How regulations are restricting this profitable investment strategy.
The establishment of Airbnb in 2008 and the subsequent emergence of similar websites revolutionized the real estate industry. Renting out on a short-term basis escaped the limits of home-sharing and evolved into an independent, full-time real estate investment strategy. Major cities in the U.S. as well as globally experienced an influx of local and out-of-state real estate investors purchasing properties and sometimes entire apartment buildings for the sole purpose of renting them out on Airbnb or other vacation rental platforms. Nationwide real estate market analysis conducted by Mashvisor, a real estate data analytics platform, highlights the fact that short-term rentals yield a considerably higher monthly rental income and return on investment in the majority of the U.S. housing market, including both large cities and small towns and villages. This is what has been driving the spiking demand for Airbnb rentals among investors.
However, as one can imagine, this real estate revolution did not happen unproblematically. The residents of hot tourist destinations as well as local authorities grew concerned about deteriorations in safety, tranquility, and quality of life due to the constant moving in and out of strangers. Moreover, many popular destinations such as Miami and Los Angeles witnessed wild parties on site of vacation rental homes, which raised further apprehension about the effect of Airbnb rentals on local communities. Another major impact of the rapid growth of the short-term rental industry has been making already-expensive housing markets even more unaffordable for both homebuyers and renters. Real estate investors were quick to swipe opportunities in the major U.S. markets, pushing home values even higher. In addition, hundreds of thousands of what-could-have-been traditional, long-term rentals were turned into short-term ones in search of a higher profit. Meanwhile, the deficit in traditional rentals in some locations caused the already-high rental rates to continue to upsurge. These effects were more pronounced in hot markets such as New York, Boston, San Francisco, and Los Angeles.
In response to the swift expansion of Airbnb investing, authorities in numerous U.S. cities decided to act on behalf of locals and impose restrictions and sometimes even prohibitions on short-term rentals. At the beginning of 2020, non-primary residence, non-owner-occupied short-term rentals are no longer allowed in New York, San Diego, Chicago, Boston, Miami, Los Angeles, Las Vegas, and many others. What this means for investors is that in 2020 they cannot buy properties to turn into Airbnb rentals in what used to be some of the most profitable locations for this rental strategy.
So, what will Airbnb investing look like in 2020? And what will the repercussions be on various markets across the U.S.?
Here are some of the most significant trends to be expected in the U.S. housing market as a result of the ever-tightening regulations on vacation rentals:
Property prices and rental rates will drop in places where Airbnb investing is illegal.
As investors cannot buy properties to rent out on a short-term basis in some of the top locations, they will pull out of these markets. This move is expected to have a downward pressure on listing prices and home values, making such markets a bit more affordable for homebuyers. Some investors will choose to switch their rental strategy, turning Airbnb rentals into traditional ones. This will relax the local rental market and lead to a decrease in rents. So, the overall effect on residents is expected to be positive.
Return on investment on long-term rentals will decrease.
As real estate investors switch their short-term rentals to long-term ones, this will increase the supply of the latter. While this will make renting more affordable for tenants, it will also lead to a decline in the rental income and return that landlords can expect. Thus, it is important for investors to conduct investment property analysis to see whether changing the rental strategy or selling their property and moving to a new market makes more financial sense.
Investors will move to places where Airbnb investing is still legal.
Last but not least, investors who favor the short-term rental strategy will relocate to markets where Airbnb is still a viable investment strategy. Some of these include Dallas, Memphis, Phoenix, Philadelphia, Tampa, and Houston. As these locations welcome new investors, they can expect to experience the effects previously felt by other markets. This could, in turn, lead to a new spiral of Airbnb regulations and prohibitions.