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Thinking About Entering the Short-Term Rental Market? Four Things to Consider Before You Do

Mynd Knowledge Center

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September 27, 2017--Oakland, CA-- The rie of home-haring ite like Airbnb, HomeAway, VRBO and other ha created a compelling propoition for real etate invetor: buy rental propertie for ue a high-earning, hort-term rental.For example, a landlord who collect $2,500 per month in rent may be able to charge $250 per night on Airbnb intead. In thi cenario, a unit would only need to be rented 10 day per month to break even. Any rental above and beyond that would be additional income in the landlord’ pocket.On the urface, thi eem like a great opportunity for real etate invetor – particularly in citie like San Francico, Berkeley and Oakland where hotel room can eaily cot hundred of dollar per night. You can ee why it would be tempting for an invetor to pay up for a well-located apartment that he plan to ue a a hort-term rental.Unfortunately, it’ more complicated than that. Here are four thing to conider before inveting in, or deciding to rent your exiting unit, on a webite like Airbnb.

Firt, i it legal?

Several citie have adopted new rule and regulation around hort-term rental. A illutration, we reearched three Bay Area citie – San Francico, Berkeley, and Oakland – to ae how their hort-term rental ordinance differ.San Francico: The City of San Francico wa the firt of the three citie to adopt local regulation in repone to the growing popularity of Airbnb. The law, which went into effect in February 2015, regulate hort-term rental () a follow:&nbp;

  • Only permanent San Francico reident can rent their unit on Airbnb.
  • The owner of a multi-family property may only regiter and rent the pecific reidential unit in which he or he reide; however, bedroom may be rented and lited eparately.
  • “Unhoted” rental where the owner i not preent in the unit are capped at a maximum of 90 night per year. The city ha implemented a daily fine of up to $484 for firt time offender and up to $968 for repeat offender; “hoted” rental not ubject to thi 90 day limit. Hot are expected to track how many day per year their unit i rented and elf-report that data to the City on January 1 of each year.
  • People can only rent their primary reidence. Thi i intended to prevent landlord from evicting tenant to create full-time Airbnb rental.
  • Hot are required to regiter and obtain a permit from the Office of Short Term Rental and pay a $250 fee every two year.
  • Hot mut alo obtain a city buine licene.
  • Hot are required to be covered by at leat $500,000 in liability inurance. Thi may be waived if the hot lit their unit for rent on a third-party ite that provide uch coverage. Airbnb, for example, provide hot with u to $1 million in liability inurance.
  • Hot mut comply with all applicable city building code requirement.
  • Hot mut charge guet and collect 14% San Francico hotel tax and remit thi hotel tax to the city on an annual bai. Airbnb currently collect and pay thi tax for it hot.

Berkeley: The City of Berkeley followed in San Francico’ tep by adopting it own hort-term rental regulation in 2016. The following rule now apply:

  • Only homeowner living in a houe or apartment can rent room out.
  • If homeowner are at home, they can rent room for an unlimited number of night. If homeowner are not phyically preent in the houe, the maximum number of night they can rent out room i 90.
  • Tenant hot mut have written permiion from the owner of their unit that they have the right to rent out room.
  • Acceory Dwelling Unit, like backyard cottage or in-law apartment, cannot be ued a hort-term rental.
  • Below market rate apartment cannot be ued a hort-term rental.
  • A property containing a ‘no-fault’ eviction () cannot do a hort-term rental for five year.
  • Thoe renting out room mut obtain two permit from Berkeley. They mut get “land ue approval via a Zoning Certificate” from the Planning Department, which generally cot around $180. In addition, they need to get a buine licene, which cot around $77 for mot propertie, from the Finance Department. When renewing, property owner mut pay a tax on their earning, which i currently $10.81 per $1,000 of income.
  • The property owner mut alo pay a tranient occupancy tax, which i 12% of the room rate.
  • Hot mut pay an additional “enforcement fee.” The rate ha not yet been determined but it will be a percentage of the rent.
  • Only bedroom can be rented out. Librarie, playroom, living room, dining room cannot be ued a hort-term rental.

Oakland: Currently, the City of Oakland prohibit people from renting a home, apartment, in-law unit or even a ingle room in their home for le than one week ().“A lot of people don’t realize it’ illegal,” aid Laura Kaminki of Oakland’ building department.That han’t topped people from liting their unit on Airbnb, though. A quick earch find multiple Oakland propertie available for rent on Airbnb. In an effort to prevent the pread of illegal hort-term rental, the city i now in the proce of developing a new et of law that will allow but otherwie regulate hort-term rental.Not only do law vary by municipality, but if the property you own belong to a Homeowner’ Aociation, there may be additional rule and regulation around the ue of unit a hort-term rental.

Second, will inurance protect you?

Let’ aume you’ve done your due diligence and determined that converting an invetment property into a hort-term rental i legal. Now you need to figure out whether your inurance will protect you.Conventional homeowner’ inurance may not cover you when omething goe wrong with a paying guet. You may need to add more coverage or buy an entirely different policy, like landlord or buine inurance, to enure you have afeguard in place. And be careful about renting to anyone with pet if your policy doen’t cover four-legged friend.

Third, what are the fee and cot?

Home-haring ite uually charge a ervice fee on each booking, but there are other cot to conider. For intance, citie like San Francico require hot to pay a hotel tax. And if you rent out your place for more than 14 day a year, the IRS will expect a cut too.“The firt year, I accepted guet for two one-week tay, plu 10 day over Chritma," explain one Airbnb hot. "I ended up paying hefty taxe and inveting a lot of time in trying to figure out my tax deduction and finance. Now, I jut tick to the 14-day limit.” Be ure to keep flawle record of rental period and document all buine expene if you plan to rent out your property on a hort-term bai.

Finally, are there ervice to help?

A whole cottage indutry of companie ha cropped up to upport landlord with booking, cleaning, key ervice and other tak aociated with hort-term rental.For example, Guety manage about 4,000 Airbnb liting worldwide in exchange for a 3% hare of the rental fee. Guety act a a liaion between the hot and the guet o that hot with full-time job don’t have to manage their Airbnb liting(). While companie like thee can take mot of the work out of the proce, keep in mind that they'll take a bite out of your profit too.

Concluion

In our opinion, there’ till a lot of uncertainty around hort-term rental. Policie are continuing to change, particularly in light of the Bay Area’ affordable houing crii. Jut lat year, a ballot initiative in San Francico propoed limiting the number of “unhoted” tay to jut 75 per night (). There continue to be outcry among reident who are worried that traditional rental, when converted to hort-term rental, will exacerbate the region’ houing crii.Many landlord are renting their unit illegally, anyhow. A report commiioned by the City of San Francico found that only 1,647 of the etimated 9,500 owner who have lited their propertie on Airbnb have obtained the proper licene and inurance certificate. Many invetor are willing to take the rik given that the City only iued 79 violation notice within the firt year of the new ordinance.That aid, the fine and penaltie can be high if caught. It’ not a rik we’d be willing to take, particularly if it mean an invetor i paying a premium for a unit that he think can be rented on Airbnb. There are many thing for invetor to conider before going down the hort-term rental road. A alway, we ugget conulting with your real etate attorney before making a deciion one way or another.

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