The Real Estate Law Podcast

2 - Short-Term Rentals, Airbnb, and What Laws You Need to Know

March 03, 2019 Jason Muth / Rory Gill Season 1 Episode 2
The Real Estate Law Podcast
2 - Short-Term Rentals, Airbnb, and What Laws You Need to Know
Show Notes Transcript

In this episode, we're talking all about vacation rentals - Airbnb, VRBO, HomeAway, and all short-term rental opportunities. What are the current laws? What should you consider if you're looking to Airbnb your property? Join Jason Muth and Attorney / Broker Rory Gill of NextHome Titletown and UrbanVillage Legal in Boston, Massachusetts for another episode of The Real Estate Law Podcast!  

Support the show (https://www.urbanvillagelegal.com)

Announcer:

You found The Real Estate Law Podcast, because real estate is more than just pretty pictures and law goes well beyond the paperwork and courtroom arguments. If you're a real estate professional or looking to build real estate expertise, then welcome to the conversation and discover more at RealEstateLawPodcast.com.

Jason + Rory:

This is The Real Estate Law Podcast, episode number two. I feel like we just did this. It's been a while. I've missed you. Yeah. Okay. Well since , since we last recorded, we've been joined by a Rosie, the wonder dog who is, oh, there she is. Hi Rosie. Apparently she can still hear. You're giving me this look. Okay, so already we're off the rails, but this is episode number two of The Real Estate Law Podcast. And, thank you very much for downloading this episode and choosing to listen. Today we're going to talk all about short-term rentals. And when we say short term rentals, we're talking about an industry that actually has been around for quite some time, a lot longer than just in the Airbnb world that we're all in right now. Right, right. In today's context, we keep talking with Airbnb's and VRBO's, but vacation rentals have been around for generations. People have been going up to the lake and the mountains, or down to the beach and renting out homes for quite a while, what's changed in the age of Airbnb is just the sheer number of the, the rental places that are available and where they're located. Now, they're coming into the cities and the suburbs where they weren't before, impacting housing stock and causing a lot more issues and facing a lot more regulation than they used to in the past. Right? So in the past, you used to have to rent these through brokerages or anyone who specializes in renting to short term vacation renters. But right now, we live in a DIY world where you could pretty much get anything you want right from your smartphone. And, just as we've recorded episodes, we actually, full disclosure, we're recording two episodes the same day. So we just recorded episode one, this is number two, but during episode number one, we just received a booking for one of our vacation properties and we own two vacation properties. And, it's always nice to see when you're not really paying attention. Next thing, your phone actually has a booking inquiry. But, this happens all day, every day. You don't have to wait for the agent that you're working with to let that you have a booking and then have them take their 10% commission. It could happen in the middle of the night. It can happen right now. And it also means that you have to pay attention to it all the time, but it can be a great way to invest in a property and get a better return than you otherwise would have if you are renting it out just to a long-term tenant. Exactly. So since this is The Real Estate Law Podcast, we're going to talk about both elements of that, with the short term rental space. We'll talk about the real estate side of it. We'll talk about the law side of it. My name is Jason Muth and I'm a real estate investor. And this is attorney Rory Gill, yes Rory Gill of NextHome Titletown and UrbanVillage Legal. NextHome Titletown and UrbanVillage Legal our attorney broker. Okay. So let's start with, is this field new? We already said that it's been around for a long time. It's not brand new, but it's emerging and with any emerging field of what happens, the law is often are a bit behind the actual technology. Is that true? Right. I mean, the analogy often given to these short term rentals is that taxis have been around for quite a long time in the form that they were, and then Uber came in. It wasn't necessarily a brand new concept, but the way that they deliver the product revolutionized it and created lots of good impacts for everybody. But also a lot of side effects that people did not foresee, and it caused the government to respond with a host of new regulations. Some of them make sense, some of them don't. But we'll dive into that too. Right? Some of those regulations come from local governments. Some come from the federal government. Like how do you tax this? How do you make sure that this is actually income that you can track? Some talking with the, the Uber and Lyft world that we're in, insurance companies want to find out, are you driving your vehicle for profit? Are you driving the vehicle to actually have passengers in the car as well? Who maybe you don't know who they are, what's their liability, there? Same situations with Airbnbs and HomeAway and VRBO. Is that what ins means? I just took a look down and what you wrote - is that insurance? Okay, good. Just remind myself to talk about that later as well. Okay. But you're talking with the host of different government regulations and you started with the federal government. But they're actually very few impacts there. Okay. You have to pay your taxes just the same, the income taxes, but when you go into the state and local level, it's quite the maze. Right. Okay. So let's quickly talk about, first of all, what is this space? How does this work? I mean, I know we might take it for granted that we understand the Airbnb world and how to book there, and why you'd want to go that route, versus staying in a hotel somewhere, but not everyone does. I mean, some people, we'll go to real estate meetups or we'll talk to people, the fact that we have vacation properties that we rent out this way, and we'll get a whole slew of reactions. Sometimes people will be like, oh, that's great. I've always wanted to do that. Or, Oh actually I have one myself. Or, o I've stayed in Airbnb once before too. Why would you want to do that? That sounds like a pain. What are the rules behind that? Isn't it strange having people sleeping in your place? Because we actually also use the properties that we have for vacation rentals. They're kind of thinking about that. They're not really thinking about the rules behind it, the law behind it, any situations we had with acquiring the properties. If we had to disclose how we're going to use it, what have you. So let's, let's talk about this space first. I think that Airbnb is one of those terms. It's like Kleenex, it's like Google. It's one of those terms. It's become a verb. Okay, I Airbnb my place out. Yes. Now, it's, it's crossed over into being an active verb since it's done that, that that is probably one of the leaders in the space. Even though there's a HomeAway, there's VRBO, there is TripAdvisor that also does vacation rentals. There's Vacasa, there's a lot of these different companies out there. But, for the purpose of this conversation, Airbnb is how we classify it. That's how we're going to classify a vacation rental. This is 2019 we're recording this. So, the space isn't new, but what are some things that are some benefits as to why people actually might want to use their property as a vacation rental? Let's start there. You can do a lot more different, a lot more things with the property. You can Airbnb to use the verb, your home, your primary residence, and you can, you wouldn't be able to rent out your primary residence full time. With a vacation property, if you wanted to use it yourself, you can use it when you want it to use it and then Airbnb it for the remaining remaining time. It's, that's not something you can do with a long-term rental. And even if you have no intention of using the property yourself, the numbers can quite simply be better. Renting out a place for a week at a time or even a day at a time can add up to quite a bit more income than renting it out to a long-term tenant a year at a time. That's the benefit. And I think you can already start to see where the problem is with Airbnb. As a renter, if you're looking for a larger space that maybe has the full amenities of your home, or maybe you're staying with your family or a group of friends, you don't want to get their own individual rooms. A lot of times you'll look for vacation rentals to be able to rent a full house, for example, or a larger space that has a yard. Maybe you can kind of live within a neighborhood, kind of feel what it's like to live in whatever part of the country you're renting an Airbnb. And there's some beautiful listings. I mean, I look all the time, at listings around the country and, I would certainly love to stay in some of these Airbnb. They are architecturally gorgeous. It's a very different experience from just a standard hotel in that same city. Right. But the ease of booking now is getting to be very similar to that of a hotel. Exactly. The booking engine is great. I mean, like, as I said, when we recorded the first episode of The Real Estate Law Podcast, we received a booking actually for a week this summer. And it's because we have instant booking set of as long as the booker meets certain criteria with their identification and whatever else HomeAway I think is where we got this booking from. Whatever else they verify. If it's your email address or your identity, they'll let you qualify for instant booking. So, with the Airbnb space, there's lots of different things you have to consider based on the type of property. Right? The situation we're talking about with one of the places that we Airbnb, it's a single family home in a residential community that's also a vacation community and, there's, it's a loose association. There's no regulations about whether or not we can or can't do this. So we're allowed to do it. Right? And that tends to be the situation with the least amount of restrictions. The single family homes. Yes. Right, exactly. Because you own the property, you own the building. It's not a co-living situation where you have to pay a fee toward an association, whether it's a condo association or Homeowners Association. But when you're talking about the cities. We live in Boston, we're recording this in Boston right now. And, there's a whole lot changing, with Airbnb and short term rentals. Not only in the city of Boston, but in the Commonwealth of Massachusetts. There's a, there's a whole slew of things you have to consider. We almost have to date this podcast clearly as February, 2019 because that the rules and the laws are evolving that quickly as the government tries to catch up and impose some level of fairness without overregulating the industry. Where we're sitting in Massachusetts, regulations are actually pretty new. We are the wild,wild east for a while. With no regulations, in the Airbnb space until actually this year. The rules go into effect in July and it's going to force a state registry of all these properties as well as imposing the hotel tax on all Airbnb properties, which can be ranged from anywhere from 13 to 18% depending on where exactly the property is. That's a game changer for Airbnb properties here in Massachusetts. Well, Massachusetts has to get their cut now. And by reputation. It's interesting that they were relatively late to the game. The other state where we do business and have experiences New Hampshire, where they treated Airbnb is as hotels from the very beginning and posing the same level of reporting and taxation that large hotel chains would have on their properties. I remember after we bought the property a few years ago, and this is part of the intention was to basically offset the cost of owning it by doing vacation rentals. Because lots of people around this lake do that. Did we post it on Airbnb? And then what happened? We had not yet had a renter, but we had it available on Airbnb listed before we could even apply for the hotel license. The state sent us a letter demanding that we apply for the license, and there was no penalty that we hadn't applied yet. It was like a gentle reminder like, hey, it was a little bit more than gentle. We obviously want to abide by the rules of whatever municipalities in which we're operating, and we certainly recommend that. Because the alternative is that you could plead ignorance and then the State Department of Revenue is still going to come at you and say, well, that's nice that you didn't know, but it's your responsibility to know these things if we're going to do this. If you're looking at state level, the states tend to be imposing registry restrictions and/or licensing restrictions to make sure that you apply for license or put the property on a registry in their opposing hotel-like taxes on it. It varies widely state to state, but it's something that you want to follow and want to check in with your state on. Right. So in New Hampshire it's 9% currently. Yes. And, we received that letter shortly after we posted it. We don't know how they found us. We have some suspicion. Sometimes, neighbors might rat you out. They might not, who knows. But, we're, we're grateful that they did because, I would prefer not to have gone a year of renting and then them come at us with back taxes for a year plus penalties. We wouldn't have gone a year anyhow. Well, I'm just saying, whatever the period of time is that we would have not known that this was something that we had to do. So we learned this early on and that is a lesson right there. It's like, if you're going to get into this, you need to know the rules of engagement. You have to know exactly what the laws are. You can't say, I didn't know because that's not going to hold up in a court of law. If you owe the money, they're going to come at you for the money. Right. So, we're fine with that. I mean, it's built into the cost right now. In fact, in New Hampshire, Airbnb actually remits the taxes on our behalf and that's been going on since I believe October of 2017 or November of 2017. Well, that's a question I have is whether the increased taxes, even the relatively high taxes are actually going to impede the business of Airbnb properties. Or if the demand is just so strong that the level of taxation almost doesn't matter to the market. I guess what you're suggesting here is very similar to purchasing items online that didn't have any sales tax withheld. And then, when municipalities were saying, Hey, listen, like you can't just buy this online, it's affecting our retailers here in the state or the Commonwealth. You need to pay tax on this as well. Did online shopping go down or did people stop buying things because it was tax free online? Maybe to in a certain extent, but I don't think it's had a huge impact in that business. Last year was an interesting test for us, New Hampshire because, from the first year to the second year, I didn't change....in fact, I think I raised the rates a little bit on the property because the first year we actually remitted taxes from what we collected, so I actually had to back that out and pay that. The second year that we did, this was last year in 2018. And, most of, in fact, I think all of the Airbnbs, I kept that rate where it was or raised it a little bit and then they charge renter's tax on top of that. So that's what they remitted. So we actually, I actually think that we grossed more, or netted more last year because we weren't remitting our taxes out of what we collected. It was being added on top of it. Like a typical taxes, right? Yes. In Massachusetts this year, I remember, we were at our other vacation rental in Provincetown, Massachusetts, and we had just left, I think that day we left and then we checked the email or checked my news later on in the day on, on New Year's Eve, only to see that Governor Baker passed, the Airbnb laws in Massachusetts that same exact day saying that July 1st in Massachusetts, there's going to be taxes imposed on any rentals that happen afterward. We learned that in Provincetown, I think it's 14.75% or it has a 14 something. I'm not sure what the exact number is. But yeah, it's almost 15% tax on top of what our rental fee is going to be. Which will be quite the experiment because it's been 0% here up until now. Right. It has. And, so in a market like Provincetown, like we actually don't have a baseline because we don't know what it was like beforehand. So everything that we know is going to be tax going forward. And, if the market is strong enough to support vacation rentals, then renters are going to pay it, they just are. I mean, I don't think owners are going to absorb this cost, do you? I don't believe they'll have to. It may be very market specific and we'll see how it behaves in the vacation, areas versus the cities. So the cities, okay. So let's talk about that. Since we're in the city, we have have intimate experience with properties around us being Airbnb'ed, and you have professional experience on the law, on the legal side about some work that you've done in this field. So from the personal experience, we live in a multi-unit building here in Boston. Our neighbors, we noticed, one of the units was Airbnb'ing their unit out, a couple years ago. I don't know exact dates of it, but we would kind of see random people on the deck every so often, and they were certainly friendly and they would talk to us and say hi, but we didn't know who they all were. And come to find out that the property was being Airbnb'ed for a little bit. Now why can that be problematic for a situation where there's multiple condos in the same building? So that's another level. We're skipping over the municipal, we'll get to that for now. I'm good because we're recording it where I'm staring at this building. And, I think that we can start there because it's a really easy like personable, relatable story. Condo associations often prohibit short term rentals, and there there's a wide range of reasons. One, people believe that will detract from the quality of life. If a unit in the building has transient populations coming through, people partying for a weekend might behave differently than people who lived in the unit full-time as long-term tenants or as owners. Whether that's true or not is to be seen. But more importantly, loan underwriters often will refuse mortgages to condominium units that allow short-term rentals, and that makes it much more difficult to refinance or sell your unit. So to protect that interest of unit owners, a lot of condominium documents that are being drafted now specifically exclude short term rentals, rentals shorter than one month, three month or six months, effectively banning Airbnb in condo buildings. And that's a new thing that's happening in condo documents now or that that's, those provisions had been put into them over the past few years? They've been clarified, and they've become much more rigid. And this is not just a local thing to here. This is a national underwriting standard for condo units. There's a lot of new construction happening, throughout a number of neighborhoods in Boston. I would imagine that these new buildings are putting this into their condo documents as well. Almost universally. Okay. So, you mentioned something about safety. I do understand that. I mean, I bumped into a neighbor, I don't know, a year ago or so as they were, I think they were selling their unit. And we happened to chit -hat about the Airbnb and they rolled, their eyes and were not thrilled about it. I could tell. And part of me was thinking maybe, they were paying off the association or something and saying, hey, listen, like, just let me finish doing this and I'm going to have a long-term renter in there, but we'll give you 10% or whatever it was. I thought there was a way that they were placating them, but that didn't happen. And it was basically like they did it against everyone's, knowledge. And then, there were people that were coming home and finding random people in the staircase that they didn't know. If it's your, if it's your primary residence, I can understand how that could be a little off putting. And neighbors will complain and it will be banned. Yeah, exactly. As we were putting some notes together for this episode of The Real Estate Law Podcast, you mentioned, discuss the Eastie case and, here in Boston we call East Boston, which is where the airport is located Eastie. And Eastie is a very hot market in the city right now. It's one of the kind of last bastions of redevelopment that's available in the city of Boston. A lot of units are transacting there. There is a lot of development along the waterfront because you have a gorgeous view of downtown Boston from Eastie. So, there's definitely a lot of attention in that market right now. And, developers are looking to make money. People are always looking to make money. I would imagine that some people maybe have an interest in, doing short term rentals in a market like East Boston that is right by Logan Airport that probably has a lot of people coming and going that might be right for that market. Now, what, what was the case that you're referencing? Well, the East Boston case, an example of both of the demand for the short term housing being close to the airport was key to having people come through, but it was also an example of the city's clumsy attempt to impose some regulations on Airbnb properties. At the time, there really were no rules and a client of mine operated an Airbnb in East Boston, and the city came after him for operating an unlicensed bed and breakfast. And I'm not kidding, the city's entire argument that they tortured this guy in court with was that the website was called Airbnb, therefore he's operating a bed and breakfast. Fortunately for us in law there are definitions, but by the time I was brought into the case and by the time we got the hearing before the judge, he spent lots of sleepless nights worrying about the criminal case that the city had brought against him. And we were finally able to make our argument before a judge, the city retracted its case and just withdrew. And shortly thereafter, withdrew all of their cases against Airbnb operators until they can come together with new regulations. But it was a really clumsy attempt and I think it was ethically questionable to come after people with criminal charges. We're not violating any law whatsoever. Right. So not just civil charges. They were saying there was a criminal charge here and in the basis of their argument was that since he was doing it on Airbnb's platform, the, the characters B and B signify a bed and breakfast. So therefore this is not allowed. Right. But in the building state building code, there was a definition of bed and breakfast and that certainly was not met by any stretch of the imagination. And the homeowner that I was working with wasn't dead set on necessarily keeping the Airbnb going on forever and ever. He just wanted the rules to be fair across the board. And he was, I think rightfully upset that he was being singled out by the city and was pretty terrible test case. And this case has been cited right. Since then. This is one of the landmark cases here that's involved with Airbnb, or how would you classify that? I'd say it's landmark because it, the city shortly thereafter withdrew its cases, but the, one of the reasons they withdrew it is the city didn't want this to go up and face a final judgment because if they did so then there would have been a definitive declaration that what they were doing was unlawful. Right. Okay. So, it's an evolving space. There's new laws that are coming out all the time right now. It is very municipality by municipality specific, not even just down to the state, but even to the town or city level. Right? Well, right, because to some degree that makes a lot of sense. Certain cities and towns have very different interests. If you're in a community that is a vacation community, you may face regulations, geared toward that. So we use the towns on Cape Cod for example, that require rental certificates. Those are driven to make sure that houses are not too crowded and that there are certain minimum safety standards. So safety and capacity or the concerns of a lot of those towns. And also making sure that now with the new law that they get, they're paid their share of the hotel tax. But in other municipalities like Boston, the primary concern is the housing shortage. In much of eastern Massachusetts, there is a severe housing shortage and housing costs are going up. Housing inventory is still incredibly low and with the potential profits and Airbnbs, they're taking up a lot of the housing market, preventing homeowners and tenants from finding places to live. So the cities now gearing its new regulation to prevent that problem from getting out of hand. Okay. So, since I don't operate, a vacation rental in Boston, that's what we have our primary residence and, and there's no intention for us to do it, I'm a bit blissfully ignorant of the actual laws that are happening in Boston. I have read about the fact that it is changing something about number of days that you're allowed to rent out to people, I believe. But maybe you can clarify what some of the upcoming laws are going to be. Well, Boston enacted a new ordinance - It's pretty much banned all Airbnbs in the city, sparing only some small property owners the right to rent out rooms in their house or parts of their two or three family if they actually live there. Airbnb is challenging this in court, but Boston is effectively banning Airbnbs and even those will that will continue to operate will have to pay additional fees and go on an additional registry. This is all because the city of Boston has a pretty acute housing shortage, so they're trying to prohibit it. Whereas some of the vacation communities are trying to just control it. I would imagine the vacation communities are probably trying to encourage it too, because a lot of these vacation communities don't have enough hotels or actual bed and breakfast properties that could support the demand for some of these busier weeks. Yeah. So it's about capturing the income that comes into the community, whereas even though we have a hotel shortage as well in Boston, that primary concern is the housing shortage. Right. Okay. So, we could probably go on and on about this and we'll probably have to devote a couple of other episodes to vacation rentals in Airbnbs as we go on. But, since you have both capacities as an attorney and as a real estate broker, what is your opinion of whether or not these are good investment? They are good investment and it's a good way to go. However, you always want to calculate how else a property could be used because there is so much regulatory risk involved with Airbnb is that they could be banned in places like Boston, drastically changing your numbers. So if you were to purchase a property as an investment with the intention of putting it on Airbnb, I would make sure that it also works as a full time rental, or as a flip or a sale because you need other exit strategies. If the laws catch up to you and make it, cost prohibitive or illegal to operate. Do you see a lot of listings that actually talk about the potential of an Airbnb? I mean, maybe not in Boston specifically, but, as you're looking at communities throughout Southeastern Massachusetts or New Hampshire where you're licensed, do you see this like written right in there by brokers? Well, I did in Boston for quite a while, especially multifamily buildings that were not condominium conversions that might have had strange architectural features that didn't make the property great for somebody to live in full time. That a short term visitor would tolerate. That option for those properties has gone away. But you one time not long ago, you would see that in Boston listings. Right. Okay. Now, it's a great point that you talk about having another exit strategy for the properties. And, we think we have that with both the ones that were operating. We're not sure. We're not planning to exit them, but , if somebody does buy property with the intention of vacation, renting that property out and for some reason, if they don't see the return they're looking for after the first year or so, if the market is still strong, they could always just sell the property and move on if they wanted to. If it's in a healthy vacation area that lots of people would want to just naturally own property in. Yes. Cause not every renter in the places that we have, our vacation properties, or not every property owner is actually even renting their places out in the first place. Some folks they just use it themselves. If they, if that's what they choose to do it, they choose to do that. We actually do use the property on occasion. But we certainly liked the bookings. Yeah. And so the other point, Airbnb can also be an interim solution. If you have a gap between tenancies, you can rent out the property in short term stints between the old tenant in the new tenant. So there are other creative ways to use it that aren't the primary economic driver in that may still be legal in places like Boston, but it's, I would always have multiple plans for properties. And if you're going to make more money operating Airbnb, that should be extra. And then there's a whole lot of other considerations, such as if you're going to operate the property as an Airbnb, it'll have to be furnished, right? You'll have to have, someone to clean the property and service the property and sheets and toiletries and all that fun stuff. And you either either have to find and obtain a good property manager or be willing to engage the guest yourself. Right? So, we'll, we'll cover all that in a future episode of The Real Estate Law Podcast. But for now, I think we could wrap it up and, say thank you so much once again to attorney and broker Rory Gill for joining us. Rory, where can people find you? I'm easy to find online at NextHomeTitletown.com or UrbanVillageLegal.com. Excellent. Okay. And My name is Jason Muth, and we really appreciate your listening to The Real Estate Law Podcast. If you wouldn't mind, we love reviews. Hopefully they'll be five stars or at least four, but if you could a jot a quick review for us or if you want to rate this podcast, where you happen to download or whether it was on TuneIn radio or iTunes or Spotify or Stitcher or Google Play or any of the typical podcast platforms, would really appreciate it because the more reviews the get, hopefully the more of this information can be used by others. So, once again, I'm Jason Muth. I'm Rory Gill. And thank you for listening.

Announcer:

This has been The Real Estate Law Podcast, because real estate is more than just pretty pictures and law goes well beyond the paperwork and courtroom arguments. We're powered by NextHome Titletown, Greater Boston's progressive real estate brokerage more at NextHomeTitletown.com. And UrbanVillage Legal, Massachusetts Real Estate Council serving savvy property owners, lenders and investors more at UrbanVillageLegal.com. Today's conversation was not legal advice, but we hope you found it entertaining and informative. Discover more at RealEstateLawPodcast.com. Thank you for listening.