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Regulating short term rentals

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Regulating short term rentals

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Overview

Short-term rentals are furnished homes or rooms rented on a short-term basis—typically less than a year and usually only for a few nights or weeks at a time. Their popularity through online platforms like Airbnb and Vrbo has raised concerns among many cities, towns, and counties about their potential to exacerbate housing affordability challenges. One criticism is that their relative profitability encourages landlords to convert long-term rentals to short-term rentals—reducing the overall rental stock and contributing to rising rents for remaining long-term rental units. However, homeowners (and even renters in some cases) may benefit from the income provided by short-term rentals. As a result, efforts to regulate short-term rentals can be controversial. Regulating these rentals in popular vacation hubs may be a particular challenge due to the need to balance income from tourism with other resident interests.

In this brief, we discuss the effect of short-term rentals on local housing markets and different approaches to regulating short-term rentals, including policies that use the revenue raised from short-term rentals to invest in affordable housing.

About short-term rentals

Short-term rentals may be managed by small-scale operators, such as a homeowner who rents out a single accessory dwelling unit, but in some areas, the short-term rental market attracts larger-scale investors. They typically fall  into one of three types; these categories can be important for localities considering if and how to regulate them: 

  1. Hosted partial-home short-term rentals, in which a homeowner rents a portion of their home, such as a spare bedroom or accessory dwelling unit, and shares the property with tenants. 
  2. Unhosted owner-occupied short-term rentals, in which a homeowner rents their home to tenants while away from home, such as during a vacation.
  3. Dedicated or “investor-owned” short-term rentals, which are homes used primarily or exclusively as short-term rental properties.      

Effects of short-term rentals on neighborhoods, the economy, and housing affordability

Impacts on neighborhoods and local economies 

Hotels in commercial districts may have few residential neighbors. By contrast, short-term rentals are typically in residential districts, where neighbors may worry and voice concerns about perceived negative impacts. Common concerns are that short-term rentals will increase noise, crime, and trash, as well as strain available parking and change the character of a neighborhood by introducing commercial activity and visitors with no stake in preserving or improving neighborhood quality or property values. 

Critics of short-term rentals contend that operators significantly compete against hotels and reduce occupancy taxes paid to local governments. However, other research indicates that short-term rentals may stimulate economic growth

A study of the New Orleans, LA short-term rental market’s impact on the local economy found that while short-term rental platforms led to around $100 million in annual revenue, they also removed rental units from the market, especially in older and low-income neighborhoods. 

While there is minimal research on the impact of short-term rentals on local economies in the U.S., there is some international research that may be applicable to U.S. localities. A case study of short-term rental growth in Santa Cruz de Tenerife, Spain suggests that short-term rentals drive up rents not only in central areas where short-term rentals are concentrated, but in the municipality’s suburban areas as well. 

Another study conducted in coastal Australia investigated the impacts of additional Airbnb listings in localities with and without tourist economies. Researchers found that localities with existing lodging capacity did not experience negative impacts. However, they found that localities with less tourist-driven economies experienced population displacement, as well as an increase in quality of life complaints from residents.

Impacts on housing affordability  

Several studies have found evidence that short-term rentals contribute to rising rents:

In Boston, MA researchers found that an increase of short-term rentals contributed to higher asking rents for long-term rentals and a reduction in the number of available long-term rentals. And a nationwide study  found that a one percent increase in short-term rental listings within a ZIP Code led to a .018 percent increase in rents and a decrease in the supply of long-term rentals in the same area. 

Another study of the impact of Airbnb rentals on housing prices found that in New York City, an increase in Airbnb rentals contributed to an increase in property values. While the study did not conclusively determine why properties values may rise, the authors suggest it may be due to 1) new revenue streams and reduced costs of owning property for Airbnb hosts lead to a greater demand for properties from investors; 2) tourist spending in areas with a concentration of Airbnb units supports improved neighborhood amenities, goods, and services; and 3) tourists increase demand for commercial space in a neighborhood.  

The evidence on the impact of short-term rentals on housing affordability is mixed. For example, one study found that short-term rentals in New York City are not as profitable or plentiful as many people believe and that there is little incentive for landlords to convert long-term rentals to short-term rentals. 

Outside of the U.S. context, a study in Portugal found that a one percentage point increase in the share of Airbnbs in municipalities led to a 3.7 percent increase in house prices, with even greater price increases in historical centers and tourist cities. 

Approaches 

Localities are increasingly regulating short-term rentals and there are many different approaches they can take to do so. The fluid nature of short-term rental markets—which involve multiple hosts independently deciding whether and when to host a rental and through dozens of online platforms—have caused some cities to turn to software solutions to assist in identifying illegal short-term rentals

Those interested in regulating short-term rentals will likely want to consider a range of policy options. Among the key regulatory tools available to localities are:  

  • Monitoring of short-term rentals: Localities may require short-term rentals to register or acquire permits, which may include measures to protect the safety of tenants and mitigate potential disturbances for neighbors.
  • Fees or taxes on short-term rental operators: For example, a tax that increases with the number of days a unit is rented may discourage conversion of “mom and pop” short-term rental units to year-round Airbnbs or “Airbnb hotels.”
  • Caps on the number of short-term rentals: Localities may choose to restrict the total number of permitted units in certain neighborhoods, zoning districts, or the locality as a whole.
  • Limits on the frequency of rentals: Localities may limit the number of nights a property can be rented as a short-term rental.
  • Restrictions on tenants: Localities may consider limiting the number of tenants who can stay in a short-term rental.
  • Prohibiting certain types of short-term rentals: Localities might ban dedicated or investor-owned short-term rentals.  

Examples

Below, we briefly describe how a variety of localities regulate short-term rentals, including small and large cities and localities with a large tourism sector. 

In New Orleans, LA, short-term rentals are banned in the French Quarter (except for a strip on Bourbon Street), and some regulations require hosts to rent out a unit for 90 days of the year and pay annual licensing fees. 

In Philadelphia, PA, all hosts must obtain a “Limited Lodging Operator” license and pay fees to the city if they intend to rent their unit for any number of nights. The city’s licensing regulations previously exempted hosts who rented out their units for less than 90 nights a year, but the City Council adopted more restrictive regulations in 2021 after a rise in nuisance complaints.

In 2017, Portland, ME’s City Council adopted new regulations that capped the citywide annual number of STR units as well as the STR share of each multifamily building, and prohibited STRs in non-owner-occupied single-family homes.

Regulations adopted in 2018 and 2019 in Asheville, NC banned entire home rentals of less than 30 days except for those within a resort zoning district. Wilmington, NC adopted regulations in 2019 that required property owners to register each short-term rental with the city and maintain a separation of 400 feet between the rental property and any other rental property. The city created a lottery to determine which properties could remain as short-term rentals, with a one-year deadline to cease operation for properties not selected.  

Savannah, GA passed a similar ordinance to Asheville in 2017, although instead of an outright ban on home rentals of less than 30 days, the ordinance established a 20 percent cap on short-term rentals in residential wards. Once a geographic ward reaches that cap, a homeowner’s application for a new short-term rental permit will not be granted. It is worth noting that both Georgia and North Carolina introduced state legislation that would preempt local regulation of  short-term rentals. 

In the college town of Tuscaloosa, AL new rules regulating short-term rentals adopted in 2019 limited the number of districts in which owners can rent out their property, maintaining short-term rental permissions in districts close to the University of Alabama campus. Residents outside of the district can petition the zoning board for a special use variance to legally rent out their properties.

Examples of localities redirecting revenue generated from short-term rentals to affordable housing 

Some localities use revenues raised by their regulation to help fund affordable housing. The following localities have adopted such policies or are exploring the idea: 

  • Portland, OR: In 2018, the City Council adopted an ordinance to collect two fees on short-term rentals: (1) a 2% fee on hosts who use booking agents to advertise or accept reservations, and (2) a $4/night fee on booking agents and “transient lodging intermediaries.” Portland estimated that the per-night fee could contribute $2.5 million to the housing budget. Revenue from the hosting fee would support the budget for the Tourism Improvement District.
  • Washington State: In January 2021, a state senator proposed a bill to allow municipalities to “levy an additional tax of up to 10 percent on ‘internet-based’” short-term rentals. This tax would be paid by consumers and the revenue would fund the capital and operating costs of affordable housing programs. As of July 2022, this bill was still in committee.
  • Seattle, WA: In 2017, the City Council voted to impose taxes on operators of short-term rentals, starting in 2019. These taxes added $14 per night for entire homes and $8 per night for rooms. The revenue supports community development projects and affordable housing creation.

Related resources

The resources in this section may be helpful to localities seeking to understand available policy options and how other localities have attempted to regulate short-term rentals.

  1. Regulating Short-Term Rentals: A Guidebook for Equitable Policy encourages localities to clearly define short-terms rentals as distinct from hotels, establish a registry and occupancy tax for the units, and cap the number of nights a unit can be rented, among other policies.
  2. The Colorado Municipal League developed Short-Term Rentals: Municipal Best Practices in Colorado, which profiles four Colorado localities’ approaches to regulating short-term rentals, and a matrix of short-term rental regulations in approximately thirty jurisdictions across Colorado, Idaho, Utah, and Wyoming.
  3. A Practical Guide to Effectively Regulating Short-Term Rentals includes sample policy objectives and a range of regulatory approaches for different types of localities, including localities with a lack of affordable housing or those with a significant tourist economy. (NOTE: Readers should be aware that this guide was prepared by the CEO of a short-term rental compliance service.)
  4. Short-Term Rental Regulations: A Guide for Local Governments recommends best practices for localities to develop and implement short-term rental regulations. The guide includes strategies for how to engage diverse stakeholders in the development process, how to apply a racial equity lens to the policy itself, and how localities can effectively enforce regulations.
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