California’s tourism industry is a source of pride across the state. For a savvy real estate investor, vacation rentals might seem like an obvious venture. Tourists need places to stay, after all, and why not offer them an alternative to hotels? Well, not so fast. The legal status of vacation rentals in California is not at all clear. Numerous restrictions may apply, including city ordinances and homeowners’ association (HOA) rules. The “sharing economy” has further complicated the legal landscape throughout the state. San Diego real estate investors should be extra diligent when considering going into the vacation rental business.
What Is a Vacation Rental?
A good working definition of a “vacation rental,” for our purposes, is residential real estate made available for short-term rentals. “Short-term” means that people can rent the property by the day or week, as opposed to residential leases that are usually expressed in months or years.
What Is the Problem with Vacation Rentals?
The short-term nature of the rental can affect the character of the property. If the owner—i.e., the investor—uses the property exclusively, or even primarily, as rental property, it arguably becomes commercial rather than residential property. This can create problems with local zoning ordinances and expose the owner to liability for local taxes charged to hotels and similar businesses.
The main argument in favor of short-term vacation rentals is that a property owner should be able to do what they want with their property, provided that their use of their own property does not harm others. Many of the arguments against short-term vacation rentals focus on alleged harm.
One argument claims that allowing short-term rentals in residential neighborhoods changes the character of the neighborhood, such as by increasing traffic and noise, and therefore it risks lowering the values of surrounding homes. By reducing the total amount of available residential space in an area, short-term vacation rentals could also cause an increase in rent. Lawmakers are trying, with varying degrees of success, to find some middle ground between these interests.
Laws Dealing with Vacation Rentals
Some states have enacted laws regulating and restricting vacation rentals, but California is not among them. Investors considering vacation rentals should first look at local zoning, tax, and business ordinances to see what they can do. A Los Angeles appellate court ruled in 2016 in Chen v. Kraft that renting a spare room through the online service Airbnb violated local zoning laws. If the property is part of an HOA, investors should also look at any relevant rules restricting the use of the property.
Vacation Rentals in San Diego
San Diego’s regulations affecting vacation rentals have almost certainly been a source of many headaches for property owners and renters alike. The city adopted new regulations in 2015 that allowed short-term rentals, but only under specific circumstances. Property owners who rent property on a short-term basis and who do not reside at that property are required to obtain a Transient Occupancy Registration Certificate, which otherwise applies to hotels and other businesses providing lodging.
In early 2017, however, the San Diego City Attorney issued a memorandum stating that short-term vacation rentals are illegal under city zoning laws. The City Council is currently reviewing possible actions, including significant restrictions on short-term rentals. The City of Del Mar, meanwhile, decided earlier this year to prohibit all short-term rentals in areas zoned residential.
Update: Here is our most recent update on the City of San Diego and vacation-rental restrictions.
More Blog Posts:
What California Real Estate Investors Should Know About Commercial Leases, Titles and Deeds, August 10, 2017
What California Real Estate Investors Should Know About Residential Leases, Titles and Deeds, July 26, 2017
What Is the Difference Between Real Estate Syndicates and Real Estate Investment Trusts in California? Titles and Deeds, July 12, 2017