Navigating Regulatory Risk in Real Estate Investing

Diving into the complex landscape of short-term rental regulations.

Navigating the ever-evolving regulatory landscape of short-term rentals (STRs) can seem like navigating a maze with ever-changing walls. From state mandates to neighborhood covenants, the variety and scope of regulations affecting STRs can be as varied as the properties themselves. This blog post aims to serve as a primer on the types of regulation that impact STR operators and offers insights on how to effectively maneuver through these regulatory waters.

Levels of Regulation

State-Level Regulation: At the state level, legislation might dictate overarching rules affecting STRs across all municipalities within the state. These can range from tax collection duties to broader operational guidelines designed to ensure safety and fairness in the STR market.

Municipality: Local governments often have the most direct impact on STR operations through zoning laws, operational restrictions, and licensing requirements. These regulations are tailored to the specific needs and concerns of the local community.

Home-Owners Association (HOA): For properties within HOA-governed communities, additional rules may apply. These associations have the power to restrict or outright ban STRs within their jurisdictions, often through covenants, conditions, and restrictions (CC&Rs) that homeowners agree to upon purchase.

Types of Regulation

In preparing my report on the "State of the State of Short-Term Rentals in Michigan: 2024," (available HERE), I delved into the regulatory frameworks of 40 Michigan municipalities. The findings were categorized into three primary buckets:

1. Residential Dwellings: Regulations that apply to all residential properties, focusing on safety and community impact. This includes adherence to building codes, installation of smoke and carbon monoxide detectors, and compliance with local noise, trash, and parking ordinances.

2. Rental Properties: This category covers requirements specific to rental operations, such as registration, licensing, and potentially an inspection process. It aims to ensure rental properties meet basic safety standards and that tenants or guests are informed of their rights and responsibilities.

3. Short-term Rental Regulations: These are regulations specifically targeting STRs, including zoning restrictions, caps on the number of STRs, and mechanisms for complaints or concerns related to STR operations.

Understanding What Regulations Apply

It can be tough to navigate what regulations apply; so lets talk a bit how to navigate this. It can be a bit like playing detective, but I think calling the local muncapality office can offer a world of insights!

Authority to Regulate: Determining who holds the regulatory reins can be complex. The authority can lie with different levels of government or with HOAs, each with its own set of rules and enforcement mechanisms.

Resources: To navigate this landscape, STR operators can turn to several key resources:

Municipal Governments: The Zoning Administrator or equivalent office is typically the starting point for understanding local STR regulations and possible local tax laws as well. I advise my clients to also review minutes of City Planning and/or City Council mintues to ensure no changes are coming and advise to join lock social media forums and search on key terms to assess if the environment is hostile or friendly toward STR. Some muncipalities may not regulate.
HOA Bylaws: For properties in HOA communities, the association's bylaws are crucial documents that outline what is and isn't allowed. Keep in mind, some HOA have older language about transient lodging which has been intrepreted to apply to STR, so don't presume if it doesn't say its banned that you won't find yourself in a pickle when the Board comes knocking. I personally don't invest in areas with HOA unless its explicitly allowed.
State Legislation: State government websites provide access to statewide laws affecting STRs, including tax law.

Common Regulatory Issues

Lack of Parity in Ordinances Ordinances specific to STRs, like noise restrictions, present a notable lack of parity. Noise can indeed be generated by any resident, not just STR guests. Regulations focusing singularly on STRs for issues applicable universally across residential settings may not only be unfairly restrictive but also can foster unnecessary divides within communities.
Erosion of Property Owner Rights: Some regulatory approaches risk infringing on property rights by implementing restrictions without relying on informed, data-driven insights into the role and impact of STRs. Blanket bans or overly restrictive zoning can deter the potential benefits STRs offer, from tourism boosts to additional income for homeowners.
Misclassification as Motel/Hotel Operations: Treating STRs like motel or hotel operations overlooks fundamental differences, particularly regarding guest density, traffic, and overall risk profile. STRs, often nestled within residential areas, do not inherently bring the high turnover and public usage characteristic of commercial lodging facilities.
Inconsistent Policies on Home-Based Businesses: The contention that STRs constitute disallowed home-based businesses, while other types, such as group homes or in-home daycare centers, are permitted, highlights inconsistencies in regulatory practices. Such disparities can undermine the legitimacy of STRs as a viable economic activity within the scope of residential zoning.
Misuse of Zoning to Ban STRs: Employing zoning laws to outright ban STRs misinterprets the intent of zoning, which is primarily concerned with land development impacts - issues like flow of traffic, use of resources, and pollution are items considered for zoning. STRs generally have no more impact on land use than any single-family home. Comprehensive master planning should consider whether limiting STRs aligns with community goals and needs, rather than defaulting to restrictive zoning as a means to control STR proliferation.
Housing shortages. Studies have started to highlight that banning STR is not returning homes to housing supply; as second homes or even having multiple homes, home owners utilize STR to fund a nomad lifestyle or vacation home, and if banned retain those properities as short-term renting was never the sole purpose for owning the propety. Communities should not, without careful analysis, act to ban STR beliving it would have a meaningful impact on housing availability. While in some communities there may exist a larger supply of commerically aquired STR, that is not the norm, and availability of housing is a complex issue with multiple factors - most with far more meaningful impact than STR.
Navigating New Regulations. Grandfathering in existing STR when new limitations are implemented is not a sure thing; don't assume new regulations don't apply or that your STR is "safe". While attrition is a far better approach, clarity is the best approach and regulators ideally address this when changes are being discussed.

Navigating Regulations: Tips for Success

Conduct Thorough Research: Before purchasing a property or launching an STR, verify the regulatory environment. This might mean reviewing state laws, local ordinances, and HOA bylaws.
Stay Informed: Regulations can change, so it's important to stay up-to-date with local government proceedings, community meetings, and relevant legal developments.
Engage with the Community: Building positive relationships with neighbors, local officials, and community members can provide early warnings about regulatory changes and offer opportunities for advocacy.
Seek Professional Advice: When in doubt, consult with a legal expert or a professional experienced in STR regulations to navigate complex or ambiguous regulatory environments.

Understanding and complying with the myriad regulations affecting STRs is essential for sustainable operation and profitability. By staying informed, engaged, and proactive, STR operators can successfully manage regulatory risks and capitalize on the opportunities within the dynamic STR market.

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My business The CEO Host is all about helping STR owners and manger run their business like a Boss; around here, we leverage solid business principles, goals, and lifestyle focused investing to achieve our life's vision. We laugh at ourselves for taking on too much, reward ourselves for leveling up not just our lives - but our kids lives too, and live intentionally. If you are looking for some help to achieve this, lets CHAT and see how I can support you - be it getting more clarity, more organized and efficient, or just starting. My corporate experience, education, and logical, strategic approach to business has been a boon to short-term rental owners, operators, investors. I'm here to help those seeking to be in achieving goals faster with more confidence.

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Hey Boss! I'm Kate, owner/founder of The CEO Host. If you are interested in taking a leap into short-term rentals - or have some questions about your existing business, my goal - passion, and career, is to help YOU succeed. I've coached hundreds of folks getting started or looking to optimize, analyzed more deals (and duds) than I could count, completed thousands of hours of education and training, attended conferences... So don't be shy. A good CEO knows to bring in expert help - and that's what I'm here for! Lets HOP ON A CALL and chat!

Categories: regulation