Pat Hune, Broker, 1st Southwest Realty, with help from Various Sources, February 2020
Article Summary – A) Brief History of Airbnb, B) Legislative, HOA and City rule changes can end or limit short-term rentals and cities are implementing fines and restrictions on “party house” short-term rentals and short-term tenants that disturb the neighbors, C) Put rentals into an LLC to protect your other assets, D) Tell your homeowner’s insurance if the property is a long or short-term rental, E) Use the right short term rental lease, F) If your property is surrounded by short term rentals it may be a disclosure issue when you decide to sell.
A) History of Airbnb – Short-term rentals are all the rage. Short-term rentals are defined as rentals for 30 days or less. It all started in San Francisco in 2008 with two tenants needing more money to pay the rent for their San Francisco apartment. They decided to rent out three air mattresses on their living room floor and include breakfast. Air Bed and Breakfast then became Airbnb. Just like Uber, a simple concept quickly became a billion dollar industry. Investors quickly realized the return on investment for short-term rentals was a lot higher than long-term rentals. Long-term rent would be $1,800 a month while an Airbnb rental income could be 3 or 4 times higher. The investors jumped into the real estate market, sometimes paying more than market price. It did not take long for the neighbors of short-term rentals to start complaining because of the additional traffic, noise and trash from the short-term renters. As the neighbors anger grew the rules started changing in an attempt to control the short-term rentals and preserve the neighborhoods.
B) Legislative, City and HOA Changes – Cities and towns throughout the United States have implemented varying short-term rental regulations. For example, San Francisco now has several requirements, e.g., the owner of a short-term rental must live in the home nine months out of the year. On the other hand, Chicago basically has only one requirement: short-term rentals must be at minimum of 30 days. However, cities and towns in Arizona, by state law, cannot regulate short-term rentals, except for short-term rentals used as “party houses.” These are homes that are used for weddings or giant parties that normally would never be approved for residential areas. A new Arizona law kicked in at the end of August 2019 that creates a series of fines for property owners who allow such non-permitted parties to occur on their properties. The City of Tempe put an ordinance into place that requires short-term rentals to be registered so they have the owner’s contact information in case there are issues with the tenants. The reason is some of these rentals are negatively impacting neighborhoods. This is intended to help reduce neighborhood issues and increase public safety by having contact information available to emergency responders. But also so they know where to send the fines for party houses.
There are currently two legislative changes in the works. House Bill 2875 and Senate Bill Senate Bill 1554. One of the changes is restricting a “corporate entity” from operating a vacation rental in a residential zone unless authorized by a municipality. Other proposed changes are:
- Limit the number of adults at a rental;
- Require equipment that monitors and detects noise and notifies the owner if noise is unreasonable or in violation of a noise ordinance;
- Prohibit smoking outside within 100 feet of a residence; (Does this mean you should go smoke at the neighbors house?)
- Restrict occupants from checking in without being met by someone in person;
- Prohibit occupants from parking on public or private streets if on-property parking is available, subject to $100/day fines for violation;
- Allow municipalities to levy $50/day fines for each day the occupancy or use of a rental violates the law.
Homeowner Associations are completely different and can implement whatever restrictions they want with the appropriate vote from the HOA members. Many HOA’s moved swiftly to implement a minimum amount of days. Some communities, like McDowell Mountain Ranch in Phoenix, have completely eliminated short-term rentals in 2019. Other HOA’s have implemented minimum stays of at least 30 days. In some cases the existing short-term rentals have been grandfathered in. If the house sells then the new owner cannot use the house as a short-term rental.
C) Put rentals into an LLC to protect your other assets –Regardless of whether a property is a long or short-term rental each property should be put into a separate Limited Liability Company (LLC). It should never be put directly into your trust. What happens if a tenant falls due to inadequate lighting or an uneven curb, fire destroys the structure and the tenant is injured or killed? In our litigious society a lawsuit could result in the landlord losing their entire estate including the house they live in!
Example-Faulty electrical wiring results in a fire where one of the tenants is killed. The family sues; the jury finds for the family and awards several million dollars. This amount is far above the property insurance limit. The family seizes the landlord’s 5 rental properties (worth $1,500,000), personal residence ($900,000) plus the bank accounts ($500,000). If the landlord had formed a Limited Liability Company or LLC for each rental property the only asset at risk would be the building where the tenant lived. You should also consult with an estate attorney to discuss the benefits of placing your personal assets and LLC’s into a revocable living trust.
D) Property Insurance – Some owners do not tell their insurance company the property is a long or short-term rental. When the tenants damage the property the insurance company refuses to pay the claim. Ouch!
E) Use the right short-term rental lease –Short-term rentals should not use the word tenant in the lease. The occupants should be referred to as guests. Tenants have different rights than guests. For example evicting a tenant is a legal process, requires notices and court action. This is takes a long time. Removing a guest who is violating the terms of the agreement, like using the house as a party house, is cause for immediate termination of the agreement and the guests can be kicked out.
F) Short-Term Rentals Should Be Disclosed – If your property is surrounded by short-term rentals it may be a disclosure issue when you decide to sell. Buyers are starting to ask if there is a way to find out if there are short-term rentals in the neighborhood. Recently a buyer sued the seller and the seller’s realtor for failure to disclose the property was surrounded by short-term rentals. The buyer had a legitimate case because the seller was moving because of the short-term rentals. The buyer used a neighbor’s video showing the realtor picking up beer cans, red cups and other trash as evidence. Though the case was settled out of court one can imagine the sellers paid the buyers something as compensation. The sellers may have had to buy the house back. Attorney Patrick MacQueen said, “I anticipate the Seller Property Disclosure Form will be amended soon to add a question about short-term rentals. Until that happens it is in the seller’s best interests to disclose nearby short-term rentals.” (Editor’s note – well we are in a very strong seller’s market so it might not be a factor today. But it may be a factor when the market turns to a buyer’s market.)
Conclusion – The bottom line is the laws can, and are, changing daily. If you buy a short-term rental with dreams of all the money you will make those dreams may be short lived. If the property cannot be sold as a short-term rental you will definitely lose if you paid more than market and prices have not gone up. If your short-term rental is surrounded by other short-term rentals you may have to disclose this to potential buyers, which could reduce the value and/or make the property more difficult to sell.