At least once a week, I got a message on here from an investor looking to buy a condo or townhome to use as a short term rental for AirBnb in the Phoenix Metro Area or Flagstaff.
Having discussed the pros and cons with numerous investors multiple times, I thought it would be appropriate to share some of the information I’ve learned with the rest of the BiggerPockets community here on the forums.
The Lure of Phoenix Short Term Rentals
Short term rentals are the latest hot trend in real estate investing, and it’s easy to see why. There are lots of upsides to choosing this strategy:
- Lower entry point for pricing (since it’s mostly condos)
- Can experience higher returns than LTR, especially during high tourism seasons
- AirBnb has made it easier than ever to book your property
But despite all this goodness, I can’t help but issue at least a word of warning regarding the future of Phoenix area short term rentals.
Disruption = Legislation & Regulation
AirBnb has been not only a complete disruptor to the hotel industry, it’s also been a disruptor to local neighborhoods and property owners.
And with that, comes lots of regulation.
South Lake Tahoe recently passed a ballot measure essentially banning most short term rentals.
And Laguna Beach just did the same thing:
“We don’t want commercial ‘touristification’ in our residential neighborhood,” said resident Charlotte Masarik.
Ok, well that’s not Arizona… but rumblings of similar complaints are happening in Flagstaff as well:
And Phoenix too:
So let's take a look at what laws regulating short term rentals are already in place.
Current Arizona Legislation
In 2017, a law was passed declaring that cities, towns and counties cannot place any restrictions on short-term rental properties just because the property is not classified as a hotel.
This law specifically targeted any municipalities that were trying to restrict Airbnb and other online lodging marketplaces from operating in the area. The law states there are no restrictions on the number of properties an investor can own and rent using these short-term online rental services. Neither is there a limit to the number of days a home can be rented out in a given area.
On April 11, 2018, Arizona enacted Senate Bill 1382 that requires any online lodging marketing places operating in Arizona to remit all state and local taxes. This clarification means that the individual property owners do not need to individually collect and pay any additional taxes. The online services would be responsible for collecting these taxes from any renters and making payments to the state and local authorities.
Fantastic news right?
Well… not everyone was on board with those decisions…
"I didn't move into a neighborhood to have the house next door to me turned into a weekly rental property,'' said Sen. John Kavanagh, R-Fountain Hills, in voting against the measure.
"We feel the same way at the local level,'' Sedona City Attorney Robert Pickels said. "The city of Sedona feels very strongly that the characteristics that are unique to Sedona and preservation of those characteristics are left to the city of Sedona.''
Pickels reminded the legislature of Arizona's claim to state's rights when objecting to federal legislation is proposed for Arizona, and that local municipalities should have the same rights.
But that fell on deaf ears, as in signing the measure, Gov. Doug Ducey said the legislation provides "financial breathing room'' for families by allowing them to earn something extra.
(Remember that line… it’ll be important in just a bit.)
With the OK from the government, investors nationwide hopped on the gravy train and starting buying up properties in AZ to rent on AirBnb.
But soon after the complaints piled up from neighbors and fellow residents:
Soon after came the renters, who brought an increase in noise, traffic and even recreational use of marijuana, according to the neighbors.
"We were all on edge," neighbor Holly Keeble said. "It was taking away our quiet enjoyment of living."
And now new legislation is headed your way…
Proposed Arizona Legislation
A bill with the backing of 57 Arizona lawmakers from both parties aims to add new regulations to short-term and vacation rental properties like on AirBnb.
House Bill 2672, sponsored by Rep. John Kavanagh, R-Fountain Hills, adds restrictions on the number of people allowed in a short-term or vacation rental property and would require the installation of security equipment, among other additional regulatory measures.
“REQUIRING THE INSTALLATION OF SAFETY AND MONITORING EQUIPMENT THAT MONITORS AND DETECTS THE LEVEL OF NOISE AND NUMBER OF OCCUPANTS ON THE PROPERTY AND THE TRANSMITTAL OF THAT INFORMATION TO THE PROPERTY OWNER OR MANAGER.”
Uhmmmm… you mean like cameras? How else are you going to determine how many people are in the property at any given time? Say hello to Big Brother!
Perhaps some other solution will be proposed (body odor sniffing technology anyone?) but if it's cameras you can bet those vacancy rates will go sky-high as tourists opt for hotels where they can sleep, dress and knock boots in private.
Although, Representative Kavanagh has stated this bill is to target the “major abusers” who host parties and large events in properties that are not intended for that use. So perhaps it will only be if you receive violations or complaints.
"This was sold as a bill to allow individual homeowners to make some extra cash on the side," Kavanagh told The Republic in October. "Unfortunately that morphed into large investment groups (aka you reading this) pooling their cash, buying homes and creating party houses and catering to drunken golf outings."
But here’s the whopper:
“RECEIVES NOTICE OF THREE ADDITIONAL VERIFIED VIOLATIONS OF A CITY'S, TOWN'S OR COUNTY'S APPLICABLE LAWS, REGULATIONS AND ORDINANCES WITHIN THE TWELVE‑MONTH PERIOD AFTER THE SUSPENSION ENDS, THE DEPARTMENT SHALL REVOKE ALL OF THE ONLINE LODGING OPERATOR'S TRANSACTION PRIVILEGE TAX LICENSES.”
If a property gets enough verified violations, the license to rent like this would be revoked.
Meaning if you rent your AirBnb during Spring Training and your tenants get a little too drunk and rowdy a few times, you’re screwed. Property goes back on the market and you’ll have to pay the costs of sale, or switch to long term rental.
This bill isn’t finalized yet, but it’s coming. And these kind of punishments will definitely be included.
HOAs Can Still Ban Short-Term Rentals
Before you purchase an investment property with the goal of using a short-term rental service to generate cash flow, you want to make sure to carefully review the rules around this option if the property has a homeowner’s association.
Land use restrictions within the homeowner association’s governing documents arises under contract law. Therefore it is still legal for the homeowner’s association to place restrictions on the length of a lease or completely ban short-term rentals.
An investor should work with a real estate attorney to make sure that their desired income strategy for the home falls within the HOA CC&Rs before moving forward with any purchase. AND make sure that it would require substantial majority to overturn short term rentals if already allowed. Attitudes can change.
Regulating AirBnb Drives Down Local Rents & Housing Prices
Remember that line about wanting to give Arizona families “breathing room”?
Well, a recent study of LA county showed that regulating AirBnb could help lower rents and home prices.
There’s already pressure from current homeowners on the noise, and now you may get added pressure in the future from potential tenants and owners about prices.
“There are clear distributional implications of the home sharing ordinances. We show that rents will decrease due to the home sharing ordinances, so the average renter will gain. Because of the home sharing ordinances, homeowners lose, while renters tend to gain. This offers a plausible explanation as to why cities around the world that have heavily restricted short-term rentals typically have a high share of renters”
So it's also going to depend on the owner/renter percentages of your community what the attitude may be towards short term rentals. Be sure to take that into account if buying in an area with an HOA.
I don't mean to come off like I'm sounding the alarm on STR's in Phoenix or Arizona and saying they're no longer a viable investment strategy or about to be outlawed.
I’m just reminding potential investors that there is current legislation in the works, and will undoubtedly be more legislation to come in the future.
And while some investors and families will certainly enjoy the “breathing room”, complaints from local families will be ten times louder.
You probably won’t show up at the local town hall meeting to tell everyone why STRs in your area are a great idea...
But the super pissed off soccer mom next door will, along with a story about how one of your tenants oogled her teenage daughter and made her scared and now they now longer feel safe there. That's headline material that will easily sway public opinion.
As ridiculous as this sounds, all you need is one murder or rape case in a short term rental to bring forth an avalanche of new legislation (background checks for renters?).
And don't think people aren't that stupid. This man killed six people while driving for Uber. He claimed a “devil figure” on Uber’s app was controlling him on the day of the shootings.
So there is A LOT outside of your control:
- You can't control future legislation.
- You can't control your tenants and the complaints they may get you.
- You can't control how your neighbors will vote to change the HOA.
Of the 13,000 single family homes for sale in the Phoenix metro market, 9,000 have an HOA. So you've got roughly a 75% chance of having your HOA vote to ban your short term rental.
So when a first time investor asks me about this, after telling him all these details I ask “Does that sound like a scenario you’d want to make a $200k bet on?”
For most of them the answer is no.
But at the end of the day, DO YOUR DUE DILLIGENCE. Far more than you normally would.
This strategy has worked for many an investor, and shall certainly work into the future. But if you buy into the wrong neighborhood or manage your property poorly, you could be in for a world of hurt.
PLEASE SHARE YOUR THOUGHTS:
1. Do you own a short term rental or know someone who does?
2. Do you think short term rentals should be restricted or regulated in any way?
3. What’s your best advice for investors looking to get into short term rentals now?