Short-term rental (STR) regulations are a polarizing topic, to say the least, and vary from market to market. But no STR host or investor can understand their true earnings potential without first considering the influence of local regulations—and whether that influence will be positive or negative.

Understanding How Regulations Can Impact Your Short-Term Rental Business

In recent years, regulation has become a bit of a dirty word in the short-term rental (STR) space. On paper, it may sound like an obstacle. Something that will only cause headaches for local hosts or hinder investment plans.

But this is not necessarily true. In fact, in many cases, it’s actually lucrative to invest in strictly regulated markets that have a finite supply of available STRs. And if you’re financing an STR property, your lender will want to know that you’re abiding by the local laws.

It can also be helpful to think of regulation as just another data point. Because you cannot fully understand your market’s earnings potential without first considering the influence of regulations—and whether that influence will be positive or negative.

Before investing in a given market, start by asking your favorite search engine the following questions:

What’s the likelihood that new regulations will impact my investment?

Strict versus relaxed regulations: What’s the difference?

Imagine STR regulations on a spectrum. At the far left are markets with no restrictions whatsoever. At the far right are markets that have outlawed STRs entirely. And in the middle is where most markets live—some regulations, but nothing too complicated. This could require simply registering your STR with the city. That way, city officials know who you are, where your STR is located, and who they should contact in the event of a complaint. 

Many cities track and issue penalties for an excessive number of complaints. These include trash buildup, noise violations, and overcrowded parking, to name a few. (So far, so fair.)

In stricter markets, cities may regulate what STR owners can and cannot do with a property. This includes:

Limiting the number of active STR units a single operator can own

Only allowing owners to rent out properties they’re also occupying at the same time

Only allowing stays that are 30 days or longer

Requiring owners to collect and pay specific taxes

Like all laws, STR regulations can evolve over time. Just because a market is relaxed now doesn’t mean it won’t become stricter or vice versa. Such changes have to go into consideration when you make your investment decision.

On the other hand, if you can invest in an STR property before new regulations take effect, you may have a competitive advantage as you become grandfathered into the new status quo.

Airbnb offers an online repository that details regulations in dozens of large markets in the United States and abroad. And Vrbo also offers a contact email address for STR operators seeking regulation information for specific markets. However, it’s often necessary to directly review your local government’s policies. (Here are the webpages for the cities of Denver and Barcelona, where AirDNA’s two offices are located.)

Additionally, host groups on platforms like Facebook are also great resources for networking and staying on top of regulations news. And you, yourself, may want a platform through which you can voice concerns about local proposals. (Our friends at Rent Responsibly offer amazing resources for finding local alliances around the U.S.) Keeping an eye out for future regulations is just as important as understanding current ones. It’s always worthwhile to carefully study all facets of your investment market.

Another important consideration is whether you are financing or outright purchasing an STR property. When investing with your own money, the risks are yours and yours alone. But if you’re investing with a bank or lender’s money, they’ll want to know your investment is legal and abides by all local regulations. 

When are regulations a good thing for STR investments?

Regulations can directly influence the supply-and-demand equation in any given market. Think about it: if a local government only grants a finite number of STR licenses, and you’re able to secure one—then you’ve struck investment gold.

In this situation, you’ll always know exactly how many competitors you have, too. This provides a major advantage when it comes to pricing and profits. It means other investors can’t suddenly swoop in and steal your slice of the market share.

In this case, a good sample market is Maui, Hawaii. Local governments across the Hawaiian archipelago are relatively strict with regulations, and Maui specifically limits the number of available STRs on the island. (Maui is currently at its STR capacity, and the government is not accepting new applicants at this time.) But those operators who do have licensed STRs are in an enviable position given Maui’s lasting appeal as a destination market. Supply is low, demand is high, and there’s no need to fear new waves of competition.

Atlanta is another interesting case where the local government only allows STR entrepreneurs to rent one property in addition to their primary home. This may make Atlanta less attractive to vacation rental management (VRM) groups looking to grow supply. (They might be more drawn to a market like Tupper Lake, located in New York’s Adirondack Mountains, where STR regulations are nearly nonexistent.) Conversely, Atlanta might be more attractive to first-time or small-scale investors who won’t have to worry about institutional VRMs cutting into their profit margins.

How regulations drive arbitrage opportunities and overall market health

AirDNA data shows that many markets which top our arbitrage and Best Places to Invest guides are places where moderate to strict regulations are in place. Not surprisingly, markets where it’s most difficult to arbitrage properties—such as Nashville and Charleston, South Carolina—are where it’s often most lucrative to do so. Remember: regulations sometimes veil opportunities other STR entrepreneurs may overlook.

AirDNA data also shows dramatic impacts to the STR industry in international markets where regulations are strictest, like Amsterdam and Sydney. We reported 15,000 active Airbnb listings in Amsterdam as of October 2021, when a new licensing requirement went into effect. Since then, 10,000 of those listings have been removed from the platform. Similarly, a new STR registration law enacted in Sydney in November 2021 removed 6,000 of its 22,000 active Airbnb listings.

(This is where the conversation around regulations becomes, shall we say, more delicate.)

It’s worth noting that some governments aim to restrict STRs for cultural reasons, like reducing the effects of gentrification. At the same time, a strong STR presence can offer a real economic boon to many markets, small and large.

The most common argument against strict regulations is that they’ll hamper the local economy. And often, that’s true. A strong STR scene can certainly help support small businesses, accommodate more year-round travelers, and raise a city’s profile as a legitimate destination market. A flexible supply of STRs may also allow a market to better support one-off attractions like music festivals or sporting events. This lessens the need for overbuilding hotels that will remain half-empty for the rest of the year, and it encourages out-of-towners to lodge in unique neighborhoods and more closely connect with local culture. (Approximately 35% of STRs are located more than one mile from the nearest hotel, according to our data.)

STRs can also give new life to underused real estate. In 2020, 9.7% of American homes were vacant, according to the latest U.S. census. This equates to 13 million houses, condos, and apartments. In Breckenridge, Colorado, alone, 18,000 of the city’s 31,000 homes were reported vacant, with only 9,000 being actively listed as an STR.

(To be clear, housing units are classified as vacant if no one was permanently living in them on Census Day or if they are temporarily occupied only by guests who have a usual residence elsewhere. Think of a beach house rented to vacationers.)

It suffices to say that every market is different. And to believe that regulations are wholly positive or wholly negative could mislead you on your journey to achieving STR success.

Make no mistake, though: AirDNA’s mission is to support STR entrepreneurs far and wide with actionable analytics. And we can be a valuable partner to anyone seeking fair regulations. Our data provides concrete evidence of the impact of STRs—who they attract, where those travelers come from, and a measurement of their impact on local economics

It can be tempting to rely on anecdotal accounts when it comes to STR regulations, but we believe it’s critical to first consult an accurate data source before taking action. (This latest report from the National League of Cities further details the importance of STR data relative to regulations.)

Additionally, our publicly sourced data accounts for STR properties that are operated with and without licenses—a common regulation. We routinely analyze which listings are still active after one year on the market. A sudden and significant decrease in active listings is often an indication of new regulations and whether or not a market is currently sustainable for hosts.

Regulations influence Market Grade scores in AirDNA’s self-serve MarketMinder™ platform, too. These scores help you decide where you ought to host or invest right now by comparing your target area against 2,000 of the most popular Airbnb markets worldwide. Take a look for yourself.

MarketMinder relies on a specific algorithm to determine how strict or relaxed regulations are in any given market. Here are the criteria that contribute to the final score. Generally speaking: A high score equals low regulation.

How MarketMinder Helps Uncover Your Market’s Regulation Score

The bottom line: Regulations affect all vacation rental markets differently.

Regulations are often thought of as black or white. Altogether good or altogether bad. But the reality is—surprise, surprise—they live in a gray area. And for that reason, we find it more practical to assess the impact, or lack thereof, they have on local markets. Those findings then factor into AirDNA’s tools and resources that are designed to help you make the best possible decisions for your STR business.

For more insights on the current state of the American STR industry, explore our recent Outlook Report. And to deepen your understanding of today’s most important STR guest trends, check out our new blog on the topic here.

Short-term rental regulations are a polarizing topic and vary from market to market. Discover how regulations can impact your short-term rental business.

How Short-Term Rental Regulations Can Impact Your Business | AirDNA

How regulations impact arbitrage and market health

Understanding How Regulations Can Impact Your Short-Term Rental Business

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