Airbnb Rental Arbitrage in Santa Monica | Laws, Regulations, and Taxes

What is Airbnb Rental Arbitrage?

Airbnb Rental Arbitrage is when you sublet the property you are renting for the long term to list on Airbnb in the short term. It is a low-risk investment strategy that does not require the massive capital outlay of purchasing a property to engage in the Airbnb vacation rental business.

Santa Monica as a Tourist Destination

Santa Monica is the quieter, more laidback alternative to the city of Los Angeles. The walkable and bike-friendly Southern California city lays claim to 3.5 miles of gorgeous California coastline, stunning sunsets, and the longest ocean-front bike path in the world. The centerpiece of the beach, the Santa Monica pier, comes packed with carnival rides and food stalls. The beach also offers plenty of activities for sports enthusiasts, from surfing to the famous Muscle Beach, popular among bodybuilders. For those looking for exercise away from the beach, there are yoga and trapeze classes as well as an outdoor chess park.

The health-conscious city also boasts a wealth of dining options including organic and sustainable options, plenty of bars, and a mile-long stretch of retail therapy – Third Street. Visitors looking for cultural content can enjoy a plethora of choices including 90 museums and art galleries and over 40 public works of art.

In 2019, 8.4 million visitors visited Santa Monica of which 4.4 million traveled from outside the US, generating nearly $1.9 billion to the local economy. In 2021, numbers had dropped to 3.5 million visitors with only 322,000 being international travelers. As the city recovers, it is focusing on a drive market strategy stretching into California, Texas, Arizona, Nevada, and Florida. Improving attractions such as the pier and marketing to overnight and weekend visits from all markets is paying off. Over Memorial Day weeked in 2021, the city experienced the highest hotel occupancy since 2019 of 90.5%. A full recovery is expected only in 2023-24.

Increasing demand is expected throughout 2022 from both international and business travel and rising rates.

Airbnb Rules in Santa Monica

Airbnb Laws & Regulations in Santa Monica

In 2015 the Santa Monica City Council adopted the Home-Sharing Ordinance, later amended by ordinances in 2017 and 2017. The amendments even affect short term vacation rentals that began operating prior to the effective date of the ordinance.

The Santa Monica Home-Sharing Ordinance recognizes two types of rentals:

Home-Sharing: One or more bedrooms of the dwelling can be listed as a short term rental for stays 30 consecutive days or less. The property must be the primary residence of the host who must also reside on-site throughout the rental period.

Vacation Rental: An entire dwelling or part of one is listed for stays longer than 30 consecutive days.

Permit and License Application

Hosts must apply for and obtain both a Home-Sharing Permit and Home-Sharing Business License. The application requires hosts to also provide:

• Proof of home ownership (if owner)

• Proof of long-term residence status (if not owner)

• Proof of primary residence

• Proof of insurance (Hosts listing on Airbnb are exempt due to AirCover for hosts)

• Application free

• Certification of compliance with all relevant regulations

The home-sharing permit and business license expires on June 30th of each year and hosts are required to renew their applications prior to the date.

Any false statements in the application will result in a denial or revocation of the permit and license. Any changes to the application must be notified within 30 days.

Occupancy Limits

The maximum occupancy of the home-share, including the host and anyone else who resides in the residence, cannot exceed the lesser of:

• 10 persons

• One person per 200 sq. ft. of the dwelling unit

• Two persons (excluding minor children) per bedroom

Hosts also cannot rent to more than 2 groups of visitors at a time for any given date

Visitor Vehicle Limits

• One vehicle per bedroom rented

• If the home-share is located in a preferential parking zone, then two vehicles will be permitted to use the visitor permits available

Other Hosting Regulations

• One host cannot host more than one home-share within the city of Santa Monica nor post more than two listings on any hosting platform.

• All hosts of home-shares must live on-site and in the dwelling unit offered for home-sharing. If the host is home-sharing an accessory dwelling unit for which a building permit was issued before March 31, 2017, however, the host can reside in either the main home on the property where the ADU is located or in the ADU itself.

• If the proposed home-share is a rent-controlled unit, any tenant of that rent-controlled unit who is a proposed host cannot receive monthly revenue from home-sharing in the rent-controlled unit that exceeds the monthly rent payment for the rent-controlled unit.

• Hosts must ensure the presence of smoke and carbon monoxide detectors as well as fire extinguishers. All visitors must be provided with information related to emergency exit routes if the dwelling unit is part of a multifamily building of more than one story.

• Hosts must prevent and take responsibility for any nuisance activities related to home-sharing.

• Hosts must comply with all health, safety, building, fire protection, noise limitations, and rent control laws.

• Homeowner association bylaws and covenants, conditions, and restrictions may apply.

Airbnb Taxes in Santa Monica

The city of Santa Monica imposes a Transient Occupancy Tax of 14% on the listing price including cleaning fees, for reservations 30 nights or shorter. Visitors who stay for 31 or more consecutive days are exempt from the tax, as are federal, state, and city employees on official business.

Airbnb collects and remits the tax on behalf of hosts.

It also collects and remits a $2 per night fee for reservations 20 nights or shorter.

LA County Airbnb Rules

Santa Monica is incorporated as a self-governing city and therefore does not fall under the purview of Los Angeles County laws, regulations, and taxes governing short term vacation rentals including Airbnbs.

California State Airbnb Rules

The state of California does not impose any regulations or taxes on short term vacation rentals including Airbnbs.

Airbnb Rental Arbitrage Potential in Santa Monica

Leading provider of data and analytics for the short term rental industry, AirDNA gives the Santa Monica vacation rental market a rating of B+, accounting for rental demand of 77, revenue growth of 84, and regulation of 42.

According to 2022 AirDNA data for Santa Monica:

• Average Daily Rate (ADR) is $271 (April)

• Occupancy Rate is 73% (January)

• Average Monthly Revenue is $3,400 (January)

Of the 910 rentals active in Santa Monica, 78% are entire homes with 1- and 2-bedroom homes being most common, followed by studios. Private rooms account for 20% of rentals and shared rooms 2%.

The most popular cancellation policy is Strict (61%).

The rental period of choice is for over 30 nights (45%) followed by 2 (15%) and 3 (8%) night stays.

While Santa Monica offers rent-controlled housing, hosts residing in rent-controlled units who are home-sharing are not permitted to earn from hosting more than what they are paying for rent. According to Redfin, the median price of a home in Santa Monica is $1.625 million (May 2022).

Conclusion

As a city that takes affordable housing into consideration in comparison to most other states, Santa Monica has instituted regulations on the short term rental market since 2015 to help contract rising housing prices and dwindling housing supply. While current regulations don’t make rental arbitrage impossible, the requirement for long term residency in order to do so won’t make sense for hosts looking to scale across the city or cities. Instead, rental arbitrage in Santa Monica will make sense for a long term tenant who is looking for a means of additional income.

The other option for tenants is to host longer rentals on Airbnb with the city said to be reconsidering its approach to medium term rentals in excess of 30 days.