Airbnb can be thought of as a clearinghouse for short term lodging. While Airbnb does not own any of the properties it represents, it connects tens of millions of customers every year. The prevalence of Airbnb is disrupting the hotel industry in a similar way that Uber and Lyft disrupted the taxi and car service industry. By crowdsourcing inventory and employees, Airbnb takes a cut of the profits with minimal risk.
It didn’t take long for investors to take notice of the Airbnb business model. Some real estate investors purchased “investor units” to try and profit from Airbnb customers. This set off a long string of events which has led to a recent legal battle between Airbnb and the city of Boston. It is difficult to say whether this lawsuit will be indicative of things to come, but one thing is for certain: the future of Airbnb investor units is in question.
How Airbnb Investor Units Work
Many professional real estate investors lept at the opportunity afforded by Airbnb. While the service was intended to be a home-sharing platform, those who own rental properties saw this as a way to capitalize on the latest hotel and travel trends. It should be stated that Airbnb insists that the majority of their users remain regular people renting out extra rooms in their homes. A 2014 report from the New York State Office found that 94 percent of Airbnb hosts listed 1 or 2 units. The remaining 6 percent listed between 3 and 272.
That 94 percent number can be encouraging, but there are a few caveats. For one, these statistics are outdated and industry trends move definitively towards more investor involvement in the 5 years since the report. Additionally, even if 1 out of every 100 users was a large investment firm renting out units in the 100’s that tips the scales heavily toward real estate investors over regular Joes. In a service that was intended to give power to regular people, real estate investor units are threatening to take over.
Airbnb Investor Units and the Housing Shortage
One of the main problems with investors stepping into the Airbnb rental space is the trickle down effect that has on the affordable housing crisis. Major cities have been dealing with major housing shortages for years. Investor units owned by non-resident owners are essentially taking properties away from residents. Cities like Boston view this as a real estate emergency for several reasons:
- Residential and commercial real estate is already scarce. In cities like New York, San Francisco, Boston, and many others, the demand already far outpaces the supply for real estate.
- Investor units take away from housing inventory. Investors buying up rental properties only worsens the housing shortage problem. When residents are unable to find local properties in which they can live and work, the slippery slope gets even more slippery.
- Property values skyrocket, becoming unaffordable. The American economy has long been dependent on home ownership. Investors taking away real estate to be used for tourist rentals is potentially damaging to the local economy.
The City of Boston vs. Airbnb
This all brings us to Airbnb vs. Boston. In a federal lawsuit, Airbnb filed a grievance against the city of Boston citing severe restrictions on how they do business within the city limits. The lawsuit was recently settled out of court, with both sides agreeing to terms that would create an environment where Airbnb could continue to operate in Boston without investor units. Here are the basic terms of the agreement:
All units rented out through the Airbnb platform and other similar sites must be restricted to owner-occupied spaces or by landlords who reside within the building. Any properties owned by absentee landlords or real estate investors are strictly prohibited from listing rentals on Airbnb. In other words, the city of Boston has banned investor units through platforms like Airbnb.
All Airbnb hosts must register their units with the city of Boston by December 2019 in order to be considered eligible moving forward. Once approved, Airbnb hosts must display registration numbers on all listings in order to provide transparency both to renters and to city officials.
Airbnb’s legal battles with Boston may be the most high profile case so far, but it likely will not be the last. This is one of the reasons why investor units have been popular amongst individual real estate investors but have remained unpopular for large real estate investment firms. The fact remains, investor units for platforms like Airbnb are incredibly risky as of the writing of this article. Nationwide housing shortages and public demand is trending towards similar anti-investor unit laws being passed in other major cities.
Airbnb was always intended to be used by individuals on both sides of the equations. Real estate investors saw an opportunity to make a quick buck, and many did. Looking forward, it is quite possible that the investor unit party will be coming to an end.