5 Things Local Governments Need to Know About Short-term Vacation Rentals

U.S. vacation rental revenue is expected to be $17.7B in 2023, up from $10.3B in 2020. And average unique available listings for short-term rentals on Airbnb and Vrbo are expected to increase to about 1.3 million listings this year, up 20% from 2019.

Although this sharing industry started with individual owners looking for ways to make a few extra dollars by renting out an unused room, that is no longer the case. Hosts with multiple units have become a key driver of this short-term rental economy, according to analysis released by CBRE Hotels’ Americas Research.

Why? Because short-term rentals routinely yield 30% more profits for investors than long-term leases.

As it is difficult for local governments and consumers to nail down the exact addresses of properties on platforms like Airbnb and Vrbo, owners may also, unknowingly or otherwise, skirt short-term rental occupancy taxes that go toward schools, fire departments and other important community services. And renters of short-term rental may introduce increased noise and the need for greater trash or policing, often making them a focal point of debate among rental-property owners, neighbors and local governments.

Because short-term rentals are here to stay, it makes sense for local governments to manage them well rather than trying to ban them. So how can city councils make the best policy decisions when it comes to managing these rentals? How can they better collect transient occupancy tax, sometimes known as hotel tax or short-term accommodation taxes? And how can they keep pace as the future of tourism continues to evolve?

Below are five key considerations:

1. Short-term rentals and hotels are similar, yet different.

While AirBnB started with many individuals renting an extra room on their platform, today most short-term-rental hosts own multiple properties and are investors or businesses renting out homes, apartments and guest houses. In fact, Vrbo does not even allow hosts to rent out a shared space, saying they are committed to providing a private experience. Although hotels are used to paying occupancy taxes, rental owners and hosts may not realize the requirements. Platform rentals can be much more difficult to track, as their addresses and owners are often not visible on online platforms and provided privately only after a reservation is made.

The Economic Policy Institute in Philadelphia found that, overall, the shift from traditional hotels to STR lodging often leads to less reliable tax payments. It also suggests that the economic costs of these properties to nearby residents—meeting needs for additional trash pickup, policing and other services—can outweigh their benefits unless proper taxes are collected, necessitating that STRs be subject to the same taxation and regulatory requirements as hotels.

One major difference is that while hotels are often in specifically zoned areas and have an identified number of rooms, short-term rentals can pop up anywhere, including in residential areas where trash, policing and other services are not designed to address higher tourist levels. Their numbers ebb and flow dynamically, making it difficult to project each wave.

2. All short-term rentals activity is “local,” therefore, assessing the issues and where they are located is key.

While short-term rentals that pop up in some residential areas may increase noise, trash and even crime, the reality is that a very small percentage of these properties typically cause problems. City and county governments need to be able to respond to complaints when they happen, but they should also review data to anticipate what, where and when issues may occur to make the best decisions.

Another concern is the potential impact of short-term rental properties on affordable housing. Are the prices of homes becoming unreachable for area residents because of short-term rentals or are values simply going up in the area? The effect these rentals can have on home prices depends on the specific area and its definition of affordable housing. The more data cities have, the better the decisions they can make.

Having access to information on short-term rentals, down to the property level, can help city governments:

• Assess potential issues in relation to zoning.
• Better enforce regulations and deal with potential complaints. In smaller communities or cities, it may be easier to police properties that have received complaints. In larger, more rural counties, such as the San Bernardino desert and mountains, it may take an officer three hours to get to remote areas. Cities and counties might put an officer in areas where they tend to get the most calls on a Friday night.
• Find new short-term rental property owners quickly and get them to follow local rules and best practices so that they operate safely and fairly, which allows for proactive problem prevention instead of reactive problem mitigation.

3. Voluntary collection agreements can have an expensive trade-off.

Airbnb and others engaged in agreements will automatically collect taxes for stays booked on their platforms to help city governments save time and effort. With VCAs, data is aggregated on collections from listings in a particular zip code (versus supplying specific names, addresses and collection amounts). 

However, there is a big trade-off in allowing platform providers to collect occupancy taxes in this manner: City and state governments have no way to verify or audit the accuracy of these payments.

They don’t get information on where short-term rentals happened or for how long (a few days, a week, 30 days or a year) and tax requirements may vary, based on length of stay. Some local governments are also weighing minimum stay requirements, to avoid “party house” rentals of single weekend nights. Knowing just the number of listings (versus properties) is not informative either, as property owners may have multiple listings for a single property, or worse, one license that they are using for multiple properties. 

VCAs do not incorporate those rentals booked on other platforms or offline, so it would require cities to have VCAs with not only Airbnb, but also with Bookings.com, Tripadvisor and Vrbo. And they might still miss the 25% of revenue that doesn’t happen online, according to Statista.

4. Short-term rentals are not just rentals; entire ecosystems have grown to support them.

In addition to the short-term rentals, there is also a huge, rapidly growing ecosystem of businesses focused on supporting the needs of  hosts and guests that local governments need to be aware of. This includes thousands of companies that offer everything from welcome services for guest arrival, cleaning services, software to sync with bookings, local activity experiences, grocery delivery, emergency repairs and more. Local governments need to understand this ecosystem when it comes to their area’s requirements for registration, taxes, compliance, certification and licensing.

5. Technology can help. 

Counties and cities cannot manage what they cannot see or assess. Artificial intelligence, software and analysis tools can help governments to automatically detect, manage and report on short-term rental permits and transient occupancy taxes. Some data mining solutions identify for local governments the properties operating, both legally and illegally, in a given area as soon as they come online with an advertisement that allows for short term rental. 

This data is key to proactively addressing new rental properties, often before property owners even take their first booking. By catching noncompliance issues early, the prospective rental property owner can be brought into compliance and provided the appropriate education for how to be a good neighbor. This is essential to minimize the negative impact on the community, as well run properties seldom disturb their neighbors and receive complaints for problems like noise, trash or parking.

Additionally, technologies, like noise detection devices used in Hollywood, Florida and Henderson County, Nevada as part of short-term rental permitting and home Wi-Fi routers that can sense abnormally high levels of activity, can help in managing these rentals. City and county governments only need to look to best practices implemented in other counties for help.

Short-term rentals are an evolving, quickly growing industry. But with well-regulated, smart policies the market can be a boon for local governments.