A burgeoning mess…

I have written here in the past about the burgeoning mess that short term vacation rentals have been creating over the last several years. Property investors looking to squeeze out revenue from unlikely sources, such as their own home, have in recent years been able to avail themselves of companies like Homeaway, Flipkey, VRBO and Airbnb that offer home rental as a lower-cost alternative to hotels and other traditional vacation lodgings. By going online and booking a vacation stay through private homes offered through these services, the average vacationer can ultimately save themselves a great amount when booking their vacation stay. However, as an investment, it can be risky business.

Homeaway as big business

To best understand just how pervasive these rental companies have become, consider Homeaway. This online service is an umbrella vacation rental marketplace with more than a million vacation rental listings in 190 countries, using several online monikers. Per Wikipedia, overall, this service operates through 40 websites in 22 languages. The company offers the most comprehensive selection of rentals for families and groups to find accommodations such as cabins, condos, castles, villas, barns and farm houses.  Unfortunately, this vacation rental marketplace is still, by and large, left unregulated.  So it is ripe for abuse.  In addition, the hotel industry is constantly waging war with these online firms and the private homeowner/vacation rentals they represent.  Most private vacation rentals do not require any local municipality license (though this has been changing  – see below).  In addition, most homeowners renting out their residences do not have to pay hotel bed taxes.  This too has been slowly changing over just the last year or two.  In my small upstate New York community, our local county supervisors just expanded their “bed tax” definition to include not only vacation lodging with area hotels, but also private homes as well.  It’s a trend that’s sweeping the country, as municipalities look to expand their revenue base anyway they can.  Now, enforcing this new bed tax law is another issue altogether…

Risky business

In looking at the risks for a property investment, I have made note of this risk factor before, noting here that “in general, vacation rentals have been a secondary and riskier source of property investments for the experienced investor. They represent a greater degree of risk than year-round rental units simply because they tend to be seasonal in nature. So cash flows thrown off from any vacation rental property are not uniformly consistent throughout the year. Ultimately, this makes for a greater likelihood of negative cash flows on an annualized basis. In addition, vacation homes, and time shares as well, are difficult to predict performance over the long term, due to market fluctuations and the overall state of the economy – depending on where they are located. Certainly foreign investments are even riskier, having much greater market fluctuations abroad than in the United States. Values can drop unexpectedly based on demand factor fluctuations. After all, vacations are made up of leisure time dollars. Thus, trying to predict future rental income and cash flows based on prior historical data is a tricky proposition. Also, keep in mind that vacation homes and time shares can be difficult to sell quickly should you need to get out fast.”

A common trend

Keep in mind that local municipalities round the country have been slow to create legislation that clears up the murky waters that home rental vacation investors have to swim in. In a recent news report from the Short Term Rental Advocacy Center (stradvocacy.org, 7/28/15), an online pro-home rental advocacy group, they note about recent legislation in the San Francisco Bay area: “on July 14, supervisors in the Bay City passed an amendment that would increase scrutiny on short-term renters in order to ensure they are following local regulations. Two amendments addressing complaints by local residents were considered, but in the end the more lenient of the two was passed, giving the recently created Office of Short-Term Rental Administration and Enforcement greater power to impose existing regulations. It also leaves the maximum cap on the number of days people can sublet their homes at 90 days per year; the stricter proposal would have cut the number to 75 days and require STR-hosting sites to submit quarterly reports to the city. “Home-sharing is here to stay in our city,” said Supervisor Mark Farrell. “The proposal in front of me today builds on our current law.” Dale Carson, the leader of a group that opposes STRS said that even with the OSTRAE’s new powers, the 90-day cap will be difficult to enforce. “Pray tell,” he said “how is the city to determine when a host is sleeping in her own bed each night?”

Short term rental pitfalls

I’ve written in several articles here that vacation rentals are inherently riskier investments than year-round rentals. With the advent of Homeaway, VRBO, Airbnb and the like, and their extremely large following and popularity in this country and abroad, property investors should know all the pitfalls of this type of investment when considering all their investment opportunities in real estate. At the very least, read up on your local laws regarding short term rentals. These laws are changing fast from community to community around the U.S. As I mentioned in a prior article here, “be wary of one other story that has circulated in the news recently, providing Airbnb with some rather nasty bad publicity. The incident involved a host who rented out their unit to a traveler for a month, only to find that the traveler would not leave. Due to local law, once the traveler occupied the unit for at least 30 days, they were considered a “tenant.” And as such, they were afforded all protections due tenants in tenant law. And the host had to go through a very long, expensive eviction procedure to have the “traveler” removed.” As a vacation renal property investor, make sure you fully understand all local ordinances regarding short term stays, as well as landlord/tenant law before using a service such as Airbnb or VRBO.

 

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