With the First Airbnb Landlord Conviction, Should Vacation Owners Be Worried?

by | BiggerPockets.com

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.


Related: My Client Tripled His Income Using Airbnb: Here’s What He Should Know About Taxes

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.

Related: AirBnB vs. Traditional Rental Income: A Creative Way for Investors to Cash Flow in Expensive Cities

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!

About Author

Brian Davis

Brian is a remote landlord living overseas and long-time personal finance and real estate expert who co-founded SparkRental.com.

SparkRental revolves around helping rental investors and landlords earn more and work less: we provide free rental resources such as a rental property calculator, free income investing video courses, and a free online landlord app that includes a free rental application, instant tenant screening reports, a free lease agreement, automated rent collection and more. Come by SparkRental and say hi to Brian, he loves hearing from readers!


    • Brian Davis

      Most of these laws are based on the term of the rental (usually less than 30 days) – you won’t dodge any bullets by using different services. That said, if your state or city requires hotel taxes collected, be sure to use a website that collects those taxes for you.

      • We use VRBO. We like it because we screen our own prospective guests, collect the payments ourselves and pay our taxes ourselves. It is not hard. We want to decide who stays in our house.

        Just an example: One prospective guest wanted to rent the whole house (7 bedrooms) for just himself, his girlfriend and their dog. We said renting the whole house is pretty expensive and he should pick a smaller place. He said they really like our amenities, and the access to our 30 acres, especially for the dog. Sounds somewhat reasonable, so we said okay, but we will lock the upstairs. He insisted he wanted access to the whole house. This seemed unreasonable to us. We took it as an indication that he was planning a big party, and since he was being cagey about it, we figured it was probably going to be a problem party. So we refused him. Those websites that do everything for you refuse nobody, and then the neighbors complain.

        Different services won’t let you dodge any regulatory bullets, but there are definitely some bullets you can dodge depending on the services you use.

  1. Roy N.

    We have experimenting with AirBnB this summer – on the other side of the continent and in another country, but one with pretty strict rental laws.

    We have specifically set things up on AirBnB to require a minimum stay of 1-week (anything less would require zoning and a licence to be a hotelier). It has brought us three interesting tenants: all international students (who are our normal clientele during the academic year).

    On the business side, AirBnB is not easiest partner with whom to work and their insecurity about being shut out of a booking and censoring of things like e-mail addresses, phone numbers, links to bus schedules, etc from communications between landlords and prospective tenants has cost us another three bookings this summer.

    • Rob Lucey

      Completely agree with your assessment of Airbnb’s business. We’ve used VRBO for a couple of years without major incident. Thought we’d try Airbnb … seems like they generate more inquiries but a smaller percentage translate to bookings.

      Then we had an Airbnb group that broke their promise not to throw a party and left the place in a mess. Trying to recoup costs from the damage deposit Airbnb held. When I finally found somebody to talk to (not easy and it sounded like they were on another planet), he said he’d hold the deposit until I sent receipts. A few days later the deposit was automatically refunded to the party renter and we had to eat our losses.

      So we’re not too happy with them… Had we been able to communicate directly with the renter prior to approving their booking, things might have gone better. And had Airbnb followed up on their promise to hold the damage deposit, it could have at least smoothed things over.

  2. The People’s Republic of Santa Monica at work again. After completing a relatively straightforward commercial deal in Santa Monica 7 years ago, I learned to never do business in that City unless you are in cahoots with the City’s political elite. Santa Monica is likely the most “politically correct” city in the country and they will fight for every tax dollar they can collect

    If you are concerned, select cities where the local government supports private property rights and represents those who have invested their hard earned money in their City.

  3. Tim Bodnar

    This is prime example of someone abusing the system but also politicians not understanding or adapting to anything new. These AirBNB’s bring in huge tax revenue to cities primarily in up and coming neighborhoods (something Santa Monica does not really have). Politicians almost always fail to understand how much more tax revenue a tourist in town for a week brings in then even a high end renter and how that tourist dollar going to neighborhood businesses and the owner of the AirBNB unit will filter back into the local economy as opposed to funds being paid to a hotel or chain businesses near the hotel business. Cities will also have a very difficult time enforcing these rules and will waste a lot of tax revenue doing this (would you rather have that revenue go towards stopping a criminal or to stopping a landlord?). However this guy DID NOT OWN the properties he should not be able to re rent them without the consent of the buildings owners. Cities should also limit people to one AirBNB property outside their personal residence (vacation home) anything more than that is creating the hotel type of business that should require commercial licensing anything less you are preventing people from investing in your city and possibly moving or retiring there. By limiting people to 1-2 AIRBNB rentals you are not affecting housing supply so it keeps the affordable housing advocates happy, you are collecting taxes keeping the city happy, and you are allowing tourism to increase at a nice moderate pace Keeping investors, possible future residents, and even the larger companies like AIrBNB happy. The lack of compromise on this issue and really any new technology (Uber, Driverless Cars, etc.) is appalling they always seem scared and clueless on anything new and rather than learning about it and finding proper solutions they fight it. Typically technology will always win out remember candlestick makers wanted the government to ban lights at one point too.

  4. Besides any Hotel Room Taxes applied, I would love to see stats, if any, on how many Landlords receive that rental check or revenues and report it as income? Probably not many. Why should they get a free ride on taxes anymore than the waitress that pulls in $500 a week on tips..

    • Tim Bodnar

      I have an AirBNB rental and all my income from it is reported to the IRS by AirBNB so I couldn’t avoid taxes even if I wanted too. The way I figure it is by being a host between myself and my guests about 3 times the amount of taxes are collected by local and federal government’s from us versus my “normal” 12 month lease units. This is why government is missing a huge opportunity. If a host generates more income so does the government. As long as you are limited to 1-2 houses per city it has no affect on affordable rentals and is a win win for all parties involved. Unfortunately government and greed will screw it up somehow.

  5. Marcia Maynard

    We are doing one short-term whole house rental through Airbnb. Fortunately our city does not forbid it and even benefits from it. We are bringing extra revenue to our town and into our own pockets. Our income and expenses are reported to the IRS with our annual business tax return and we have no state income tax. Airbnb collects and remits all of the local taxes related to short-term rentals (state, county, city, and hotel tax) from the guest and pays it to the taxing entities. Easy for us. Santa Monica’s folly is in not realizing the potential benefits that short-term rentals can bring to their city and they are expending money to fight it rather than to gain by it. Shatford’s folly was in taking a gamble that the city laws would not be enforced. But he was also intentionally being deceitful. He knew the city laws, didn’t agree with them, and skirted the law to do as he wished. We ask all of our guests and tenants to abide by the law. If there’s a law we don’t agree with, better for us to work at changing it.

  6. Deanne Bourne

    I think, at this point, there may be a national movement against short term rentals organized by the hotel industry. If I were them I would be concerned too.
    I have long term and short term rentals in 3 states and when we looked for a place to retire I checked into their attitude toward short term rentals. It is a casino state so I knew to be careful. We changed our search to a different county bc of their attitude toward short term rentals.
    South Lake Tahoe just passed measure T outlawing vacation rentals in all but the tourist/commercial core. What a surprise that was.
    Short termed rentals do keep the earnings local. I believe Arizona is being smart by allowing them then regulating as needed to keep them neighbor friendly. I have a condo, a house and an apartment all on property that I own. I have had zero problems with guests in two years of nearly continuous service. The negative issues can be controlled.
    If you are involved in the vacation rental or short term rental industry I encourage you to stay informed and politically active. Don’t let the hearsay from the worried competitors be the only voice heard.

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