By Douglas Katz – 11/01/2022
Short-term rentals have been booming and they continue to gain significant ground as a percentage of the industry. Many investors are building their strategies around this space as the headaches of long-term tenants and the immense profitability of short-term rentals offer better match to their plans. With this boom comes the looming likelihood of higher costs and regulation in the areas in which they operate.
As you can see, both the demand and increased supply to meet it has been strong . With this gold rush type expansion, however, many states and municipalities are looking to manage short-term rentals while maximizing the contribution to their coffers.
For example, in California, some cities are working to better identify and hold accountable a “responsible owner” in response to complaints from neighborhoods and communities. This could trend more broadly as residents push back and force their law makers to act. I even just read an article today about a mass shooting at a short-term rental in Nashville that was rented by underage party hosts. This is definitely not the first incident, so there will likely be more outcry.
Taxation is also becoming a big hot button issues. Many communities in the high country of Colorado are voting imminently on steep tax hikes for short-term rental operators. From an article in the Durango Herald:
Here’s a list of Colorado municipalities and counties asking voters to increase taxes on short-term rental properties to help fund affordable housing:
- Aspen: The city wants to levy an additional 5% to 10% lodging tax on short-term rentals, depending on whether the property is owner-occupied, which would put the lodging tax in the city of Aspen as high as 21.3%. The measure could raise more than $9 million a year, with 70% directed toward affordable housing and 30% for infrastructure maintenance and repair and environment initiatives.
- Carbondale: Town leaders hope a 6% excise tax on short-term rentals will help fund affordable and attainable housing programs and projects.
- Dillon: Voters will weigh a 5% excise tax on short-term rentals to fund community projects and services to address visitor impacts. Another measure asks voters to raise the lodging tax to 6% from 2%.
- Grand Junction: City leaders want to increase the lodging tax to 7% from 6% and increase the tax on short-term rentals to 23.52% from 14.52% to fund housing projects for residents making 80% of the area’s median income.
- Steamboat Springs: Voters will consider a new 9% lodging tax on short-term rentals that could add an expected $14 million to the city’s housing fund for the first phase of a planned 2,300 affordable units on the 536-acre Brown Ranch, which was donated to the Yampa Valley Housing Authority by an anonymous donor.
This is likely the tip of the iceberg, especially as one of the main sources of revenue for these states and cities shrinks with less real estate transactions and lower values due to the drop in home prices.
Short-term rentals are still a good investment, but it does look like operators need to build some flexibility into their models to navigate the rapidly changing operating environment.