The Short-Term Rental Industry: The Intersection Point between Tourism, Real Estate, and Government Policies

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Tourism has been a driving force behind the real estate market as well as behind government policies in this regard since the dawn of time. However, after the founding of Airbnb in 2008, a new major factor entered into this relationship: the short-term rental industry. While the home-sharing concept did not first emerge in 2008, it grew at an unimaginable speed in the last decade, leaving the parameters of an easy source of additional income for regular people and turning into a full-scale real estate investment strategy of its own. Of course, major tourist cities have been affected the most as real estate investors flooded these markets in search of profitable opportunities to diversify their portfolios. These developments forced national as well as local governments in the majority of top tourist destinations around the globe to take a stance on the issue and introduce new policies and regulations.

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The Impact of Airbnb Rentals on Local Real Estate Markets

The rapid growth of vacation home rentals in major tourist cities affected local housing markets in a number of ways. First and foremost, as short-term rental investors inundated these cities, they pushed demand for real estate properties up, which urged the already high house prices further up. As a result, affordability became an even bigger issue in these previously expensive markets.

At the same time, existing property owners started switching their rental strategy away from traditional rentals and towards Airbnb rentals. This move limited the supply of long-term rental properties and inflated traditional rental rates, directly affecting vulnerable renters.

Meanwhile, the residential neighborhoods of major metropolitan cities as well as smaller tourist towns saw an unprecedented influx of short-term visitors in single houses as well as entire apartment buildings. This trend inevitably compromised residents’ sense of security, safety, tranquility, and ultimately comfort.

Not to mention the negative effect on the hotel industry as it faced strong competition from new vacation rentals.

All these factors obliged state and local authorities to review and evaluate the newly emerged relationship between tourism and real estate in order to decide whether to intervene and how.

Government Approaches to the Short-Term Rentals Industry

When faced with the vacation rental industry dilemma, governments around the world resorted to a few different courses of action.

Some state and city authorities decided to remain neutral and allow the tourism industry and real estate market forces to figure out the winners and losers in this newly developed situation. In such locations renting out on a short-term basis remained legal – whether regulated or not – for both owner-occupied and non-owner occupied properties. This means that vacation rental homes are a feasible investment strategy in these neutral markets and indeed consistently generate significantly higher return on investment than traditional, long-term rentals, according to figures from real estate data analytics company Mashvisor. Meanwhile, the government collects various taxes and fees, creating revenue from short-term rentals, just as from any other business. Some of the most prominent examples of such cities include Dallas and Atlanta in the US as well as Cairo internationally.

The authorities in other top tourist locations decided to allow renting out entire properties to Airbnb hosts but imposed serious restrictions in order to preserve the residential character of non-commercial neighborhoods. For example, hosts in London can rent out an entire home for only up to 90 days a year, while the annual upper limit in Paris has been set to 120 days. The Madrid authorities introduced a similar threshold (90 days) but also require from apartments listed on Airbnb and other similar home-sharing platforms to have a private entrance.

Yet other cities decided to regulate the home-sharing industry strictly and prevent it from turning into an independent real estate investment strategy. For instance, Nashville prohibited the registration of new non-owner occupied vacation rentals in residentially zoned areas. Meanwhile, the authorities in New York and Orlando allow only owner-occupied short-term rentals with further restrictions including limits on the proportion of the property which can be rented out and the number of guests at any point in time.

In these places Airbnb rentals are limited to homeowners only, leaving real estate investors out of the picture, at least in theory. As you can imagine, drafting and passing this new legislation is one thing but actually imposing it is a different story. Governments in many locations with prohibitive short-term rental regulations have been struggling with assuring compliance. The main reason for this challenge is that they cannot afford to allocate the necessary human resources for checking conformity and implementing the envisioned measures for those disobeying.

All in all, the impact of the surge in short-term rentals in hot tourist locations and the consequent government regulations has been diverse. Many real estate markets have benefitted from increased demand for new construction activities, thus creating jobs and generating income. Other housing markets have been overwhelmed by the flood of visitors and investors followed by (sometimes successful and sometimes not) attempts by local authorities to curb them, so the outcome has been less positive.

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About the Author

Peter Abualzolof
Peter Abualzolof is Co-Founder and CEO of Mashvisor, a real estate data analytics company. The idea to create a platform which provides readily available real estate data and analytics to investors came out of Peter's own experience. Towards the end of the "Great Recession," being confident in his real estate investing skills (real estate is a family hobby for him), Peter started researching multiple markets as the Bay Area, where he lived, was unreasonably priced and not ideal for investing with his budget. He had lost all opportunities after 2-3 months of putting offers on properties in multiple markets as researching each market and property was taking him way more time than experienced investors so there was no way for him to find a high performing property without accelerating the research process. That's how he thought of Mashvisor. You can find more of Peter's articles on Mashvisor's blog page.

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