Short-Term Rentals, New Regulations, and Appraisal Considerations

The digital age has disrupted many traditional businesses. Ridesharing has upset the taxi business; online marketplaces have, to a large extent, replaced newspaper classified ads. Residential real estate markets are flexing to accommodate fast-growing short-term rental companies such as Airbnb and VRBO. Owner-occupied homes now have the potential for limited rentals; houses purchased for investment may have alternative rental opportunities. Well-informed and competent real estate appraisers account for this new rental model in their residential appraisals.

Is Short-Term Rental the Highest and Best Use?

The first criterion in establishing a property’s highest and best use is whether a use is permissible. States and cities in the U.S. are placing legal limitations on short-term rentals. Massachusetts now has a statute that explicitly addresses short-term rentals; Boston also recently enacted laws for such rentals. In addition, some homeowners’ associations and condominium projects regulate short-term rentals.

In Massachusetts, owners whose short-term rentals exceed 14 days in a year must pay a 5.7% room tax. All short-term rental properties must be state-registered, and all must have liability insurance. The Boston ordinance is even stricter: only owner-occupants may offer short-term rentals, and only one unit per residential property is allowed. Owners must provide contact information to both the city and tenants, and they must notify owners of adjoining properties when these property owners register for short-term rental.

Assuming short-term rental is permitted for a property, its appraiser must ensure that the property’s location is in an area that generates demand. The property should be easily accessible and have features attractive to regular renters.

Short-Term Rental Appraisals: Which Value Approach Is the Best?

The sales comparison approach assumes that comparable sale properties are similar to the subject. Therefore, the appraiser should confirm whether comparables are used for short-term rental. Afterward, these comparables must be adjusted to account for differences in potential rent income.

The income approach assumes that a property’s net income has a measurable relationship to its most probable sale price. But in Massachusetts, especially Boston, short-term rental alone may not be adequate to reflect a property’s worth. In that situation, short-term rental income might be considered complementary, not a primary value indicator.

If there appears to be adequate income to justify an income approach, the appraiser must be sure to account for vacancy, both between rentals and during low market seasons. Also, short-term rental will accrue extra expenses, such as for cleaning, advertising, and marketing.

Conclusion

Appraisers should consider short-term rental as a potential use for many single-family residences. Laws, ordinances, and legal use limitations must first be explored. For properties where short-term rental is allowed, subject property’s location, design, and features must be appropriate. In valuing those properties with their short-term rental included in highest and best use, appraisers must be careful in using the sales comparison approach to select comparable sales that have similar potential use. Adjustments for differences in use are critical since these likely figured in buyers’ choices. In the income approach, appraisers may find that capitalized income for houses with short-term rental potential still doesn’t equal value; in those cases, income may be a complement to value rather than a primary value indicator. In estimating short-term rental income, appraisers must account for vacancy and rental turnover and all expenses incurred to accommodate short-term renters.