Medium Term Rentals
- Medium term rentals definition
- Corporate Housing
- Upcoming California rule changes
Medium Term Rentals
Medium Term Housing – Definition
Medium term rentals are residential leases that are longer than 30 days but shorter than 1 year. Also known as ‘corporate housing’ – tenants stay for a few months instead of a few years. Landlords in large metros in the US have turned vacant units into corporate housing – where they rent the units to a more transient crowd – long-term visitors who don’t want to rent a unit for 1 year, and don’t want to pay daily rates for hotels.
The medium term rentals is partially a result of the sharing economy’s impact on the real estate market and the desire of both renters and landlords to stay ‘flexible.’ Just like short term rentals (which are similar to hotels, were guests stay for 30 days or less), medium term rentals are now in the crosshairs of local regulators and long term residents.
Renter rights advocates argue that this new trend is taking rental housing units off the rental market, making a housing shortage in large metro areas even worse. Coastal cities with strong job markets are experiencing a severe housing shortage – and rents have risen faster than wages. In some markets, renters spend close to 40% of their income on housing. There are other issues cited by residents. Medium term rents are not typically invested in the community – they are transient in nature, are less likely in to participate in community building, and just like short-term renters – they tend to be more noisy and disruptive.
In late 2018, the city of Santa Monica, California, began considering stricter enforcement of its anti-corporate housing laws already in place. Medium term rentals are also hard to regulate – while short term rentals are usually governed by transient-occupancy laws (which regulate hotel activity) and long term leases are regulated through the state legislature – medium term rentals are somewhere in the middle. It is likely that most medium term rentals are basically normal leases that are a few months in length, but does the parties have an actual lease in place? Does the medium term tenant know of his/hers rights?
Another issue is the difficulty of enforcement – how will a city official know that an apartment is being rented for just 3-months? Could the legislation have a negative impact on long term visitors such as academics or musicians?
The easy and obvious answer – short term rentals are under legislative siege from local cities. Landlords who want to avoid long term renter are now turning into medium term renters and corporate housing, since they can no longer use AirBnB to get daily renters. But this is a lazy explanation – it does not explain why owners turned into Airbnb in the first place. A simple explanation are profits – shorter leases = higher rents. Landlords who utilize the sharing economy in residential real estate, with sites likes Airbnb for more aggressive rents – sometimes to the tune of 30-40%, and they are especially aggressive in areas with strong tourism industry.
But a closer examination of medium-term rentals tells a different story. While rents are higher – expenses are higher too. Higher turnover of tenants means higher management costs, often owners of short and medium term rentals opting for a full time manager just to handle guests’ complaints. Adding cost of furniture, cleaning, commission and fees to the home sharing platform – owners we talk to claim the profits are far below the consensus. And most importantly, short and medium term rentals are not recognized lenders as income. Underwriters will instead project the rent as fair market value – or just won’t lend on the property at all due to increased risk.
If the returns do not justify the extra management – why do apartment owners avoid long term tenants?
Apartment owners who want to avoid long term tenants in fear of major regulatory changes also turn to medium term rentals as a possible solution. A major driving force behind the expansion in corporate housing and medium term rentals is the belief that local cities will enact rent control in more areas and expand it in existing cities with rent control.
Cities such as NYC, SF, LA – have all either extended current rent control laws or are considering expanding tenant rights in some forms. Rent freezes in LA county and other areas were enacted as a temporary measure to halt rising rent costs.
In addition, grassroots movements swept the nation in 2018 with legal initiatives to expand tenant’s rights. The most prominent attempt was California Proposition 10 – giving local authorities power to expand rent control, and force landlords to charge new tenants with ‘old’ rents. The measure was ultimately defeated in the 2018 midterms, but it served as a chilling reminder to property owners that change is coming. Owners who follow this trend acknowledge that change to housing laws are inevitable as wages rise slower than rents.
The most pressing problem is large metro area is a severe shortage of affordable housing. Some cities need to double or triple apartment production just to match demand. Removing long term rental units from the marketplace makes this problem worse. Aside from the obvious solution of ‘build more’ and remove the arbitrary barriers in the development stage, state government could be instrumental in providing housing security to tenants without artificially distorting the market with rent control. Removing housing units from the rental market is neither a new concept or a new problem. For years, landlords used the California Ellis act to remove rent control tenants for larger development project, condo conversions, or even short term rentals (illegally, but still removed).
Those symptoms described are just a result of arbitrary systems put in place by local cities as a short-term solutions to protect renters – such as rent control and for-cause evictions. Neither increased the housing supply where they exist, nor they curbed price increases. In fact, cities with rent control laws are often the most unaffordable cities to live in America. Local authorities need to reexamine the rent control rules that were enacted in the 1970s, and how they are related to the mass removal of rental units from the markets through condo conversions and redevelopment. Families and renters deserve housing stability and protection in a healthy society – but applying a band-aid solution on corporate housing where surgery is needed is the wrong solution to a growing problem.
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