Hi John, I know this is not a one-size fits all question / answer. When do you choose to sell a rental property? Let’s assume that I own property that is a good area that is appreciating in value, it’s also easy to rent (positive cash flow), and say that I’ve paid it off. When do I choose to sell it? I know that depends on a lot of factors: what would I reinvest etc? Just wondering what some of the models that you use for exit strategy? Maybe never sell – just C/O refi and reinvest in another unit?
Dear Thinking of Selling,
Deciding when to sell a property will depend on many factors – current market values, current interest rates, needs or plans for the equity in a property, among others. If you generally think you want to sell or tap the equity in a property there are a few major options that I would associate with various motivations:
Sell the property, pay capital gains taxes, and have the funds free and clear for anything. Probably the best bet if you’re tired of owning property and being a landlord or want the money to be liquid and available for travel, spending, or non-real estate investments. Paying taxes isn’t fun, but capital gains rates are lower than ordinary income tax rates which is a benefit.
Do a cash out refinance and use the proceeds to invest in additional real estate, or for other uses. In the current mortgage environment interest rates are very low and you can both lock in very low rates for decades to come and access the equity in the property (up to 70% or 80% loan-to-value) and take the funds to do anything – pay off credit card debt, go shopping, or buy another property. The cash out refinance will increase the monthly mortgage payment so you may want to look at the current property performance and if the property will still cash flow well for you.
Sell the property and do a 1031 exchange. A 1031 has some specific rules to it but basically you sell the property as normal but the funds go to a 3rd party administrator and have to be reinvested into another property within a relatively short time period. A 1031 exchange defers any capital gains taxes, so you don’t have a tax bill until the new replacement property is sold. 1031 exchanges are popular with real estate investors for the tax deferment, and as a tool to scale up in size. If your property has had good appreciation you can take that appreciation and lever it up with a new investment property mortgage. (For example a typical investment property will require 25% down payment so if you have had $100K of appreciation that will allow you to buy $400K of property.)
If you want to continue being a real estate investor I’d highly recommend Option 2 or 3 above. If you don’t, then Option 1 is probably your best bet. Option 3 will be best if you want to grow your real estate investments and Option 2 is better if you’re not sure if you want to invest in real estate or other areas.
I personally plan to keep investing in real estate consistently for many years to come so I would likely do the cash out refinance if there is a good amount of equity in the property, and given the current low mortgage rate environment. I’m not sure where your property is located, but that may also play into the picture as some places like California can have substantial tax benefits to holding a property long term rather than selling and reinvesting in another property.
Little Italy continues to grow and become a better place to visit and live. The most recent addition to the neighborhood is Piazza della Famiglia – a 10,000 square foot public plaza with apartments above and 16,000 feet of retail and restaurant space surrounding. This plaza was formerly a short block of Date Street but per an agreement between the developer, H.G. Fenton, and the City of San Diego the street was vacated and a beautiful public space was created, paid for by private dollars.
The plaza isn’t fully open yet but a few of the businesses are and when I stopped by today on a sunny, gorgeous day around noon there were people chatting and having coffee, a family walking their baby in a stroller, and a number of passersby traversing the plaza on foot and bicycle. There’s currently a small tent set up with leasing information for the two apartment buildings that H.G. Fenton built next to the plaza – Vici and Amo – which add 125 units to the area.
Here are a number of photos I took of the plaza. The Little Italy Farmer’s Market (every Saturday and the best in the region if you ask me) will soon return to Date Street and the scene is going to be better than ever.
It’s awesome to see the neighborhood and the City choosing a public space over a handful of mostly free parking spaces (metered during part of the day) that previously occupied the plaza space. For a comparison I checked out the two closest similr streets, which are similar size – Cedar and Fir. When I stopped by Cedar had 10 total vehicles parked and Fir had 20, including one person moving from one meter to another and a parking enforcement vehicle looking for ticketing opportunities. Needless to say, these streets that are devoted to cars and parking had zero persons enjoying the square footage occupied by the empty traffic lanes and parking spots.
Which would you prefer for your neighborhood? 15 empty cars on a block, or a beautiful public plaza with shops, fountains, tables, and a place to sit and enjoy life? This sort of opportunity is available in spaces across San Diego, if we choose to embrace it. More likely we’ll see massive amounts of additional free street parking across the city, as soon to come to North Park, due to the City making it easier than ever to quickly give over more public land to parking. I’d prefer more plazas, trees, and life – hopefully you’ll join me in working for the same. And don’t forget to check out the Little Italy Farmer’s Market – a great start to the weekend for locals and visitors alike. I’d recommend taking a bike-share bike, hopefully by the time you visit the local business association will have stopped sabotaging those programs in Little Italy.
The City of San Diego continues to discuss options for regulations and rules around short-term rentals on sites like Airbnb. Short-term rentals are rentals for less than a full calendar month and have been the topic of discussion at a number of City Council and committee hearings over the last few years.
I recently received an inquiry from a San Diego resident that would like to rent out one or two bedrooms in the home they live in – sharing a room or home with guests is often referred to as “home-sharing”. Home-sharing is frequently brought up in the short-term rental debate with both sides typically saying there is no issue with this type of activity. (However, home-sharing is the only type of short-term rental I’m aware of that the City of San Diego took to court, and ultimately the judge decided that this type of activity is not allowed under current rules and issued a fine to that host.)
The prospective host in this case was looking to do the right thing and get clarity from the City before hosting on Airbnb. They contacted several City departments regarding how to fill out the right information for the Transient Occupancy Registration Certificate( “TORC”), if a Business Tax Certificate is required, what taxes they need to pay, and if there are other regulations they need to follow for lawfully renting out rooms via platforms such as Airbnb.
On the response to the prospective host, the city was clear and straight-forward in providing the process to register for the TORC, what kind of taxes the host would need to pay, etc. The Transient Occupancy Tax (i.e. hotel tax) is not part of the debate and proposed short-term rental rules – it is already in place and collected (and in the case of Airbnb remitted for all hosts on the platform each month by the platform itself).
However, in regard to other requirements for operating an Airbnb, the prospective host was directed to consult the Development Services Department (in charge of Land Use and Development). Surprisingly, when the host reached out to Development Services they were told that since there are no official regulations or rules around short-term rentals, this kind of activity is currently not allowed in San Diego. That’s when the host reached out to me, as part of my efforts with the Short-Term Rental Alliance of San Diego (STRASD) – seeking clarity the city couldn’t provide and how they should proceed.
The contradiction between the responses from different City departments is confusing but accurate. Yes – you can register and pay the taxes for this sort of activity. No – you can not engage in this type of activity in the first place. This is the current status of short-term rentals in San Diego, at least for home-sharing situations. It still seems that whole-home short-term rentals may be on firmer ground, although the current City Attorney has declared all short-term rentals illegal. [Note: the previous two City Attorneys held a different position, that short-term rentals were not illegal.]
This sort of lack of clarity is harmful to potential hosts like the one highlighted in this post – a San Diego resident seeking to improve their economic position and do so in a straight-forward and compliant manner in the type of short-term rental that is roundly approved of and supported. We need clarity to support residents like this and should encourage this type of widespread entrepreneurial opportunity to give citizens more options and ability to chart their own desired course. Hopefully in the months ahead we will see clarity that gives certainty to current and potential hosts and guests and that supports the opportunity that platforms like Airbnb and others gives to many thousands of San Diegans.
Thanks to a request from the Mid-City Parking District a number of streets in North Park will likely soon be converted from parallel on-street free parking to head-in on-street free parking. The following list of requested changes will result in an increase of 254 parking spaces, using more of our public land to store empty automobiles. The proposed changes were discussed at the March meeting of the North Park Planning Public Facilities and Transportation Subcommittee – minutes including discussion can be found here. The proposed changes are on the agenda for the North Park Planning Committee consent agenda for Tuesday, April 17.
The proposed changes are spread across a large section of North Park, but the stretch of 29th Street is particularly interesting to me. 29th Street is the site of the North Park Parking Garage – a 100% taxpayer funded parking garage with low rates that rarely breaks even (and in the most recent year likely lost money due to popularity of biking, walking, and Uber / Lyft – financials aren’t yet out to verify performance). Here’s a map of the blocks of 29th Street and cross streets proposed to be converted to head-in parking (identified in red).
There are a number of reasons to oppose these conversions:
Climate change and health – Increasing automobile parking runs counter to the city’s Climate Action Plan goals to move mode share away from automobiles. Bringing (and parking) more cars in North Park brings more air and noise pollution to the neighborhood, in addition to the potential fatalities and injuries that are common from automobile use. Giving away even more of our public realm to parking is a bad idea. Increasing and encouraging more automobiles in North Park also runs counter to the promotion of the area as a walkable neighborhood. At a time when bike-share, scooter-share, and ride-share options are plentiful and increasing we shouldn’t be increasing the amount of parking for private vehicles.
Aesthetics and safety – This stretch of 29th Street is full of beautiful Craftsman homes. The average age of the homes on the block is around 90 years old. Parallel parking creates a standard car edge so visibility down the street for pedestrians, drivers, and residents is clear. Head-in parking creates large variances (think of an extended cab pick-up, which are for some reason incredibly popular in San Diego despite the urban environment lacking steers and I-beams to carry around, parked next to a small sedan). Pulling in and out becomes more dangerous for those traversing the street. Additionally, the headlights from the vehicles at night are aimed directly into homes which are mostly at street level. I can’t imagine most residents would enjoy the additional lighting from the street.
Unneeded and counter-productive– Most of the houses on these streets already have off-street parking, many have full length driveways and garages. The housing density (number of residents per unit) is almost certainly less than it was 50 years ago, as the average American household size has fallen almost by half. If the housing is nearly a century old and the households are smaller than they have been in the past it seems unlikely that residents are clamoring for more parking on the street to bring in more traffic and noise.
Here’s a photo gallery of each block of 29th Street to get a sense of the housing and parking. The street is very wide but as you can see, there is hardly a lack of parking although this may vary according to time of day.
Perhaps the worst bit of all is residents have basically no say in this process. The parking changes were requested by a parking agency and I don’t believe any residents of any of these streets were part of the application – apparently the mission of parking agencies are to maximize the amount of parking for vehicles. Residents will have a chance to respond negatively to the proposals, a written notice will be sent out. Who does the notice go to – property owners or residents? (Not sure.) Are the mailings certified delivery to ensure receipt by intended recipients? (Guessing no.) Even if the letters are addressed properly, and received what are the odds they are read or understood? (Not likely.) The standard to oppose is that a majority, more than 50%, of the notices sent out must be returned in opposition. If you’ve ever done a survey or mail response campaign you probably understand there is essentially zero chance of ever seeing a 50% response rate to any issue.
If there is demand from the residents on the impacted streets then an Opt-In approach would pass with flying colors. I suspect that there is not support from the residents given the above many reasons this is a bad idea. In either case, I believe the North Park Planning Committee has discretion on this matter to evaluate as they deem most appropriate. I hope they’ll opt to consider the impacts of yet more automobile-focused use of our land in this urban environment and reject this proposal to bring yet more traffic and parking and associated ills to the area. For reference, here’s the evaluation policy for this sort of proposal.
In addition to this conversion being a bad idea there are better options for the excess roadway that does exist. Some of those better options are:
Reduce the road width and increase the size of the housing parcels (increase the public right-of-way usable by property owner) – this would increase home values and the tax base, bringing in funds via property taxes, and allow for planting of trees or other use.
Install a bike lane to enable more residents to bike to work or school.
Do nothing. The status quo, although mostly a vista of asphalt, has real potential and we shouldn’t discard it for more unneeded free parking. Not to mention that once granted it is very difficult to repurpose parking area to other uses, as recent debates in Hillcrest and elsewhere have underscored.
My favorite – Dreaming big I’d love to see Balboa Park connected to the new North Park Mini-Park, located at 29th Street and North Park Way via a beautiful greenscape. My proposal would greatly reduce the street size of both 29th Street and Granada Avenue to something like below – going from 54 feet of street space to 16 feet (paired one-way streets, one North-bound and one South-bound with one side of parking) and adding 19 feet of green space to either side of the two streets. That’s a lot of additional greenery, quieter roads, and an increase in parking on each lot of one space per driveway. (Although I would guess many residents would do as they currently do and opt for more productive uses of their land than parking vehicles and utilize for gardens, play areas, chicken coops, hop scotch, and other options.)
If you have an opinion on this proposal you can attend the North Park Planning Committee Hearing on 4/17 or contact the group via email at email@example.com. Additionally, on my street – Granada Avenue – I’ll be working with the other residents to proactively state our opposition to this sort of conversion. You can consider doing the same as it seems likely the many over-sized roadways in San Diego will likely follow 29th Street in becoming a parker’s paradise.
Formally known as the Shift “Next Level Apartments” this recently erected building in the East Village portion of Downtown San Diego looks like it was designed for a video game. The colors and the odd angles and shapes throughout feel so strongly like they stepped out of an early Halo game or something similar.
The building is bounded by 15th Street and 16th Street as well as J Street and K Street, a full city block. Will be interesting to see it fully tenanted and up and running – the street scene in East Village continues to ramp up in a major way. The units are priced from $1700 – $4500 although the available units ranged from $2795 for a 1 bedroom, 1 bathroom to $3920 for a 2 bedroom, 2 bathroom.
I was recently included on two podcast I regularly listen to, both on the topic of short-term rentals. I have been using platforms like Airbnb for about 8 years to welcome people to San Diego and have had a great experience. As with many other cities around the globe, San Diego has been debating the proper place for short-term rentals (rentals of less than 30 days or a calendar month) in recent years. I’ve become involved in that political debate locally and follow the issue broadly as well.
The Voice of San Diego podcast is a great resource if you’re interested in local issues and longer interviews with people that make an impact here. I was part of a four person panel discussing potential new rules for short-term rentals in San Diego. The podcast was held shortly before a full City Council hearing on the topic which was expected to result in new rules for the city. Instead, the all day hearing resulted in nothing new and the issue remains up in the air.
Check out the Voice of San Diego podcast on short-term rentals here:
I was also recently on Get Paid for Your Pad – a podcast focused on short-term rentals with news and interviews of hosts from around the world. This show is a great resource if you are a current host, considering hosting, or just interested in the topic. Host Jasper Ribbens, from The Netherlands, does a great job of including perspectives from hosts from different cities and nations and covering a wide variety of news items from technology to new rules that impact the short-term rental industry.
Property taxes are typically described as a wealth tax – they are taxes levied on assets held rather than transactional taxes like income taxes (applied to wages as earned) or sales taxes (applied to goods when purchased). Property taxes are applied to the same property each year.
Back in 1978 Proposition 13 was passed in California to place a limit on property tax increases. Per Wikipedia, Section 1. (a) of Proposition 13: “The maximum amount of any ad valorem tax on real property shall not exceed one percent (1%) of the full cash value of such property. The one percent (1%) tax to be collected by the counties and apportioned according to law to the districts within the counties.”
Proposition 13 also placed some rules on how the value of a property is assessed or re-assessed. Again, per Wikipedia: “Proposition 13 declared property taxes were to be assessed their 1975 value and restricted annual increases of the tax to an inflation factor, not to exceed 2% per year. A reassessment of the property tax can only be made a) when the property ownership changes or b) there is construction done.”
I was curious about the impact of Prop 13 on property taxes in San Diego after seeing some listings on Redfin and Zillow that had astoundingly low property taxes. For example, the Banker’s Hill property shown below, currently for sale for $1,697,955, carries an annual property tax levy of $136.97. That effective tax rate of .008% is far below the 1% established under Proposition 13.
I decided to take a look at the property values and property taxes on my block in North Park. The houses are all pretty similar (outside of one empty lot that was purchased by a local church and razed for a small and scarcely used parking lot). Below are the property values (per Zillow Zestimate) and property taxes paid (per San Diego County Treasurer website). I’ve listed all the properties on both sides of the street but removed the addresses for privacy reasons.
Despite the homes on the block having pretty similar property values the amount of taxes paid and effective tax rate vary quite a bit. I found it interesting to see the differences in a very small area of town summarized together.
I’ve been thinking about vacant housing units in San Diego for some time and recently was reading about the issue in Vancouver, Canada. The data provided was much more thorough than anything I found locally so I wanted to use it to estimate what the numbers might be in San Diego. Following is my take and links to the underlying information from Vancouver. If you have information on this topic I’d love to connect or hear your input.
This article from the Vancouver Sun from February 2017 lays out some good information about vacant housing units in that city, which in recent years has been often in the news for quickly rising housing prices. Included is the following:
The figures from “2016 show there were 25,502 unoccupied or empty housing units in the City of Vancouver” (below graph from article shows the growth in this number from 1986 to 2016, a period during which Vancouver real estate prices skyrocketed)
This figure is for the City of Vancouver, not the region, and represents 8.2 per cent of total housing units
Per City of Vancouver, there were 309,418 total dwelling units in the municipality as of 2016. This total supports the above calculations (309,418 x 8.2% yields 25,372 or roughly the same amount as show in bullet one)
In response to the high housing prices in Vancouver, the city levied a 1% property tax surcharge on vacant units to push owners to add the units to the housing supply for renters or other owners.
I’ve been trying to find vacant number estimates or similar studies in San Diego and have asked various reporters, housing industry experts, random Twitter users, and other avenues to seek this information. The answers I have received have been all anecdotal but mostly consistent – there are a lot of Downtown condos and probably a fair share of other units that are mostly vacant but it’s hard to ballpark the percentage.
Vancouver is a relatively similar city to San Diego, located on the west coast of North America and with high housing prices and demand. Below are some basic demographic and economic factors – San Diego is larger but in the same ballpark, a large regional hub in a developed country.
Poplulation (metro) – Vancouver = 2.3M, San Diego = 3.3M
Poplation (city) – Vancouver = 647,520, San Diego = 1.4M
Housing units (city) – Vancouver = 309,418, San Diego = 526,663 (1/1/2015)
Since I can’t find a good local estimate for vacant units I thought Vancouver would be a reasonable estimate, or at least a starting point for conversation and hopefully the SD City Council, EDC, Chamber of Commerce, or other party could commission a study to quantify this aspect of housing stock in San Diego. (I would guess the amount would be higher in San Diego than Vancouver given the long history as a vacation destination, the warmer weather, and the presence of large population centers nearby – Los Angeles, Phoenix, Las Vegas, etc.)
The SANDAG numbers may best reflect the number of vacant units, but it’s worth looking at a portion of the above referenced Vancouver Sun article which notes that the private study produced a vacancy rate more than double existing city estimates.
“The census numbers of unoccupied units are more than double an estimate released by city hall last year because a completely different set of criteria and data were used.
Assessing the extent of empty or underused homes can differ depending on “your measurement tools,” said Yan.
While the census might count a greater number of folks who are, say, on extended vacation during the census period, the city’s estimate was criticized for likely missing the number of units used for only short, seasonal periods, perhaps one or two months in the summer, but then are left vacant for the rest of the year.”
So, based on SANDAG’s vacancy rate of 5.2% we would have 27,386 vacant units in San Diego. Using the Vancouver vacancy rate of 8.2% would estimate 43,186 vacant units here. And if we thought that the government estimates are off by half due to sampling methodology, as they were in Vancouver, we could use a rate of 10.4%, yielding 54,773 vacant units in San Diego.
Given the large impact that property tax rules in California can have on homes held for long periods (Prop 13 being most prominent) I would think the vacancy number in San Diego would be at the high end of the above numbers, probably 50,000 or higher, maybe much higher. Prop 13, over time, can result in incredibly low property tax burdens for long-time owners. Prop 13 allows properties like the amazing home below, currently for sale for $1.7M, to pay a total of $136.97 in total taxes a year – a rate of .008% rather than the approx 1.05%, $17,850 a year, if taxes were applied on market value at existing property tax rates. When holding costs are essentially nothing, there’s greatly decreased incentive to sell and little cost to holding an empty property. It’s probably a large part of the reason the house across the street from me in desirable North Park, which is worth around $750k, has sat completely empty for the 4 years I’ve been in the neighborhood.
I’m not advocating for an empty house tax as Vancouver did, but seeking to get an estimate of vacant units in San Diego to consider a similar or other action. Being involved in the short-term rental (aka Airbnb) debate here the impact of short-term rentals on housing availability and prices frequently comes up. It’s undeniable that increased demand has an upward effect on housing prices. However, short-term rentals produce economic activity for owners, businesses, and the city whereas empty units do none of those things. Upper estimates of short-term rental units in San Diego are around 15,000 (I would guess it’s around half that number) – likely far dwarfed by empty units in our city. We would be much better served putting vacant units on the market rather than reducing economic activity, entrepreneurial opportunity, and property rights by greatly restricting short-term rentals.
New Airbnb Feature Likely To Be A Boon For The Platform
Airbnb has a feature currently only available in a number of cities around the world – Co-Hosting. The current list, below, includes 25 cities although additional cities are being rolled out per my conversation with an Airbnb representative this week.
So what is the Co-Host program about? Basically, it’s a way for a property owner (a “Host” in Airbnb parlance) to add another Host (the “Co-Host”) to a listing. You can tap a friend, relative, neighbor, or experienced Airbnb huser to manage your property for you. This is a huge growth opportunity for the platform and one I’m surprised is not getting more publicity. I’d guess this is because they’re currently in test mode and working out any bugs in the program. In addition to assigning management rights to an Airbnb listing, the Co-Host option allows users to set fees (management fees as a percentage of gross earnings or fixed fee, cleaning fees, etc.) and the platform will automatically split earnings and distribute to both the Host and Co-Host per the Co-Host settings.
There are a number of reasons why someone might want a co-host for their property. The hassle of managing a property isn’t for everyone and to be able to hand off some or all of that responsibility will be attractive to some. For others, travel schedules or work demands might necessitate a co-host for short periods of time or seasonally. I can see myself wanting to add one of my children as a co-host to our listings in the future and giving them limited management rights to gradually give them control and responsibility for their own business.
In addition to existing Airbnb Hosts it’s easy to see how the Co-Hosting option could enable landlords to allow long-term tenants to utilize Airbnb in a monitored and responsible way. Between landlords, existing hosts, and the growth in the number of hosts in general I see a lot of growth potential for co-hosting. It should also allow Airbnb to retain hosts as there’s an option to avoid the hassles of managing a listing but still have the earnings, flexibility of schedule, and other benefits the platform provides. Airbnb has built a huge user base complete with reviews and other data and strengthening that base and building on it will be a competitive edge for the platform against the many competitors in the field.
I recently became a Co-Host here in San Diego and am excited for the opportunity. As one of the most experienced SuperHosts in the area I’m comfortable with taking on another listing to manage and hopefully the Host will see a benefit from the reduced workload for the property. If you are considering a Co-Host in San Diego you can find my profile at the below link. I’d be happy to talk with you about co-hosting and my experience and expertise.
Wondering if Airbnb offers Co-Hosting in Your Area? You can find out by logging in, and checking at the bottom of the menu bar. If Co-Hosting is an option for you, there will be a section labeled “Management” with a sub-section “Co-hosts” on your menu bar. You can directly invite someone you already know as a Co-Host or use the “Find a co-host” option to search by location for experienced hosts.
Below is a Facebook post I shared in August but am updating and adding some links and additional text. Next Tuesday the San Diego City Council will have a special meeting to consider changes to the Municipal Code which would eliminate nearly all short-term rentals in the city. The changes will address whole unit rentals of less than 30 days, as home-sharing (a room in a home rather than a whole unit) is essentially already banned. For more in-depth detail and the legal mumbo jumbo I’d recommend reading this great post by Omar Passons from earlier this week.
The following are my thoughts on Airbnb / short-term rentals, why I support short-term rentals in our city, and where I see the industry going in the future.
I am an Airbnb host and have been for a few years. When our family travels it’s basically exclusively what we use. We’ve had a great experience on both sides of the equation and I’ve never tried to hide that. I’m a supporter, user, money maker, etc. Next month we’ll be taking our family to Mexico City for a week and look forward to staying in an Airbnb property there. Here’s a photo of the property we’ll be staying at.
Locally and globally Airbnb has experienced massive growth since being launched in August 2008, this wouldn’t be possible unless it was affording an opportunity for the millions of hosts on the platform. (Potentially this could be due to hotel rooms being artificially capped by zoning / permits / etc but I think it’s mostly because these platforms are accessing non-standard rooms and properties in authentic neighborhoods that provide superior value.) Pair the desire for non-standard rooms / neighborhoods and value with the growth in travel globally and you have a massive opportunity.
However, the growth to date is likely to be dwarfed by the growth to come. PriceWaterhouseCoopers (PWC) issued a report in 2015 on the “sharing economy” including a variety of sites across industries including Uber, onefinestay, Airbnb, Feastly, and many more. As of the report date, only 7% of the U.S. population had participated in the sharing economy as a provider. PWC predicted that five major sharing economy sectors – travel, car sharing, finance, staffing, and music / video streaming – would grow from $15 billion in 2015 to $335 billion in 2025, a growth rate of approx. 36.4% annually.
What does the current opportunity and projected growth mean for hosts? Money. I know of few people that open their homes to strangers for free – even CouchSurfing is predicated on the give & get premise so there’s a benefit or exchange of value derived. There’s an economic opportunity for people to utilize and they are taking it – great. They’re doing so on a widespread, individual basis and connecting one-to-one with guests – even better.
I think a lot of the blowback is about “punk” millenials like me that are just saying “screw the rules” and “i do what i want, the system is the one with a problem”. Based on my interactions with other hosts I think this far from the truth. It’s widely covered that millenials don’t have much money, have major debts, live with their parents at historically unprecedented levels, and mostly don’t own property.
Who does own property? Boomers. And older members of Gen X and the Greatest Generation. (And Millenials that inherited from those groups or have had above average successes.) Additionally, for many years the average house size has been growing while the average household size has been shrinking. Per the American Enterprise Institute, from 1973 to 2014 the average number of persons per home declined from 3.01 persons to an all time low of 2.54 persons. Over the same period the median home size increased from 1,525 square feet to a record high of 2,506 square feet.
So today home sizes in the US have never been higher and family size has never been lower. Meaning? There are tons and tons of empty rooms – completely unused, spider web covered. I live across from an entirely empty house (next to a surface level parking lot in a residential neighborhood) in the heart of San Diego’s hippest neighborhood of North Park. Empty rooms are the real opportunity of the short-term rental industry – for both host and community.
Many articles focus on flip young people (me and my brethren punk millenials) boasting about having 10 units and how the money is so easy putting properties on VRBO, Flipkey, or Airbnb. It’s probably true, to some extent. This is a new opportunity with a ton of excess demand not currently being met. This excess demand will be met due to the incentives created – there is real money on the table.
The idea and model of web-based room renting is fairly new – even a few years ago it was unknown or fringe. (Though boarding houses and room letting has existed for centuries.) Today people from all age groups use it widely, though as the PWC report points out there is much room to grow. Think of the evolution of users of Facebook – young first adopters, then a broader segment of the populace, and today with a huge amount of older frequent users. That’s where this model is going – both on the user and host sides. The same with uptake of private room vs. whole home. When I started hosting our guests were 70-80% foreign, today that’s about 15%. The idea of staying in someone’s home was odd to Americans but more familiar to foreigners. This trend will continue and even now I hear a lot of commentary about preference for private room vs. whole home. The personal connection is much greater – part of the “live like a local” push that is the current Airbnb media slogan.
As all of these trends come together the biggest opportunity – empty rooms – will take over. This will be driven by the biggest owners of property in the US, Boomers. Those multiple property “owners” (quotes because the multiple property hosts are often lessors that use Airbnb as a sublet opportunity) will be crushed by home-owning Boomers. Especially in California the advantage is huge – no mortgage, property taxes fixed at a very low level thanks to Proposition 13, and more empty rooms than a younger family with kids at home. Someone paying $700K for a 2 bedroom today can not possibly compete with someone offering a room in the same 2 bedroom bought for $70K in 1975. In a similar vein will be people with changing situations and spare rooms – couples about to have their first child and build a family, older couples that recently sent their children to college, etc.
What else is the economic opportunity doing? It’s spurring people to add units – increasing supply of total housing. That’s a good thing. Attic and garage conversions, adding separate entrances to bedrooms, building grandma flats, even building new units with purpose built areas for use as short-term rentals – when there is opportunity people respond. It’s the same reason you see cranes everywhere in San Diego today and none in 2010 – if there’s no opportunity no one is going to commit capital and take risk. Today many (maybe most?) of these sorts of new units may be going to short-term rentals. That won’t always hold true and when total supply goes up there is more flexibility in the market and potentially a decrease in average cost. (Potentially because demand also fluctuates.)
This post doesn’t even touch on non-economic factors – the personal connection is enormous and underplayed. Many of our guests are moving to SD, want to move here, are interviewing for jobs or academic opportunities – they instantly have a local perspective on the region, a connection for the future, and a guide. This is a huge deal. San Diego is the best place to live in America and I love sharing why with others. I know many other San Diegans feel the same. Our residents can connect and relate to guests from around the globe 100x better through short-term rentals than the biggest ad campaign, Comic-Con, or other paid marketing can accomplish. Opponents of STRs use the term “Short Term Vacation Rentals”, I prefer short-term rentals as many guests are not here to party and play at the beach, there are a host of reasons people visit San Diego and top of my priority list is attracting talent to our city.
I have a feeling that short-term rentals are likely to be banned soon in San Diego. Many other California cities have taken this path and it’s hard to blame them. We’re looking at all-time highs for rents, property prices, etc. Our population continues to boom. The economy grows, but mostly at the top. It is not a pretty picture for those looking to buy or rent and short-term rentals are undoubtedly a part of that growth in prices (although based on number of units I would say a very small part). But giving people an economic opportunity is a good thing and taking it away by dictat is a bad one.
I’m proud of the hosts / property owners I’ve met. We are committed to addressing real issues. We have proposed a number of specific, meaningful regulations to avoid negative impacts for San Diegans – an increasing fine scale including prohibition of use, dedication of TOT funds from short-term rentals for enforcement, an annual registration fee with funds for enforcement, posting of contact information and a required response time (or additional fine). These are meaningful suggestions and address complaints from opponents. We are happy to come to the table and discuss other aspects of the debate.
I didn’t come from money, we didn’t inherit our house. The opportunity from short term rentals enabled us to purchase our home in North Park as well as have a parent at home during the early years for our children. That was huge, huge, huge for us. If others don’t want to have a stranger in their home or yard – that’s absolutely their choice. But to take away that opportunity from future home buyers and others we should not do. Good times come and go – not long ago many in SD were underwater on their homes. More opportunity and more flexibility is great and should be embraced. I hope that short-term rentals will continue to provide an opportunity for San Diegans of all backgrounds, means and neighborhoods.
I hope you agree and will let your City Council Member know.