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Home REAL ESTATE New Evidence Shows That Banning Airbnbs Reduces Rent Prices—What Does That Mean For Investors?

New Evidence Shows That Banning Airbnbs Reduces Rent Prices—What Does That Mean For Investors?

by California Digital News

Strict Airbnb regulations and even bans have been popping up left and right. New York City instituted what amounts to one just months ago. Honolulu instituted a 90-day-or-more rule last year. And in places like Dallas, short-term rentals have been banned almost entirely.

While that’s not ideal if you’re heavy in the short-term rental (STR) game, a new study shows it’s not great for long-term rental owners either. In fact, for markets with a heavy short-term rental property presence, a ban on short-term rentals can have a significant impact on long-term rents in the area.

Are you invested somewhere with a big Airbnb presence and a potential ban on the horizon? Just planning where you might invest in your next rental property? Here’s what the study tells us.

Long-Term Rents Take a Hit From STR Bans

The study, which was recently published in Real Estate Economics, looks at the after-effects of the ban on short-term rentals in Irvine, California. In 2018, the city put regulations in place that prohibited rentals of 30 days or less in any residential area.

Irvine enforced it, too, even hiring outside contractors to help root out violators, and by January 2021, the number of short-term rental listings in the city had been cut in half. 

Many of those former STRs were then turned into long-term rentals. This pushed up supply and, according to the study, reduced rents by about 3% citywide in just two years. 

The decrease isn’t huge, especially considering Irvine’s average rent is about $3,000 for a one-bedroom property. But it does speak to the risk investors take when buying in areas with a large STR presence. 

Michael J. Seiler, a professor at the College of William & Mary and one of the study’s authors, said:

“Rental policy can absolutely ruin your financial plan. That’s the only reason you bought this house—as an investment, and you never planned on living there. And now this investment’s revenue just went out the window. I can tell you this from a nerd who builds financial models, it can become really uncertain in terms of how much is this really going to pay off. Is it going to be hugely profitable or hugely unprofitable? And that one decision alone—whether short-term rentals are allowed—can flip that number big time.”

According to the study, properties that have similar property characteristics to area short-term rentals are also at higher risk of rent declines. 

Know the Lay of the Land

Understanding the STR landscape is important before investing anywhere—whether in long-term or short-term rentals. As Seiler explains, a sudden ban can make a big difference in the rents you’re able to command on a long-term property. But if you invest in an STR and are forced to convert it quickly into a longer-term rental? That can throw off your finances, too.

“Yes, you can pivot and convert to a long-term rental, but you didn’t run the numbers on that,” Seiler said. “You better run the numbers both ways and then try to assign a probability that you just might not be able to do short-term, even if you can right now.”

The problem investors may run into is that more cities facing fast-growing rent prices will likely use STR bans as a strategy, putting several businesses at risk and cutting into future cash flow for long-term rental investors.

It’s important, more now than ever, to get a good sense of a market and its relationship with STRs before investing.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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