short-term rentals are difficult to regulate.
- Fact: There are several ways to regulate short-term rentals. Cities can require short-term rental hosts to obtain permits, pay taxes, and comply with certain safety standards. Additionally, cities can work with short-term rental platforms to develop policies that promote responsible hosting.
- Myth: Short-term rentals are only beneficial for hosts and platform companies.
- Fact: Short-term rentals can benefit entire communities. Guests who stay in short-term rentals often spend money at local businesses, such as restaurants, shops, and attractions. This can help to boost the local economy and create jobs. Additionally, short-term rentals can help to introduce new people to the community and promote tourism.
Concerns can be addressed
If you have any concerns about short-term rentals in your neighborhood, it is important to talk to your neighbors and local officials. There are several things that can be done to address any concerns and ensure that short-term rentals are operated responsibly and respectfully.
This is just one example of when the City government issues common-sense local regulations that are not onerous on the property owner and not too costly to obtain a rental certificate. The short-term rental business as I mentioned above will react to the market. If there is a good market, properties for sale may be turned into short-term rentals, if not, they will be residential dwellings.
Some recommendations are provided in this article that have worked well for many cities and ones that investors can get behind. Public officials should understand that not all investors reject the idea of regulation. Regulations help keep competition honest by establishing standards all must live by.
Reasons why a community should invite short-term rentals
- 1. Tax Revenue – Short-term rentals are operated in properties that pay property taxes. Often these properties are purchased with the intent to be used as a vacation rental. Perhaps the buyer paid a higher price and the tax rate was increased as well.
- 2. No tax reductions – Short-term rentals usually do not qualify for any reductions in property taxes such as senior discounts or homestead discounts for owners who occupy the property. The result is higher revenue.
- 3. Fees-Taxes – As will be discussed below
- 4. Maintenance of property – Another point discussed below is how well short-term property owners will maintain their property often better than neighboring properties. This helps to keep property values high.
- 5. Sales and other taxes – Many communities charge state and or local taxes when paying guests to stay at a vacation rental property.
- 6. New income to the community – Guests spend money in the local area e.g. restaurants, gas stations, etc. That income pays salaries and generates more tax revenue
- 7. Revitalization of neighborhoods – Investors often buy run-down homes and bring them into compliance with regulations and improve the area. Flippers encourage investors to buy these properties that were once in bad condition, to use them for economic value.
The Application
Create an application and require property owners to fill in the blanks. Who, what, when, why, etc. All of the contact details and information about the property that is not already on the tax rolls. The complete application will be the foundation for moving forward with the approval process.
Zoning
It’s my opinion that vacation rentals not be allowed in R1 residential developments such as tract homes or master-planned communities. These houses are too close to each other, parking may be an issue, and frankly, if there are going to be any problems it will be in those types of planned communities where noise and lots of people coming and going may disturb the neighbors.
My preference is for vacation rentals to be located in mixed zones and commercial areas. I know this statement may anger some investors who have purchased property in residential areas but there is a solution for this.
Grandfather all existing short-term rentals. Allow short-term rental owners to continue offering them vacation rental properties as long as the same ownership does not change hands. An option for communities is to request new applications for buyers of these properties and a that point either approve or disapprove. Over time, short-term rental properties will gravitate to other zoning areas.
Defining what a short-term rental is
Currently, most cities use the beyond 30 consecutive days rule. This means that any property rented for up to 30 days or 28 days (four weeks) is considered in the short-term rental ordinance and any that is rented for 30+ days is excluded from the short-term rental ordinance. This informs any property owners of the difference between renting or leasing their home for longer periods so that they will not run afoul of short-term rental regulations.
Business License
Some communities require a business license or a privilege license. The fees for these are usually modest. On the Mississippi Gulf Coast, they run about $25 per year. The need for a business license may be superseded by the requirement for a short-term rental license that will usually come with a fee. I have seen fees ranging from a few hundred to five hundred dollars per year.
Fees should be reasonable since many property owners may not earn a great deal from their rental properties and the key here is that they will not be able to apply for tax reductions. In some areas such as Mississippi, property owners can homestead their primary residence. This provides a discount on property taxes.
When a property owner moves to a new primary residence, their existing property now a vacation rental will be subject to a higher tax rate. Some people have property managers rent their primary home when they are deployed (military) or out of town. Regulations usually indicate that if they earn any money from rent, they will not be entitled to the tax breaks. The bottom line here is that vacation properties earn more in property taxes for communities. Take the property tax rate into account when considering adding fees for short-term rentals.
Specific rules
One rule that I like is the requirement that a local property manager be responsible for a property when the owners are not in the immediate area. Cities can gain great comfort knowing that they can get in touch with someone, a short-term rental host to solve problems. A trend of recent years is internet start-ups acting as Airbnb hosts operating from office towers in big cities many states away.
When problems occur, they have no one on the ground for local government to deal with. Local leaders can rest assured that if owners of short-term rentals are required to hire local property managers, there is accountability.
Local Property Manager
Explaining to the public that a local property manager is available for immediate contact will help solve a big problem that has plagued communities. Often a property is turned into a short-term rental and the neighbors do not know how to reach the owners. The trash can is left out for days and who do they call? Good local property managers will introduce themselves to the neighbors and hand out business cards.
Informed neighbors are excellent watchdogs in the sense that they can report misuse of the property or a squatter. I have met neighbors around all of my personally owned short-term rental properties and have encouraged them to contact the property manager for any reason even to make suggestions.
I gave a tour to my neighbors
Today, I gave a tour of a vacation rental to neighbors who had not seen the inside. The neighbors were impressed at the house, and how nice it was inside. It was clear that the outside was well cared for although it needed some attention. They originally opposed the permit and were still skeptical of the future but at least they knew that the house was going to help keep the value of the neighborhood in good shape.
Insurance
Communities should require short-term property owners to obtain a landlord’s insurance policy that will cover the house in the event of a fire, flooding, or another issue. The reason for involvement by the community is to be sure that the house does not become an isore should there be catastrophic damage. Investors may abandon their house rather than fix it out of pocket. The insurance policy will help with this issue.
Fire Inspection
The fire inspection is usually included in the package of registration information. It’s important here that the local government not come down with a heavy hand. These properties are not hotels and there could be a tendency to regulate them as such. I have seen requirements for sprinklers which is way overkill.
These single-family homes usually have ingress and egress points that satisfy the need to get people out in the event of a fire. Smoke and carbon monoxide detectors and commercial fire extinguishers are satisfactory to protect guests.
Don’t ask property owners to post the permit on a wall, that’s overkill. Local governments keep a list (or online database) of which real property units are permitted. Hanging an ugly document on a wall serves no purpose. Another thing that some cities are requiring is a lighted fire exit sign.
I believe that this is also too much. Guests found their way into your three-bedroom house and they know the backdoor, sliding door, and windows because they use them. The vast majority of short-term rentals are not large buildings. They are condos or single-family homes, with easy entrance and exit.
Guest Guide
The guest guide is a very important tool that can be required. The guest guides that I have created include all safety issues, city requirements, HOA requirements, and things they should know about the property. In particular, the guide should address when to take the trash out to the street or bin for disposal. The parking rules are important.
Beyond the minimal requirements, these guides help guests understand where everything is located in the house such as extra towels. The WIFI code is included and any special knowledge they need e.g. outside light switch, location of beach toys, and much more.
The guide includes information about the location of supermarkets, drug stores, and yes even liquor stores. Pages include lists of restaurants and places to go and see. Most important is the information about the house rules e.g. noise, alcohol is forbidden for minors, no drugs, no smoking, etc. Some hosts even list the cost of lost or broken items.
A vacation rental is not a hotel
A vacation home is not a hotel and for good reason, people have decided they want to stay in a house or condo or townhome rather than a hotel. Don’t overthink the requirements. Just because you can regulate things does not mean you need to create obstacles to creating an effective short-term rental policy. Remember that in addition to what a city may require, some properties are in areas with homeowners associations that have overlaid their onerous regulations.
It’s important that new regulations mesh with existing regulations but trying to use existing hotel ordinances will not work. This means crafting uniquely different ordinances that address the features of a short-term rental property.
One city requires that a register be available listing all data from the stay. This is what is required for a hotel and again, there is no real need for this level of detail. The more the requirements, the more staff are required to collect the information, and the higher the cost of the program. Why?
One HOA that I am aware of requires the owners to communicate to the HOA the license number of the vehicle, make and model, and name and address of the guest “before” they arrive. It’s clear that they know nothing about how Airbnb and VRBO work. This information is not gathered for distribution by third-party websites.
They also want to know how many days they have stayed. This is a great deal of work for hosts to do and is not necessary. Enough information is acquired by the rental platforms should a problem occur.
Local government tries to stay ahead of criticism
I have worked with cities and local laws, particularly short-term rental laws. There is such a wide variety of requirements from city to city you would think that one would get it right. The fact is that they are all scrambling to stay ahead of those few residents who come to the Council meetings and complain about a new permit request.
What most people do not understand is that in some cases, communities can not prevent property owners from the legal use of their properties. Some zoning areas have a “by right” clause meaning that if the zoning use complies then they have a right to be allowed that use.
Recently, I was at a city council meeting for a client. A few residents came in to complain about the permit request for short-term rental. Not one of them had ever encountered a negative issue regarding any short-term rental it was that things “could” happen. The city officials addressed the complaints by stating that they had a right to use the property for this use because it was zoned for this type of fuse (called property rights).
The purpose of the hearing was not to approve of the use per se, it was to approve that what they had planned complied with the use. The residents still failed to understand. This is the challenge that local government must meet. Enacting a registration process is a good start to help residents understand that the City is aware of the use and knows how to contact the owners.
What about taxes?
In the area where I live and work, local and applicable state taxes for vacation rentals are 12% of the total charge. This tax revenue can be substantial, particularly in the busy season. Every community is supported through taxes both sales and property. Considering that your community is collecting property taxes on short-term rentals and in addition sales tax, these small businesses can be a significant source of income.
Cities that require permits usually require that the owner register with the county and or state to be sure that sales taxes are collected and paid. While the internet platforms do this, people often directly rent their properties and intentionally do not pay sales taxes. I believe that paying sales taxes is something that should always be done to support the community.
Some open a vacation rental and don’t pay taxes
Airbnb and vrbo collect required local and state taxes and pay them for the hosts. hosts who rent directly often do not register or pay sales taxes.
Now consider the sales taxes and other taxes created when owners of these vacation rentals rehab houses and furnish them. The average rehab for a vacation rental is probably in the $40,000 range. Furnishings cost upwards of $20,000. Contractors would be hired to do the work and they are paying taxes.
Retailers are collecting sales taxes on the materials. I have rehabbed several houses and the numbers here are about what I have paid. When you count the tax revenue generated from these activities and the actual rentals, some communities may find that short-term rentals are a significant part of their budgets.
A five-star rating is critical
A five-star rating is key to the continued success of any short-term rental property. While most do not earn a five-star on every stay for a variety of reasons, it’s critical to maintain an average in the high 4% range. This can not be done if the property is left in bad condition. What does this mean to your community?
It means that the marketplace works for you. A property owner must maintain their property to keep getting high ratings. High ratings mean more rentals. It’s simple math.
Airbnb data shows that short-term rentals with 5-star ratings earn significantly more revenue than those with less than 4 stars. In the United States in 2022, the average revenue per night for a 5-star listing was $259, while the average revenue per night for a listing with less than 4 stars was $198.
This difference in revenue can be attributed to several factors. First, guests are more likely to book listings with higher ratings. A study by Airbnb found that listings with 5-star ratings are 70% more likely to be booked than those with less than 4 stars.
Second, guests are willing to pay more for listings with higher ratings. A study by Vrbo found that guests are willing to pay a premium of up to 20% for listings with 5-star ratings.
Finally, hosts of 5-star listings are often more experienced and professional. They are more likely to have a good understanding of the Airbnb platform and how to optimize their listings for success. They are also more likely to provide guests with a high-quality experience.
What does a bad rating mean in reduced income?
Here is a table showing the average revenue per night for short-term rentals with different star ratings in the United States in 2022:
| Star rating | Average revenue per night |
|---|---|
| 5 stars | $259 |
| 4 stars | $228 |
| 3 stars | $197 |
| 2 stars | $166 |
| 1 star | $135 |
As you can see, the revenue difference between 5-star listings and listings with less than 4 stars is significant. If you are an Airbnb host, it is important to focus on providing your guests with a high-quality experience to earn 5-star ratings and maximize your revenue.
As I drive around, I see some homes that are not in good condition. Landscaping, paint peeling, bad roofs etc. There is little reason for the owners to do anything about these issues. As long as the condition does not rise to a violation of the local codes, neighbors have to put up with the decay.
If an investor were to buy that house (it was in an eligible zone) and make it a vacation rental, it would probably be the best-looking house on the street. This is a key benefit for communities to embrace short-term rentals as one element of overall land use.
How to work with the public
There are some constructive things that a municipality can do to help keep the public informed about vacation rentals. Here are some suggestions and without a doubt there are many more:
- 1. Post for residents to see, the basic requirements to host a vacation rental property. Let them see that this is well thought out and there are consequences for bad actors.
- 2. Arrange for viewing of some vacation rental properties. Real estate agents often set up a day where agents can travel from one property to another just looking at them for prospective clients. Cities could arrange with several property managers to do the same. Let residents see the inside of the properties and how well they are maintained.
- 3. Public details about the tax and other income raised from short-term rental properties. Let residents see that tax dollars are helping them by supplementing the local budget. In other words, these properties are paying their way.
- 4. If possible publish statistics about the economic value to the community derived from short-term rentals e.g. dollars spent by visitors.
- 5. Write stories on the municipal website about how a historic property was rehabbed or saved from destruction by an investor who is offering it as a vacation rental.
- 6. Host an annual review of vacation rental properties, income earned, historic properties preserved, etc. at a planning commission meeting or a city council meeting. Show photos of before and after. Of course, the public would be invited.
- 7. Host a meeting where residents can meet with hosts and where hosts can present what it means to operate a well managed vacation property.
Get creative, from my experience, it’s the lack of facts that causes people to imagine the worst. Exposure to the good things mentioned above will help convince residents to stop fighting this emerging market and embrace it.
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