Although HH, the Colorado tax reduction initiative was ultimately defeated, there was one profound item…
According to AirDNA 50% of all nightly rentals in Denver are currently unlicensed and not paying the appropriate taxes. Denver implemented various rules to try to crack down on nightly rentals requiring all nightly rentals to be a primary residence. It doesn’t appear this is working if over half the units are still out of compliance. How does this impact real estate values? Does Lake Tahoe have the answer?
The city of Denver has only one compliance officer. By not enforcing the current regulations, the city of Denver has lost over 4 million in revenue. Seems like a no brainer that the city could add a few people at 60k/year and still have an amazing return on their investment.
Change in neighborhood character
Short term rentals drastically change the character of a neighborhood. If you live next to a house used for short term rentals you no doubt understand the impact. In the past, I owned a cabin SW of Fairplay where one of our neighbors put his house up for short term rentals. The problems were immediate. There were issues with noise, traffic, parking, garbage, etc… These conflicts are increasing as more nightly rentals are coming to traditional residential single family homes.
An issue of fairness
Nightly rentals are creating an interesting dynamic of fairness. Is it fair for someone to buy a house to rent to increase their income? As a property owner does he/she have this right? While on the other end of the spectrum another property owner who bought a house to use as a home and yet ended up next to a hotel in a residential area. On the flip side, a hotel must pay commercial taxes and also taxes on each rental, but yet the person renting their property has a “subsidized” tax bill that is substantially lower than the hotel operator and also many don’t pay taxes (in Denver 50% fall into this category). This creates inherent conflict among the three groups that will ultimately lead to change.
Impact on real estate
Nightly rentals are no doubt driving up prices by reducing inventory that could be used for longer term rentals or other homeowners looking to purchase. This decrease in supply is exasperated in already constrained markets like Denver. Why would someone rent monthly when they could get double or triple the revenue by renting nightly? This has led to immense growth in nightly rentals.
Just as fast as nightly rentals have transformed the market, they can go down just as quickly. The majority of nightly rentals are not rented by someone who has a primary residence. Logically if you were renting your primary residence, where would you live? This creates an interesting dynamic since primary residence owners are the ones that can vote in elections.
There is no zoning or regulation that will ensure an owner’s ability to rent their property on a nightly basis. Without this protection, nightly rentals could be toast along with the revenues the owners received as exhibited below.
Lake Tahoe recently proposed a ballot initiative to cap nightly rentals and eventually phase out all nightly rentals outside the business core by 2021 (Sacramento Bee). This would leave thousands without the ability rent nightly on their property (there is an exception for primary residences that they could rent their property up to 30 days a year). Although Lake Tahoe looks extreme banning nightly rentals outside the commercial core, many communities will follow a similar approach as residents get fed up with the nightly rentals.
A nightly rental might look like a great real estate investment on paper, but the potential might be fleeting as increased conflict occurs between residents and investors in many areas. Remember it is residents that get to vote for the new regulations that could ultimately change your fortune so plan accordingly when valuing a property and/or buying real estate.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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