The First Airbnb Landlord Conviction | Real Estate Investing Blog

Last week saw the first Airbnb landlord conviction in the nation, when Santa Monica convicted vacation rental owner Scott Shatford of eight misdemeanor counts. Over the last three years, more jurisdictions have been outlawing — or at least heavily regulating — vacation rentals owned by individuals. While many vacation rental landlords have doubted the laws will be enforced, Shatford’s conviction might change their tune.

Enforcement Case Study

The City of Santa Monica offered Shatford a plea deal for two years’ probation and a fine of $3,500. While Shatford will not serve jail time (unless he is convicted of a similar crime within the next two years), Santa Monica freely admits it was making an example of him.

“The message is: We will enforce the law,” asserted Denise Smith, a code enforcement analyst for Santa Monica.

But at what cost? The City of Santa Monica has created a task force of three full-time employees (including Smith) to crack down on vacation landlords. Shatford, who owns five vacation rental properties and authored a book on how to make money on vacation rentals, claims the city has spent hundreds of thousands on enforcing this law.

The city spent $1,200 on booking costs alone in the sting on Shatford’s rental unit. Combined with the law enforcement costs and the legal costs of prosecuting him, the city’s fine of $3,500 hardly dents the city’s expenses.

Toward what end? Critics (including Shatford) argue the new laws result from a strong hotel lobby and easier tax enforcement, rather than existing to serve and protect the citizens of Santa Monica.

Laws Targeting Short-Term Rentals

In Santa Monica, new laws explicitly ban leasing an entire rental unit for less than 30 days. They go on to require business licenses of anyone operating short-term rentals, that the landlord or subleasing tenant remain on-site for the entire term, and that the resident pays the city’s 14% hotel tax.

But Santa Monica is hardly alone. New York City also prohibits short-term rentals of less than 30 days, unless the owner/tenant is present. According to New York State Attorney General Eric Schneiderman, a full 72% of Airbnb rentals in New York are illegal.

And is anyone surprised that San Francisco also imposed a ban on short-term rentals?

Aside from the hotel lobby, cities are also eyeing their tax revenue. Many cities charge a hotel tax to sap tourists and are loath to part with any potential tax income. To counter this objection, Airbnb started offering to collect local hotel taxes where required.

While not every city was moved by Airbnb’s offer, in May Arizona governor Doug Ducey signed a law protecting vacation rentals statewide. Under the law, no cities or municipalities in Arizona can ban vacation rentals.

Ducey makes the case that tourist dollars should stay in local communities, rather than fund out-of-state hotel chains. “This bill truly is a win for everyone — it ensures that short-term rentals remain an option for travelers to Arizona and provides enormous economic benefits to local communities, while streamlining the collection of tax revenue.”

Contingencies & Bottom Lines

So, where does all this leave vacation rental owners?

Most U.S. cities still allow Airbnb, but vacation landlords still have cause for concern. With the stroke of a pen, local governments with strong ties to the hotel industry can legislate landlords out of business.

Vacation landlords should have a contingency plan or exit strategy in place. One option is to simply lease the unit long-term to traditional tenants. Another is to sell the property outright.

But the options don’t end there; the only limit to owners’ options is their creativity. Landlords could turn the property into a boarding house or rezone it as a bed and breakfast. Maybe they create a community garden with rentable plots if the property has a large yard. They could sign a lease-purchase agreement, auction the property, or offer seller financing.

The uncertainty surrounding vacation rentals means that investors need to be conservative in their math when considering a new investment. The math has to work not just at optimal vacancy rates and high vacation rents, but for their contingency plans as well.

After all, you never know when your home town will start passing laws, filing criminal charges, and making examples of landlords.

As for Shatford? He’s skipping town. “I’ve decided to move my family to Denver, Colorado, a more progressive city that isn’t in the back pocket of the hotel lobby.”

We’d love to hear from landlords — have you ever tried your hand at vacation rentals? Have you had trouble with local laws and regulations? What trends do you see on the horizon for vacation rentals?

Let me know your thoughts with a comment!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.