Cities are Cracking Down on Short-Term Rentals—What Does It Mean For Investors?

This story was originally published at BiggerPockets.com

Nationwide, cities continue to impose new regulations on short-term rentals, effectively putting Airbnb hosts out of business in some areas. So far, legal attempts to fight the restrictions have been largely unsuccessful. For example, Airbnb and several local hosts brought lawsuits against New York, but both were dismissed, and new rules that prohibit short-term rentals in most cases went into effect on Sept. 5. 

In about 80% of Airbnb markets, regulations impact short-term rentals, according to the company. Some cities are concerned about lost tax revenue and have imposed the same tax rates on vacation property owners that hotels are subject to. Those moves impact a property owner’s profit margins at a time when revenue per listing is down in many cities due to an oversupply of vacation rentals. 

But in other areas, the restrictions mean that many rental property owners can no longer operate. For example, the New York law requires that hosts live in the unit they’re renting and that guests have full access to the property. And hosts who violate the law face fines of up to $5,000. 

The cities of Denver and San Francisco have similar rules. These rules benefit homeowners renting out a spare room since they reduce competition but prevent most investment property owners from doing business. 

There are some in-between scenarios as well. Some cities, like Santa Rosa, California, have put caps on the number of permits available to hosts. In Jefferson County, Colorado, properties must be on at least one acre of land to qualify for a permit. 

While not as extreme as New York’s restrictions, these ordinances leave some investment property owners out in the cold. 

The Impact on Listings

Listings have fallen significantly in some cities since new restrictions were enacted. In New York, there were 39% fewer listings in July when compared to 2018. In San Francisco, there was a 19% drop, according to data from AirDNA.

Meanwhile, listings are thriving in cities without significant regulations. For example, listings in San Antonio, Texas, have doubled since 2018, as of July, while listings in the Scottsdale-Phoenix area in Arizona grew 91%, and Indianapolis saw a 76% increase in listings. 

That doesn’t mean that hosts in those cities are enjoying increased profits. The opposite is true—revenue per listing is dropping in cities like Phoenix and San Antonio, though the extent to which revenues are falling depends on who you ask. We began reporting on the decrease in revenue per property in January when it became apparent that the glut of short-term rental properties was driving down occupancy rates. 

But at least hosts in cities with little oversight can try to compete for bookings. In some cities, hosts are forced to switch to long-term rentals to collect some income, which may not be enough to cover their expenses. 

The Justification for Short-Term Rental Regulation

There are some known issues with short-term rental properties, like loud noise, traffic overflow, and parties, says Claudia Cobreiro, a Miami-based real estate attorney. “Counties, cities, municipalities, or communities may enact rental restrictions to reduce or avoid some nuisances that can sometimes be associated with short-term vacation rental tenants,” Cobreiro says. “The community’s and its residents’ security is also a frequent motivation for regulation and restriction.” 

But cities debating new short-term rental restrictions are also pointing to housing affordability problems as a reason to pass regulations. It’s a hot-button issue in small towns and major urban hubs alike, with residents often divided on the right course of action. 

For example, in Columbia, Missouri, only 37% of residents support regulating where short-term rental properties can be located, although most support requiring property owners to register. But in the area where most vacation rentals were located, 47% want the regulations. 

Research has shown that short-term rental properties have an impact on home and rent prices—one U.S. study noted a 0.018% increase in rents and a 0.026% increase in home prices for every 1% increase in listings on Airbnb. Another study showed that the expansion of Airbnb listings in New York City caused rents for residents to surge by $380 in a single year. That’s due to a reduction in the housing supply from properties that might otherwise be rented out long-term if Airbnb wasn’t an option. 

Of course, tourism also brings economic activity to an area, creating more jobs for locals. A report from Airbnb notes that in five Colorado counties, Airbnb guest spending supported 15% of all jobs and generated 12% of earnings for workers in the area. 

However, the Economic Policy Institute argues that the economic benefits of Airbnb are often overstated since the spending would happen anyway if short-term rental properties weren’t available. Only 2% to 4% of travelers in two surveys report that the unavailability of Airbnbs in an area would impact their trip plans. The rest would have stayed in hotels, creating similar economic benefits—without the reduction of housing supply. 

The role of the hotel industry can’t be overlooked. The American Hotel and Lodging Association began plans to lobby politicians and state attorneys general and fund studies that showed the negative impact of Airbnb in 2016, documents show, pouring millions into regulatory work. The association was behind a bill that hiked fines for Airbnb violators in New York City, for example. 

That makes it tough to tell where these new initiatives are originating from—supporters of new regulations tend to argue that they’re addressing housing affordability. In Arizona, where a 2016 law limits cities from passing short-term rental regulations, local lawmakers are pushing for reform. They argue that the law doesn’t defend property rights as intended but instead allows investors to violate the property rights of residents for their financial benefit. Meanwhile, hotels sit half-empty, and families are displaced from rental homes, lawmakers say. 

While some larger investment firms have gotten into the Airbnb market, most Airbnb hosts are small investors—everyday people looking to supplement jobs with insufficient income or build wealth for their heirs. As regulators make efforts to limit short-term rentals with the goal of expanding affordable housing, the livelihood of small investors merits consideration. 

Some municipalities have made efforts to incentivize investors to provide local housing rather than banning short-term rentals. For example, Summit County in Colorado offered eligible property owners $22,000 per lease in exchange for renting their properties long-term to local workers at a capped rental rate. 

The program ran out of budget in 2023 due to high interest, though officials are working to extend the funding based on the program’s success. The county also imposed new caps on short-term rentals this year, which homeowners are challenging

How to Navigate Short-Term Rental Laws

Cobreiro says investors need to arm themselves with information. “To determine whether a property is affected by a short-term rental restriction, an investor should obtain all relevant property information from the homeowners’ association, if applicable, and do the same at the city, municipality, county, and state level for similar regulations,” she says, noting that homeowners associations often have restrictions that may stem from local ordinances. 

It also makes sense to work with an attorney because “understanding a city’s short-term rental laws, or even the short-term rental restrictions of a given homeowners association, could make or break an owner’s ability to make a return on an investment property,” says Cobreiro. 

In addition, an accidental violation can be a nightmare for investors. “Violation of rental restrictions at the association and government level can cause the investor to face penalties and fines associated with the breach, which can sometimes quickly escalate daily and lead to a lien against the property to enforce payment,” she says. 

It’s also important to have a backup plan, especially if you’re investing in an unregulated area near a municipality with strict rules since there can be a domino effect. The medium-term rental strategy is one way to circumvent local laws that govern rentals of less than 30 days, and demand is picking up for month-to-month rentals. Monthly stays on Airbnb surged in the fourth quarter of 2022, accounting for 22% of bookings. 

The Bottom Line

As more localities crack down on short-term rentals, property owners and aspiring investors alike need to prepare for a regulatory scenario that would prevent them from earning rental income on short-term rental platforms. Talk to a local real estate attorney before closing on a deal to help you make sense of any restrictions, and run the numbers for a medium-term and long-term rental strategy to ensure you have a viable backup plan. 

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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