Rental Arbitrage in Boston | What You Should Know!

Rental Arbitrage in Boston | What You Should Know!

Thinking of Investing in Rental Arbitrage in Boston?

The following information will aid you in making a more informed decision regarding your next short-term rental venture in Boston and prepare you for what to expect from the process.

Industry Development for Short-Term Rentals and Rental Arbitrage

For 2021, AirDNA predicts a strong year for the short-term rental industry. Occupancy is expected to average around 58.9% with average daily rates projected to rise 6%, too, hitting about $248 for the typical property. Demand is forecast to jump 27.5% by the end of the year.

"Rental Arbitrage" has evolved into a ubiquitous phenomenon in the rental industry. Even in spite of the pandemic, short-term rentals had over 70% occupancy. In the second quarter of 2021, short-term rentals in coastal destinations grew by more than 20%. The effect of this has been to push revenue earned per unit up while apartment rents have been stagnant, allowing for growth in rental arbitrage. According to Scott Shatford, CEO of AirDNA: "Rental arbitrage is taking on a whole new meaning in 2021". What was once seen as ‘house hacking’ has now become a fully streamlined, transparent way for renters and owners to both benefit from flexible living.”

In a new report, non-dense coastal destination markets were identified as major arbitrage locations in 2021.

What is Rental Arbitrage?

A Rental arbitrage is when an individual rents property for the long term and then rents it out on OTAs such as Airbnb, Vrbo, Booking.com, HomeAway, etc. This means that you’re using short-term rentals to pay your long-term lease and pocketing the difference.

Rent arbitrators benefit from the following features:

  1. The property is not your own, so there is minimal risk.
  2. Increased earning potential
  3. Negotiating a fixed rental price reduces your monthly expenses.

Get to Know Boston

In 2021, Boston city will be a market to watch if you are considering investing in property or considering rental arbitrage in this behemoth city. Boston ranked as the 9th best real estate market in the US according to a report by Urban Land Institute.

Massachusetts' largest city, Boston, has a population of almost 695,000 residents and is also the state's capital. As one of the most populous cities in the United States, Boston ranks with the sixth-largest economy. The Boston economy is diverse and rapidly growing, and the rental market is one of the most important aspects of the city's ecosystem. It is known in both the national and international property markets that Boston is a major tourist destination. Over 21 million people visit the city each year, including both domestic and international tourists. They include both leisure and business travelers.

 Boston Rental Arbitrage

Rental Arbitrage Market Potential in Boston

According to Boston property investment data, the median property price of property listings in the city increased by 16% year on year. The annual growth in the price per square foot amounted to 15%, from $699 in 2020 to $802 in 2021. This is a major increase that exceeds the average real estate appreciation rate across the US housing market over the same period. This trend demonstrates the resilience of the Boston property market even in the face of the global pandemic and shows that this is indeed one of the top places for investing in rental properties.

According to AirDNA 2021 data, Boston Short-Term Rental Arbitrage Opportunity tools are as follows:

  • Monthly revenue $2,487
  • Average daily rate is $202
  • Effective Rentals 2,330
  • Occupancy rate 64%

Get to know Boston’s Short-Term Rental Categories

Limited share

Limited Share Units have a private bedroom or shared space in an owner-operator's primary residence. The owner would be present during the rental. The fee for this type of unit is $25 per year. Occupancy is limited to three guest bedrooms or six guests, whichever is fewer.

Home Share

Home Share Units have a whole unit available for a short-term rental at the primary residence of an owner-operator. The fee is $200 per year. Occupancy is limited to five bedrooms or 10 guests, whichever is fewer.

Owner-Adjacent

Owner-Adjacent Units are within owner-occupied two or three-family buildings. In this situation, the owner lists a single secondary unit as a short-term rental. The fee is $200 per year.

Pay close attention to the following notes as well :

  • Limited share and home share units must be an owner-operator’s primary residence. An owner-adjacent unit needs to be within the same property as an owner-operator’s primary residence.
  • Owner-adjacent units must be in a two-family or three-family home. One can register the unit they are living in as a home share or limited share unit and one additional unit as an owner-adjacent unit.
  • The city of Boston also specifies that a building owner can only offer one whole unit at a time. For example, if you have a home share unit and an owner-adjacent unit at your property, you cannot be away from the property and rent both at the same time.
  • Primary residence is defined by the City of Boston as a property where the owner lives for at least nine months out of a 12-month period. When requested, the owner must be able to demonstrate: -They have lived on the property for nine of the past 12 months or -They plan to live on the property for nine of the next 12 months.

Short-Term Rental Regulations in Boston

In order to be eligible to register and rent one’s home on a short-term basis, property owners must first ensure their home is eligible and is within a property classified as residential use, and does not violate any of the following criteria.

A short-term rental is not permitted in the following homes:

  • Low or restricted income
  • Subject to affordability covenants
  • Subject to rental assistance under local state or federal law

Furthermore,

  • Residences cannot have been subject to three or more violations of any city ordinance or state law within the last six months
  • Residencies cannot have any outstanding violations relating to:

    ♦ Short-term rental ordinance ♦ Excessive noise ♦ Improper disposal of trash ♦ Disorderly conduct ♦ Sanitary, building and fire code violations.

The following buildings cannot be used for short-term rentals, despite being classified as residential:

  • Complexes for communal living
  • Assisted living facilities
  • Group housing
  • Shelters for the homeless
  • Orphanages
  • Temporary dwelling structures
  • Transitional housing

Among other restrictions and requirements, short-term rental units are not permitted to be located within problem properties or within properties owned by problem property owners. You can find more information about problem properties in the City of Boston Code of Ordinances.

Short-Term Rental Requirements in Boston

Once you’ve ensured that your home meets the necessary requirements to host a short-term rental, you can sign up and register your property on the city of Boston’s short-term rental registration webpage.

In order to register, you will need to provide Inspection Services with at least two of the following items as primary residence evidence:

  • Proof of residential exemption
  • Utility bill
  • Voter registration
  • Motor vehicle registration
  • Deed
  • Driver’s license or state-issued identification

The Key Responsibilities of a Boston Property Manager / Host

  1. You must include the registration number issued by Inspectional Services on any listing offering a unit as a short-term rental.
  2. After Inspectional Services has reviewed your application and you have paid for your registration, you must get a business certificate through the City Clerk's office.
  3. You must renew your short-term rental license annually.
  4. Note that - Licenses do not transfer with the sale of the unit.
  5. You must post a sign inside the unit that lets occupants know the location of fire extinguishers, fire exits, and pull fire alarms.
  6. You may only offer one entire unit at a time. For example, if you have a home share and an owner-adjacent unit at your property, you cannot be away from the property and rent both at the same time.
  7. You must notify abutters that a unit has been registered as a short-term rental unit. You need to do this within 30 days of being issued a short-term rental license. An abutter is defined as any residential dwelling within 300 feet of the short-term rental unit

Note, Violation of any of the Short-Term Rental laws or codes along with those mentioned above will cause a suspension of one’s short-term rental license. The suspension will last for as long as the violation exists.

Boston Short-Term Rental Business Certificate

Along with registering your property as a short-term rental with the City of Boston, aspiring hosts will also need to obtain a business certificate through the city clerk’s office. In order to apply for a business certificate, you will need to fill out the business certificate form which includes a filing fee of $65. Business certificates are valid for four years and must be renewed using the same form linked above.

You will need a copy of your registration number form as well as the business certificate for your short-term rental in order to file for the certificate. To apply for a business certificate at City Hall, you must submit your documents, payment, and completed form.

Zoning Code

The Boston Zoning Code sets out the zoning regulations for Boston's neighborhoods. Make sure your listing does not violate any zoning definitions by consulting Article 2 of the Zoning Code. Important definitions include "use," "accessory use," "dwelling," "lodging house," "boarding house," and "family."

Taxes

The law applies a 5.7% state excise tax on short-term rentals. Boston, which will be allowed to tax short-term rentals at a 6.5% rate. The City of Boston excise and convention center taxes may apply to your listing as well. In addition, the Massachusetts excise tax may also apply. It would be subject to a 2.75% convention center financing fee.

Moreover, short-term rentals would be subject to taxes unique to them. Towns and cities could impose a “community impact fee” of up to 3%. Depending on the municipality or city where short-term rentals are located, the total tax could be up to 17.45% - or 17.95% in Boston - if the local tax component is added to the community impact fee. Refer to the Massachusetts Room Occupancy Tax Guide for more details.

The tax will apply to the total rent paid by guests, which includes services, cleaning, and other fees.

As of July 1, 2019, Massachusetts state law requires certain intermediaries to collect and remit these taxes to the appropriate parties. As a result, Airbnb will collect and remit these taxes for short-term rental hosts in Boston. In addition, Massachusetts state law requires that you register with the State’s Department of Revenue

Conclusion

Boston provides considerable rental arbitrage potential as one of the emerging markets in the US. As rental arbitrage serves as an ongoing growth model for short-term rental properties, many investors may be able to take advantage of this trend in the market and get on board within a reasonable amount of time without incurring excessive capital expenditures.

Check out these other markets that offer rental arbitrage opportunities too: Houston, Austin, Orlando, Nashville, Myrtle Beach, Fort Lauderdale

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