Bosley Realestate

Airbnb And The Economy Of Shared Housing

June 15th, 2016 | Real EstateKing West / Niagara / Liberty VillageSt. Lawrence MarketCollege Street/Little ItalyLittle PortugalQueen West

I’ll admit it – I’m an easy target when it comes to viral marketing. But I’d wager that even a hardened cynic might find their interest piqued by the new Airbnb commercials. They're frame after frame of beautiful views, exotic locales, and stunning residential interiors. A soothing self-assured voiceover sells their newest buzz line: “Don’t just go there. Live there”.

 

 

Airbnb is a web-based company – now estimated to be worth almost $20 Billion USD - that connects travelers from all over the world to homeowners who are looking to make extra money by renting out their homes for short periods of time. It was a trailblazer in the now-exploding market of commodity sharing, and has become a titan in the short-term accommodation-sharing world, just as Uber is swallowing the competition in the car-sharing world.

While the website itself is very user friendly, the actual experience of renting out your home to guests isn't always so easy to navigate. Here, we share with you some vital information about the world of short-term vacation rentals.

 

 

The Good, The Bad, And The Unknown

From the perspective of a traveler, the appeal of a site like Airbnb is obvious: spend less money, and experience your destination as the locals do (instead of from within the often inauthentic bubble of a hotel or resort). The perks seem just as straightforward for homeowners; who wouldn’t want to make some extra cash with minimal effort? Millions of people across the world have had very successful and rewarding experiences opening their home to others and pocketing the profits, but, allow us to play the Debbie Downer for a moment and share some of the the serious pitfalls of the popular but very uncharted and unregulated industry.

The reality of the host/traveler contract is far more complicated than a signature and a payday; short-term rental sites like Airbnb and VRBO wade very murky waters legally-speaking, often taking advantage of ignorance and a lack of municipal policy. Allowing individuals to rent out their homes, rooms or apartments to visitors is not in itself illegal, but in many cases the rentals advertised on the site run afoul of local housing laws and regulations. For example, in New York, owners and tenants cannot legally rent their apartments out for short periods (less than 30 days) unless they are also living on the property. What's more, tax issues may arise in cities where those renting vacation accommodations are required to pay a hotel or tourist tax.

Undoubtedly, property insurance coverage is one of the more serious concerns associated with the utilization of short-term rental sites, and carries some of the harshest consequences. What many vacation hosts don't know is that their property insurance coverage could immediately become void upon renting their space, rendering them financially responsible for any and all damage that might befall their property. While lenders require extra insurance on a principal residence that is used as a furnished rental, there are very few insurers that offer coverage for furnished short-term rentals which are not owner-occupied. And while being host to an untrustworthy or poorly-behaved guest may seem like an obvious or acceptable risk, the consequences of that troublesome tourist become direr if, for example, your property insurance coverage evaporates.

While city lawmakers, tax lawyers, and property insurance companies are players to be taken seriously in the vacation rental game, there's no person or body that has made enemies with Airbnb quite as completely as the hospitality industry. They are a particularly infuriated group, due to the ability of short term rental sites to undercut hotel room prices by significant margins, while escaping all the regulatory burdens that hotel and motel operators are subject to, including items such as having proper business and liquor licenses, health and safety requirements, proper signage, and customer identification. In April of 2014, the Economist reported that if Airbnb continues to grow at its current rate, by 2016 it will be taking a 10% bite out of hotels' takings – enough to send many businesses under. The hospitality industry continues to fight back against Airbnb in court and in government, and it's definitely a battle that any aspiring host should monitor.

But it's not all bad news: the majority of vacation rental hosts never run afoul of any serious trouble, legal or otherwise. In fact, Airbnb and its operators have enjoyed unprecedented success since its inception. While the aforementioned dangers are the stories that make headlines and become cautionary tales, many city authorities are fully embracing the economy of shared housing. Two years ago, Amsterdam became the first city to pass an 'Airbnb-friendly law'; the new legislation grants residents the right to rent out their homes for up to two months of the year to up to four people at a time (though multiple applicable taxes must still be paid). France, also on good terms with Airbnb, passed a bill, unchallenged, legalizing short term rentals of primary residences. This kind of 'pro-global community' legislation allows short term rental websites to operate with the clear support of the law, provided they abide by the guidelines unique to each destination. More cities need to take note and follow suit in order to bring this industry out of the shadows and make short-term renting a safer experience.

 

 

Toronto Falls Short In Short-Term Renting

So what about Toronto? Currently, there’s little recourse to poor short-term renting practices under the City of Toronto's existing rules. According to city officials, if individuals want to rent their house, there is nothing to prevent it under current zoning bylaws. That being said, The MaRS Solutions Lab has been hired by the Ontario government to develop a strategy for regulating the sharing economy. (This includes Uber, whose car service is an extremely hot button issue in Toronto right now.) But, as of yet, no legislation has been passed to regulate the 6,800 City of Toronto hosts that have welcomed over 219,000 visitors in the past year alone.

However, as this service grows, there is resistance. The first bodies to impose bans or restrictions on short-term rental websites in Toronto have been condominium boards. In the Rules and Regulations of most condominiums, the vast majority of corporations restrict rentals to tenancies of six months or more. Penalties for disregarding these rules include very hefty fines and immediate termination. This is also a considerable risk for guests. One couple I know rented a suite in Liberty Village but within an hour of arriving the hydro had been shut off with a big note posted on the unit door by the condominium board citing non-compliance. They had to pack their suitcases in the dark and find alternate accommodations. In another instance, my friend found the lobby access card had been canceled on his second day, and when he asked the concierge they said they were aware the condo was being rented as an Airbnb which was being terminated immediately. My pal managed to convince the concierge to let him stay for the weekend. One way owners are trying to circumvent these restrictions is that they meet the guest outside the property and accompany them to the suite, while advising the guest to present themselves as 'friends' of the owner. Apparently, this is quite common.

We faced this issue head-on earlier this year, when one of our Buyers - who works out of the city frequently - asked us to help him find his first condominium purchase in a building that permitted the services of short-term rental sites like Airbnb. The process took a few months. When ideal units in his budget and preferred downtown location would come to market, we would make inquiries to the management companies regarding their short-term rental by-laws. Of the 30 condominium management firms we contacted in the downtown core, only 5 did not have a policy prohibiting the use of short-term rental websites. The other 25 required a minimum 6-month or 1-year lease and expressly forbade the use of airbnb. This is primarily due to safety concerns, and renters who may not take the welfare of the building seriously. Case in point? In March, a man was shot in the head at a property that was consistently rented out – usually for parties – on Airbnb. Then, in April, more gun violence erupted in a Front Street condo, where a gang was using Airbnb to rent out space.

Check out this family company that manages 21 rental properties, and has completed a purpose-renovated Airbnb rental property. They claim to "rigorously" vet their applications and require a minimum five-night stay, as shorter periods tend to draw the party crows: Short-term Airbnb rentals finance sisters' long term vision

As the search continued, we discovered one of the better buildings suited to furnished rentals is the residential sister tower to the Pantages Hotel - located near Dundas Square in the heart of downtown. The building is well-managed, the suites well-priced, and the location well-suited to short-term rentals. As luck would have it, a spacious one bedroom suite with a terrific view met all of our client’s criteria, which he secured with parking and locker for under $400,000!

Here are some pics:

 

Nice, eh? We're just as thrilled as our client that we were able to secure this well-appointed, Airbnb-friendly pad that ticked all the boxes on his wish list!

 

 

Shared Shelter And The Housing Market

The success of Airbnb has already affected Toronto’s real estate market in both obvious and subtle ways. First, the Globe and Mail recently shared a study out of Simon Fraser University that hypothesized that short-term rental websites have helped to drive up property prices, particularly where investment properties are concerned. Whole houses and apartments are standing empty between vacation renters, taking a chunk out of the available rental housing stock while exacerbating the affordable housing crisis. With the consequent scarcity of long term rentals, rents go up.

Secondly, if you are a condominium buyer with an entrepreneurial spirit and wish to become an Airbnb host, your housing options will be considerably diminished. It’s a shame that, in a market that already values freehold housing far above condominiums (with an ever-expanding price gap to match), it is freehold housing owners who are reaping the benefits of short-term rental sites, while most condo owners have their hands tied. But it's not all roses for house owners too. Some of our clients who rent through Airbnb tell us that it's critical to field inquiries and try sleuth out the bad apples. Young adults who live in the suburbs have discovered it's easier to rent a house in the downtown core for the night or weekend to use as a crash pad when they go out partying. They hit the clubs and then bring the party back to the rental, where their pals can pass out when they're sufficiently inebriated. There's less risk of being caught than renting a hotel room and it's cheaper when spread across a large group of partiers in a house with more bedrooms. Our clients see a consistent set of questions that flag the possibility of partiers. They ask "Does the owner live in part of the dwelling?", "Is there any onsite parking and if yes, for how many cars?" and: "How close is it to the night life?" Fortunately, these young adults lack finesse.

One way of ensuring a level playing field for both Guests and Hosts, is that the site has a review system for both. Either party can either leave 'star ratings' or a word review ranking their experience. Categories include 'cleanliness' and 'communications' that begin from the point of contact to completion, ‎so that the system protects the majority who understand that sites with a review system promote good behaviour. It's only the kids who are less invested - or couldn't care less - that are the troublemakers. That said, one friend who runs an Airbnb rental site out of Montreal suggests Hosts only accept Guests who already have an established Rating. It's an easy way to avoid all the potential pitfalls.

All pitfalls and windfalls considered, yes, it is tempting to try one's hand at becoming an Airbnb host. But as hosts continue to ignore condominium rules and regulations, anger their neighbours, risk their insurance (and potentially their mortgage lenders if there are clauses in the mortgage document restricting rentals), and skirt city bylaws, until clear legislation is passed in every city and country, Airbnb will find it hard to shake their shady reputation (not to mention the fines and court cases). So, if you're ambitious about joining the shelter-sharing game, we advise that your first move is thorough research. Look into your city's bylaws, your condo's regulations (if applicable), and review your property insurance policy and mortgage documents. For those that exercise caution and common sense, renting your home has the potential to be a very rewarding experience!

 

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UPDATE July 7th, 2016:

Since the writing of this blog, a new coalition dubbed Fairbnb has launched a campaign urging Toronto city councillors take aim at regulating Airbnb. The government is being asked to look at how other jurisdictions have responded to the "home-sharing crisis" and hopefully gain insight from their successes. Rightly so, Fairbnb believes Canadian cities must modernize their laws and enforcement so that there are fair, consistent, and respectful market rules for short-term rentals. Read a CBC article here.

Fairbnb also welcomes dialogue surrounding Wimdu, 9Flats, and any other networks related to the ever-expanding online home-sharing economy. Visit the Fairbnb website for more information.

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Do you have questions about Toronto real estate? With decades of experience navigating the highs and lows of our market, and our commitment to remain acutely aware of shifts and trends, we're here to help! All without pressure or hassle.

~ Steven and the urbaneer team
earn your trust, then your business

Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage - (416) 322-8000

- earn your trust, then your business -

 

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