A New Trend in Airbnb Regulations? What Nashville's Short Term Rental Legislation Means for Investors

Earlier this near, Nashville’s City Council voted to begin phasing out non-owner occupied Airbnb's in residential neighborhoods.  Investors with Airbnb properties have about three years left before the policies take impact.

Here's the background: a hotel shortage in this growing city and tourist hub caused a short term rental market to explode.  The city took reasonable steps to regulate it, allowing a certain number of short term rental licenses per neighborhood.  However, as more hotels are opening and neighbors are complaining about incidents at these properties, the City Council passed legislation to begin phasing out short term rentals for non-owner occupied homes.  You can read more about this legislation here.

There is a chance that this moves in a different direction, but I think this is a sign of things to come.  Look for this type of legislation moving to more communities across the country.

I’m an avid Airbnb consumer that has logged 100+ nights in Airbnb rentals in the last few years, but I am also a real estate investor and am well aware of the impact that regulators can have on investment properties.  I’ve thought about short term rentals as a part of investing but have stayed away from it out of concern that government and non-government regulators have far too much power over the viability of these investments.

If you're an investor thinking about short term rentals, there are three things investors should take away from this legislation:

  1. Short term rental platforms not a viable way to skirt zoning laws.   Operating short term rentals in areas that are zoned residential may not be a viable investment strategy.  We can all claim that we’re free to do what we want in the comfort of our own homes, but when these are investment properties there are legitimate regulations on how the properties can be used.  It's not a winning argument for investors to argue that operating a short term rental in an area that is not zoned for hotel or business use should be allowed.
     
  2. Short term rentals aren’t a viable way to be a landlord without being licensed and regulated.  Rental property owners are typically required to meet safety, fair housing, and other laws.  Short term rentals are likely not a viable way to be a landlord and dodge the requirements that other property owners are subject to.  There’s a trend beginning that rental properties, whether they are short term or traditional rentals, will be treated the same by regulators. Investors who operate short-term rentals must be ready for rental licensing and other requirements, and include those costs and requirements when they analyze deals.
     
  3. Short term rentals are not a viable way to be a hotel without licensing and taxation. Nashville, like many cities, passed legislation that would require short term rentals to be taxed at the same rate as hotels.  Zoning and safety licensing is likely the next trend.  Hotels, small or large, have a long list of requirements placed on them by city and state regulators. Short term rental owners aren’t likely to be able to avoid these requirements; if you’re operating a hotel or B&B, you’ll likely be taxed and face the same requirements at other hotel and B&B operators whether you have one unit or twenty units

For house hackers and frequent travelers who are using Airbnb (or other platforms) to rent out their owner-occupied residence, I wouldn't worry about this trend.  This proposal makes a key distinction between owner occupied and non-owner occupied properties.  Regulators have tried unsuccessfully to frame the argument differently by trying to regulate how many nights you’re spending in your property as the litmus test.  This proposal was ridiculous and effectively wanted residents to register where they sleep each night to be enforceable (Joe Slade White, a top political consultant, helped Airbnb frame the argument as an invasion of privacy in these ads). The distinction between owner-occupied and non-owner occupied seems to have good political support and it’s a legal framework that’s already in place.  If you owner occupy the property, you’re on the stronger side of the argument.

However, if you are an investor who wants to make Airbnb a core part of your portfolio, it is important to consider that regulators can have a huge impact on your business.  Even if you own your property and finance it as an investment property, you are subject to zoning and government regulation.  Nashville’s change will have a significant impact on many investors who thought that short term rentals were viable long term real estate investments.

It should be noted that government regulators aren’t the only ones with power over your short term rental investments.  Nashville’s legislation has less impact on short term rentals in high density areas (zoned commercial) but risks still remain.  Apartment managers change and with it, so do policies on these short term rentals.  Condos provide more control, but only to the extent that a Homeowners Association is supportive.  Many HOAs are not warm to the idea of short term rentals and a change to HOA bylaws could mean challenges to your short term rental business.  

Investors shouldn’t drop short term rentals as a strategy because of one vote in one city, but I think this is a sign of things to come. If you are considering short term rentals in your investments, it’s good to consider how regulators could impact your business and think about how you may want to change your business model.  Short term rentals are a great tool for house hackers and owner occupants, but they may not be a viable way to run rentals and hotels without the right zoning, licensing, and regulation.

 

 

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