The Future of Phoenix Short Term Rentals (AirBnb)

[Wes Blackwell]

At least once a week, I got a message on here from an investor looking to buy a condo or townhome to use as a short term rental for AirBnb in the Phoenix Metro Area or Flagstaff.

Having discussed the pros and cons with numerous investors multiple times, I thought it would be appropriate to share some of the information I’ve learned with the rest of the BiggerPockets community here on the forums.

The Lure of Phoenix Short Term Rentals

Short term rentals are the latest hot trend in real estate investing, and it’s easy to see why. There are lots of upsides to choosing this strategy:

• Lower entry point for pricing (since it’s mostly condos)
• Can experience higher returns than LTR, especially during high tourism seasons
  
• AirBnb has made it easier than ever to book your property

But despite all this goodness, I can’t help but issue at least a word of warning regarding the future of Phoenix area short term rentals.

Disruption = Legislation & Regulation

AirBnb has been not only a complete disruptor to the hotel industry, it’s also been a disruptor to local neighborhoods and property owners.

And with that, comes lots of regulation. 

South Lake Tahoe recently passed a ballot measure essentially banning most short term rentals.

https://www.rgj.com/story/money/business/2018/12/06/most-airbnb-vacation-home-rentals-banned-south-lake-tahoe/2233124002/ 

And Laguna Beach just did the same thing:

https://www.latimes.com/socal/daily-pilot/news/tn-dpt-me-lb-council-20190505-story.html

“We don’t want commercial ‘touristification’ in our residential neighborhood,” said resident Charlotte Masarik.

Ok, well that’s not Arizona… but rumblings of similar complaints are happening in Flagstaff as well:

https://azdailysun.com/news/local/airbnb-a-boon-for-owners-headache-for-neighbors/article_1abd0fbb-83ee-54d6-96c3-cd753349094f.html

And Phoenix too:

https://www.azcentral.com/story/news/local/phoenix/2018/11/30/airbnb-rental-home-closes-shop-after-neighbors-ban-vacation-rentals/2025777002/

So let's take a look at what laws regulating short term rentals are already in place.

Current Arizona Legislation

In 2017, a law was passed declaring that cities, towns and counties cannot place any restrictions on short-term rental properties just because the property is not classified as a hotel.

https://azdailysun.com/news/local/despite-local-objections-new-year-s-laws-include-airbnb-expansion/article_52d485d5-79cd-567f-943c-bff142e9493c.html

This law specifically targeted any municipalities that were trying to restrict Airbnb and other online lodging marketplaces from operating in the area. The law states there are no restrictions on the number of properties an investor can own and rent using these short-term online rental services. Neither is there a limit to the number of days a home can be rented out in a given area.

On April 11, 2018, Arizona enacted Senate Bill 1382 that requires any online lodging marketing places operating in Arizona to remit all state and local taxes. This clarification means that the individual property owners do not need to individually collect and pay any additional taxes. The online services would be responsible for collecting these taxes from any renters and making payments to the state and local authorities.

https://legiscan.com/AZ/text/SB1382/id/1738135

Fantastic news right?

Well… not everyone was on board with those decisions…

"I didn't move into a neighborhood to have the house next door to me turned into a weekly rental property,'' said Sen. John Kavanagh, R-Fountain Hills, in voting against the measure.

"We feel the same way at the local level,'' Sedona City Attorney Robert Pickels said. "The city of Sedona feels very strongly that the characteristics that are unique to Sedona and preservation of those characteristics are left to the city of Sedona.''

Pickels reminded the legislature of Arizona's claim to state's rights when objecting to federal legislation is proposed for Arizona, and that local municipalities should have the same rights.

But that fell on deaf ears, as in signing the measure, Gov. Doug Ducey said the legislation provides "financial breathing room'' for families by allowing them to earn something extra.

(Remember that line… it’ll be important in just a bit.)

With the OK from the government, investors nationwide hopped on the gravy train and starting buying up properties in AZ to rent on AirBnb. 

But soon after the complaints piled up from neighbors and fellow residents:

Soon after came the renters, who brought an increase in noise, traffic and even recreational use of marijuana, according to the neighbors.

"We were all on edge," neighbor Holly Keeble said. "It was taking away our quiet enjoyment of living."

https://www.azcentral.com/story/news/local/phoenix...

And now new legislation is headed your way…

Proposed Arizona Legislation

A bill with the backing of 57 Arizona lawmakers from both parties aims to add new regulations to short-term and vacation rental properties like on AirBnb.

House Bill 2672, sponsored by Rep. John Kavanagh, R-Fountain Hills, adds restrictions on the number of people allowed in a short-term or vacation rental property and would require the installation of security equipment, among other additional regulatory measures.

https://www.azleg.gov/legtext/54leg/1R/bills/hb2672p.htm

“REQUIRING THE INSTALLATION OF SAFETY AND MONITORING EQUIPMENT THAT MONITORS AND DETECTS THE LEVEL OF NOISE AND NUMBER OF OCCUPANTS ON THE PROPERTY AND THE TRANSMITTAL OF THAT INFORMATION TO THE PROPERTY OWNER OR MANAGER.”

Uhmmmm… you mean like cameras? How else are you going to determine how many people are in the property at any given time? Say hello to Big Brother!

Perhaps some other solution will be proposed (body odor sniffing technology anyone?) but if it's cameras you can bet those vacancy rates will go sky-high as tourists opt for hotels where they can sleep, dress and knock boots in private.

Although, Representative Kavanagh has stated this bill is to target the “major abusers” who host parties and large events in properties that are not intended for that use. So perhaps it will only be if you receive violations or complaints.

"This was sold as a bill to allow individual homeowners to make some extra cash on the side," Kavanagh told The Republic in October. "Unfortunately that morphed into large investment groups (aka you reading this) pooling their cash, buying homes and creating party houses and catering to drunken golf outings."

But here’s the whopper:

“RECEIVES NOTICE OF THREE ADDITIONAL VERIFIED VIOLATIONS OF A CITY'S, TOWN'S OR COUNTY'S APPLICABLE LAWS, REGULATIONS AND ORDINANCES WITHIN THE TWELVE‑MONTH PERIOD AFTER THE SUSPENSION ENDS, THE DEPARTMENT SHALL REVOKE ALL OF THE ONLINE LODGING OPERATOR'S TRANSACTION PRIVILEGE TAX LICENSES.”

If a property gets enough verified violations, the license to rent like this would be revoked.

Meaning if you rent your AirBnb during Spring Training and your tenants get a little too drunk and rowdy a few times, you’re screwed. Property goes back on the market and you’ll have to pay the costs of sale, or switch to long term rental.

This bill isn’t finalized yet, but it’s coming. And these kind of punishments will definitely be included.

HOAs Can Still Ban Short-Term Rentals

Before you purchase an investment property with the goal of using a short-term rental service to generate cash flow, you want to make sure to carefully review the rules around this option if the property has a homeowner’s association.

Land use restrictions within the homeowner association’s governing documents arises under contract law. Therefore it is still legal for the homeowner’s association to place restrictions on the length of a lease or completely ban short-term rentals.

An investor should work with a real estate attorney to make sure that their desired income strategy for the home falls within the HOA CC&Rs before moving forward with any purchase. AND make sure that it would require substantial majority to overturn short term rentals if already allowed. Attitudes can change.

Regulating AirBnb Drives Down Local Rents & Housing Prices

Remember that line about wanting to give Arizona families “breathing room”?

Well, a recent study of LA county showed that regulating AirBnb could help lower rents and home prices.

https://voxeu.org/article/short-term-rentals-and-housing-market

There’s already pressure from current homeowners on the noise, and now you may get added pressure in the future from potential tenants and owners about prices.

“There are clear distributional implications of the home sharing ordinances. We show that rents will decrease due to the home sharing ordinances, so the average renter will gain. Because of the home sharing ordinances, homeowners lose, while renters tend to gain. This offers a plausible explanation as to why cities around the world that have heavily restricted short-term rentals typically have a high share of renters”

So it's also going to depend on the owner/renter percentages of your community what the attitude may be towards short term rentals. Be sure to take that into account if buying in an area with an HOA.

Caveat Emptor

I don't mean to come off like I'm sounding the alarm on STR's in Phoenix or Arizona and saying they're no longer a viable investment strategy or about to be outlawed.

I’m just reminding potential investors that there is current legislation in the works, and will undoubtedly be more legislation to come in the future.

And while some investors and families will certainly enjoy the “breathing room”, complaints from local families will be ten times louder.

You probably won’t show up at the local town hall meeting to tell everyone why STRs in your area are a great idea... 

But the super pissed off soccer mom next door will, along with a story about how one of your tenants oogled her teenage daughter and made her scared and now they now longer feel safe there. That's headline material that will easily sway public opinion.

As ridiculous as this sounds, all you need is one murder or rape case in a short term rental to bring forth an avalanche of new legislation (background checks for renters?). 

And don't think people aren't that stupid. This man killed six people while driving for Uber. He claimed a “devil figure” on Uber’s app was controlling him on the day of the shootings.

https://www.theguardian.com/us-news/2019/jan/07/uber-driver-michigan-kills-six-guilty-plea

So there is A LOT outside of your control:

• You can't control future legislation.
• You can't control your tenants and the complaints they may get you.
• You can't control how your neighbors will vote to change the HOA.

Of the 13,000 single family homes for sale in the Phoenix metro market, 9,000 have an HOA. So you've got roughly a 75% chance of having your HOA vote to ban your short term rental.

So when a first time investor asks me about this, after telling him all these details I ask “Does that sound like a scenario you’d want to make a $200k bet on?” 

For most of them the answer is no.

But at the end of the day, DO YOUR DUE DILLIGENCE. Far more than you normally would. 

This strategy has worked for many an investor, and shall certainly work into the future. But if you buy into the wrong neighborhood or manage your property poorly, you could be in for a world of hurt.

PLEASE SHARE YOUR THOUGHTS:

1. Do you own a short term rental or know someone who does?

2. Do you think short term rentals should be restricted or regulated in any way?

3. What’s your best advice for investors looking to get into short term rentals now?

[Chris Pike]

@Wes Blackwell thank you for a great post! This is a very comprehensive overview of the short-term rental market here in the Phoenix metro. I also see a ton of people being lured in by the high returns of the STR strategy here, and many of them are not taking all of these factors into consideration when they need to be. At least if they plan on using this investment strategy for the long term.

1. I have 3 short term rentals here in Phoenix.

2. I am obviously a little bias, but I feel some of the regulations that are being considered and already imposed in other cities is too much.

It is very easy for people to push horror stories and say that short term tenants are going to disrupt the neighborhood with noise, traffic, parties and god forbid smoking weed. Although, the same thing could very easily happen with a long-term tenant, or even a neighboring property owner. I have experienced this personally on multiple occasions. Growing up I lived in a very safe middle-class neighborhood in Billings, MT. My neighbors across the street (who owned their property) had an older son who sold drugs from their home. Heavy flow of traffic, cops regularly coming to the property, and all of the other complaints people have about short-term tenants applied. More recently, I lived in a condo here in Downtown Phoenix in a small tight nit community of residents where the HOA banned short term rentals. While living at the property, my neighbor (who owned the property) got a new boyfriend who loved to party. At least 3 times a week they would be blasting music until 4 in the morning or even later. We approached them multiple time asking them to keep quiet and it still kept happening.

The worst part about these situations is at the end of the week these people didn't leave to return to their home. This was their home, and we were stuck dealing with them as long as we lived there or either of us decided to move. In both of these situations I would have gladly replaced my neighbor with a short-term rental knowing that this stuff would happen occasionally, but most likely not nearly as frequently as we already had to deal with them. 95% of our guests are respectful and we never hear any complaints about them from neighbors. This may be different in areas that are more conducive to parties, such as Old Town Scottsdale. Although, from our experience we have very rarely had the nightmare guest that is described in all of these claims.

I also feel that it is easy for people to demonize "large investment groups" that are coming in and destroying their neighborhoods. From what I have seen locally most of our competition in the short-term rental space is individuals with a few properties being ran as short-term rentals like ourselves, or individual owners with only one property. In all reality, it seems like these people are trying to pool small investors, including many here on BP, with large "evil" corporations. There are a couple big players such as Wander Jaunt and Sonder. Although, Sonder seems to stick to partnering with larger apartment complexes in listing a few of their units. Wander Jaunt is a little more across the board with their rentals.

Also, many property owners I see doing short-term rentals are renovating their properties substantially before listing, us included. Many of our neighbors are very happy to see improvements being made to dilapidated properties next door, bringing up the value of their neighborhood.

I can understand and see many points being made against short term rentals. Although, I feel that some of the claims are sometimes a stretch and could easily be flipped to a bad long-term tenant or property owner.

This may be a little more than what you wanted to hear, although this is my two cents on the situation.

3. My advice to investors looking into this strategy is to look into all aspects that you outlined in your post. Pretty simple. Do not buy a property in an HOA as they can easily shut you down. Make sure any property you purchase makes sense as a long term-rental as well so if any future regulation comes down on AirBnBs you have a back-up strategy where you don't have to sell in a potentially down market. Also, try to find a property where you can add value so when you do end up selling (forced or by choice) you have additional margin.