Short Term Rental Legal Ruling

The question of the legal treatment of short term rentals has been contested in multiple communities around North America. Earlier this week, a legal challenge that had been underway for the past two years has finally come to a conclusion.

The City of Toronto enacted new rules in December of 2017. Almost immediately, these rules faced a legal challenge from a consortium of hosts and short term rental platforms.

The government's Local Planning Appeal Tribunal (LPAT) announced this week that it had ruled in favour of the City of Toronto, effectively allowing the city to crack down on short term rental landlords for the first time since approving new bylaws in December of 2017.

It's a major blow to people who have invested in properties for the sole purpose of putting them in the short term rental market.

It is estimated that as many as 5,000 units could return to the long-term rental housing market thanks to the city's new rules. Whether that happens remains to be seen. The definition of a short term rental is any rental of 28 consecutive days or less.

The new short term rental regulations, which include capping the number of days anyone can rent out a single property for, were originally supposed to have come into effect over the summer of 2018.

A person needs to live in an Airbnb property, either as owner or tenant, under Toronto's new regulations, and is also now required to register with the city for an annual fee of $50.

The rules also restrict the number of days any resident could rent out their space on a short term basis to 180 nights per year.

So what is going to happen? There are 4 possible outcomes for any given property.

1) Property prices in Toronto have risen dramatically in recent years. Some owners will simply choose to sell their properties on the open market, and take advantage of a capital gain, rather than experience the negative cash flow from renting at lower prices in the long term rental market. For those properties, it will return some inventory to the long term housing supply.

2) Some will convert their properties from short term rental to long term rentals. They will experience lower income and the city will achieve it’s objective of returning more housing to the long term housing supply.

3) Some may choose to continue to operate, but outside the rules and hope that they don’t get caught. We’ve seen this kind of activity taking place in New York and other cities where short term rentals have been regulated. It’s hard to say how much of that will go on.

4) I think there is a market nuance that many have completely overlooked. There are a number of clients of the so-called short term rental platforms that actually rent on the medium term basis. We’re talking stays of 1 month, 3 months, 6 months. There are all kinds of reasons for these rentals. Sometimes it’s dealing with a repair situation where some people need to vacate their home because of an emergency like fire or water damage. Some people have purchase a new home and their builder is running late and they need a place for a few months. Many are corporate contracts. In fact, the net income for a medium term rental is not that much different compared with a short term rental in my opinion. While the nightly rate is lower, the management costs and maintenance costs for a medium term rental is also much lower. For these clients, a 12 month unfurnished lease is of no use.

If I was an owner of a short term rental, I’d certainly be looking hard at the corporate medium term rental market as a viable alternative to the short term rental market.

I spoke with a representative from AirBnB last week and she told me that approximately 20% of their traffic are for stays of more than 28 days. That’s already a substantial proportion of their existing business, a proportion that I predict will grow substantially.