Short-Term Vacation Rental Compliance

What is a Short-Term Vacation Rental?

Short-Term Vacation Rentals (STRs) are generally rentals of a residential residence for under 30 days. They could range from a couch in a living room to a whole apartment or mansion.

STRs, often referred to as boarding houses, a house rental, and a variety of other terms, have existed for hundreds of years. Within the last decade, however, STRs have exploded as a substitute of (or even a preferred option to) traditional lodging, like hotel rooms. The industry is worth an estimated $115 billion (Skift Travel, 2019), and STRs total more than 10% of the traditional U.S. hotel room supply (CBRE, 2020). In rural and suburban areas, the ratio of STRs to hotel rooms increases substantially.

This explosion is attributed to the ease of managing advertisements and bookings online through websites that offer a one-stop shop for millions of listings. Hosts no longer depend on Craigslist, newspaper listings, and word of mouth to rent their extra space. Rental websites offer hosts reduced risk in the form of insurance, guest histories, and other safeguards that come with working through a third party. For guests, these websites provide reviews of rentals and hosts before booking. They also offer cancellation safeguards from a corporation, rather than an individual host.

Ninety-nine percent of the STR market in North America is made up of more than 60 active online rental platforms. Household names include:

• Airbnb
• VRBO
• FlipKey
• Booking.com

There are also providers who cater to niche markets, such as luxury stays, pet friendly, and more added each day. The market is fragmenting, making it ever difficult to identify who is listing and how much the market is worth.

Why Do Short-Term Vacation Rentals Matter to Government?

Some of the reasons why government leaders want to have STRs in their community include:

• Additional income for residents — According to Earnest.com, STR hosts make an average of $924 in monthly income from their rental unit.
• Increased room inventory for tourists — Many smaller towns don’t have the capacity for seasonality or major events and depend on short-term rentals to increase total inventory.
• Increased visitor spending — Restaurants, bars, and attractions all benefit from additional and expanded lodging. Visitors staying in short-term vacation rentals in San Diego spent $86.4 million on these activities (NUSIPR, 2015). The total economic impact of short-term rentals in San Diego has been estimated at $285 million.
• Increased tax collection — Many cities, counties, and states see a positive gain in transient occupancy taxes from short-term rentals (if hosts are paying their taxes, of course).

Unfortunately, an unregulated or unenforced STR market in communities can bring more negatives than positives:

• Party houses — Airbnb-style party houses are often in the news and for good reason: They’re disruptive to neighborhoods, and often destructive to property. Without effective tracking and regulations around occupancy, the risk of party houses increases
• Other issues that having short-term rentals in residential neighborhoods may cause.

Short-term vacation rentals need to be treated like the businesses and lodging they are. Local and state governments’ roles should minimize STRs’ negative impacts while maximizing their benefits. Governments also have a responsibility to create an even playing field between traditional lodging providers and STRs through fair permitting and licensing regulations and through the fair application of tax law. Unfortunately, governments face challenges in enforcing these regulations.

STR Challenges For Local Governments

As with most of the sharing economy, short-term vacation rentals (STRs), create unique challenges in ordinance creation and enforcement. When local governments try to approach STRs with manual or reactive enforcement, they’re faced with:

• A lack of visibility into short-term rental activity, as online rental platforms keep this information private.
• An inability to directly communicate with hosts when they’re in violation of local regulations. Sometimes a host may not know they are in violation; without direct communication, governments have trouble educating hosts on local laws.
• An inability to gather enough evidence to support a court case. When collected manually, gathering evidence can be costly and time-consuming, if not impossible.
• An inability to identify those who are accurately paying taxes isn’t possible from simply scanning listings.

Many governments without a compliance and monitoring solution use reactive enforcement based on complaints, but complaints form only a small piece of the STR market in a jurisdiction. Reactive enforcement puts the onus on proactive or upset residents, rather than addressing the core issue: whether legal or not, STRs will continue to operate.  Local governments who depend on reactive enforcement aren’t minimizing the negative aspects of STRS.

STR Challenges For State Governments

Short-term vacation rentals (STRs) also create unique challenges at the state level. State governments often have clear guidelines on tax collection from STRs but lack the resources and insights to enforce the thousands (or millions) of STRs within the state.

For key functions of state governments, such as the Department of Revenue this means:

• Missing tax revenue, often in the millions, due to non-compliance. (Additionally, many STR hosts pay state taxes in the state they live in, not the state where they rent their short-term rental unit.)
• Unfair application of tax law. Compliance is directly tied to an even playing field.
• Lack of auditability into tax collections. Are STR hosts paying the right amount?
• Lack of visibility into the tourism market. This makes long-term investment decisions or the ability to address public health concerns extremely difficult.

Unfortunately, state governments often don’t have the resources to tackle this challenge. They need the ability to identify non-compliant properties, communicate with hosts, and flag hosts that should be audited automatically. Without the use of technology, like STR compliance and monitoring software, this is impossible.

A good short-term vacation rental (STR) ordinance should have these basics:

• A clear definition of an STR, according to the local or state regulations (most common is 30 nights or less).
• What is required to operate a legal STR, whether it is a permit, a business license, tax registration, or a combination of these.
• Enforcement based on STR advertisements.
• Any zoning rules.
• Any single or multi-family rules.
• If safety inspections are required, and what those include.
• Penalties for being non-compliant.

It’s best to create ordinances based on the STR market in your local community and accurate data (i.e. avoid a one-size-fits-all approach, like state preemption). If you’d like complimentary insight on the short-term rental market in your community, book an assessment here.

Benefits of High STR Compliance (And How to Get It)

If your community or state already has regulations in place, the next step is to increase compliance. Without proactive enforcement, only about 10% of STR hosts will be compliant. It’s possible to increase that number to 90% through this process:

1. Clarify your objectives.
2. Confirm your regulations (and their enforceability).
3. Set clear, specific guidelines and make compliance easy.
4. Prepare your elected officials.
5. Communicate broadly.
6. Identify violators.
7. Gather evidence.
8. Communicate directly with STR operators.
9. Escalate when needed.
10. Continue monitoring.

In order to execute on steps 6 through 10, you’ll need the ability to identify individual hosts, gather evidence in a cost-effective way, and have a method of communicating with STR hosts directly. This will need to be done with technology as it’s nearly impossible to execute these steps with manual enforcement processes.

There are numerous benefits to improving compliance in the STR market, including:

• Improved revenue recovery from tax and permit fee collection.
• An even playing field for lodging providers.
• An effective ordinance that is relevant to your community.
• Responsible and safe hosting.
• Improved community character.
• The expectation that you take issues that stem from the sharing economy seriously, and your community understands this.

Making the Short-Term Vacation Rental Market Work for Everyone

Ultimately, there are three key ways to ensure the short-term vacation rental market works for everyone in your community:

• Create or update ordinances and laws that reflect the needs of your community, that consider all stakeholders, and that are enforceable.
• Increase compliance with regulations through improved monitoring, investment in technology, and communications, maximizing the benefits of STRs while minimizing their negative aspects.
• Resist banning STRs. Banning STRs may minimize some negative aspects, but enforcement measures are costly with little benefits.