Live, Work, Share: Putting out the Welcome Mat to Home-Sharing and Home-Based Businesses

I. A Short History of Home-Sharing

Home-sharing is a centuries-old practice.¹ Since the beginning of home ownership, property owners have allowed visitors to stay in their homes in exchange for money or other things of value – for example, the provision of services, such as common house chores. Louis XIV famously renovated and then threw open the doors of his home, Versailles, to nobles, politicians, and other guests, many of whom paid for their position as resident courtiers.² Thus, while terms like “timeshare,” “bed and breakfast,” and even “home-sharing” itself are relatively modern, the concept of dividing the bundle of rights comprising ownership and occupancy of the home in ways that people find most convenient has existed for centuries.

An early form of home-sharing in America was the “boarding house,” where people could rent rooms in another family’s home or cohabitate with other families in a shared living space. When Alexis de Tocqueville set foot in America in 1831, he secured lodging at one such establishment in Manhattan. He observed that these flexible arrangements led Americans to be both adaptable – Americans were “always changing [their] abode” – and democratic. People of different professions and economic backgrounds broke bread at the same table. Even the governor had taken up residence in a boarding house.

Throughout history, flexible living arrangements have served as affordable ways for people to see new places or to meet other short-term residential needs. During the World Wars, boarding houses offered a temporary home to women who sought work out of town. At one point, boarding houses were so popular that nearly half of all urban Americans had either resided in a boarding house or taken boarders into their own homes. Such living arrangements regularly appear in American literature: in Little Women, it is the boarding house that allows the independent Jo to leave home and venture into Boston life.

In modern times, the advent of the Internet has transformed the practice of home-sharing by providing a kind of infrastructure for full-blown vacation rentals. The rise of online home-sharing platforms has been remarkable. Airbnb alone now offers more rooms than both the Hilton and Marriott hotel chains combined. Visitors, business travelers, and those looking for a memorable neighborhood experience are, in increasing numbers, using home-sharing platforms for short-term residential housing.

It’s easy to see why home-sharing in its many forms has long been popular: it allows those who are not using a spare room, guest house, or vacation home during certain periods or seasons to earn extra income from a valuable but unused resource. In turn, it allows consumers to find arrangements that suit unique needs.

Short term rentals are a popular way of earning money through home-sharing, but they are not the only way. Home-swapping, “hometels,” granny units or “in-law suites,” and even student exchange or au pair programs are other ways that people get value from sharing their homes. With the rise of the internet, it should be easier than ever to earn extra money from the customary practice of sharing one’s home.

II. Working from Home: The Norm for Most of History

Like short-term rentals, home-based businesses have long existed in some form. In fact, for most of history people have lived where they work. Buildings that combined a work area and a dwelling place can be traced back to medieval times, when people weaved, made dresses, or tanned hides in their homes. In America, the practice of leaving the home to work in factories and other urban settings more or less began with the Industrial Revolution. The modern “office building” was only made possible once modern forms of communication and transportation allowed for work beyond the home. Although some people perceive working from home as a modern innovation, it’s actually the act of traveling to work every day that’s relatively new.

Technological advances have allowed people to return to working at home – and to do it more efficiently. For many business models, it’s no longer necessary to have a brick-and-mortar location or to work in physical proximity to colleagues. People now have the flexibility to work from home when they need to, to gain employment in other states without having to move, or to pursue entrepreneurship in a home-based business. This has been a substantial boon to working parents, people who lack access to transportation, and those with health difficulties who have difficulty leaving the home.

Home-based businesses are now a substantial part of the U.S. economy, and home-based jobs are on the rise. Fifty-two percent of small businesses are home-based businesses. Even employees at traditional firms are increasingly working from home. In 2017, 43% of Americans said they spend at least some time working remotely. This includes many independent occupations, such as real estate agents, writers, and software and computer tradespeople.

III. The Race to Regulate

Regulators have reacted to the rise of home-sharing and home-based businesses by creating swaths of rules that seek to limit or prohibit the practices altogether. Home-sharing has simply been banned in several cities. Santa Monica, California, recently banned any rentals under 30 days in duration. The law is a serious burden on people like Arlene Rosenblatt, who would like to offer visitors an affordable alternative to local high-priced hotels. Prior to the law’s passage, Arlene had been renting out her home for $350 per night when she and her spouse traveled. Now if she wants to rent out her home, she’ll have to do so for at least a month at a time.

Even where cities haven’t banned home-sharing, they sometimes enforce draconian rules that have most of the impact of a ban in practice. Fort Lauderdale, Florida, for example, limits occupancy, requires initial and ongoing annual property inspections, imposes minimum parking requirements, and requires an owner or manager to reside within 25 miles of the property. San Francisco, California, forces applicants for short-term rental licenses to submit to an in-person appointment, limits those licenses to San Francisco residents, permits only one property per licensee, caps non-hosted stays at 90 days per year, and requires $500,000 in liability insurance, among other rules. In New York City, no non-hosted short-term rentals are allowed. The owner must stay in the home alongside the guests, and no key locks are allowed on any internal doors. Some of these laws, like getting a license or obtaining insurance, may seem independently justifiable. But the cumulative impact of these rules is to create a regulatory thicket that is simply too much for most people to navigate. Many homeowners will forgo short term rentals altogether rather than try to comply with numerous and expensive regulations.

The fines for violating the labyrinth of home-sharing restrictions can be disastrous. In 2016, Miami Beach passed an ordinance that imposed fines of up to $100,000 per day. ³ At one point, the city even considered imprisoning homeowners for violating the ban. Officials in Kauai County, Hawaii have levied fines of $10,000 per day against people who simply rented out a room in their home.

Other regulatory responses effectively require a person to surrender some of their constitutional rights in order to share a home, such as the right to privacy or the right to be free from unreasonable government surveillance. For example, the city of Chicago passed an ordinance requiring those who rented out their homes to be open to inspection by government officials “at any time and in any manner” without probable cause or a warrant.⁴ New York City formally required Airbnb and other home-sharing websites to disclose the names and addresses of their hosts, until a federal judge blocked officials from enforcing that measure. The judge ruled that the “governmental appropriation of private business records on such a scale, unsupported by individualized suspicion or any tailored justification” was an unreasonable search and seizure.

Home-based businesses have also been thrown into jeopardy by regulation. Vague zoning laws often leave homeowners with little guidance about whether their desired business is permitted or verboten. For example, many statutes say that a home-based business is permissible if it is “customary,” or if it is “incidental” to the residential use, but because they do not define those terms with any specificity, homeowners must guess at whether their business is legal. Where statutes offer a list of permitted occupations, they are sometimes outdated – as evidenced by the numerous restrictions specifically allowing the home-based business of “millinery” (hat-making), a business model that had its heyday in America a century ago.

Other cities impose regulations that make it practically impossible to have a home-based business. Some cities prohibit any sales at a residential property, making it illegal to sell crafts on Etsy or collectibles on eBay. Others strictly limit the number of “customers” that may be present in your home (even though homeowners are allowed to have an unlimited number of “guests” for non-economic purposes, and even though homeowners are allowed to perform all manner of services for any number of friends or family for free). Portland forces home-based businesses, including tutors and hairstylists, to choose between having one employee come to the house or a limited number of customers per day – and requires every single customer to make an appointment prior to appearance. Businesses can have no more than one vehicle up to the size of a medium pick-up truck associated with the home business.

In Nashville and San Francisco, it is illegal to have even just one person or “customer” in one’s home for a business purpose. Those who want to cut hair, teach violin, or tutor schoolchildren must violate local law to pursue their occupation.⁵

Stories of entrepreneurs being thwarted by onerous regulations abound. After neighbors complained about a small yoga studio, the city of Phoenix, Arizona shut down Angie Hall’s backyard business.⁶ Officials in Cobb County, Ga., went so far as to shut down a videogame blogger, even though his only “business activity” was playing video games and uploading clips of his gameplay to YouTube. The city of Nashville threatened to seize property from a local record producer because he ran a recording studio out of his garage.

Kim O’Neil, owner of a medical billing company in Chandler, AZ, was similarly shut down by onerous regulation. Kim moved her medical-billing company to her home shortly after her father became ill. Working from home allowed Kim to care for her father and to tend to her two children – something that would have been impossible if she worked from a brick-and-mortar office. Even though the business had no signage, no visiting customers, no commercial equipment, and no on-site sales, city representatives notified her that she would have to build a parking facility, submit architectural drawings of her home, and obtain approval from every neighbor within 600 feet in order to continue working out of her home. Facing high compliance costs, Kim was forced to shut the business down.

While laws that regulate the use of one’s home are couched in terms of protecting the public, they are frequently motivated by “not-in-my-backyard” (NIMBY) attitudes or protectionism. There’s no doubt that Sacramento auto shops benefit from the city’s ban on even minor automotive work in one’s garage for money.

Not unlike the taxi industry’s efforts to stop the growth of Uber, or the restaurant industry’s attempts to regulate away food trucks, the hospitality industry has acted swiftly to stifle competition from homeowners on home-sharing platforms. It was the unlikely duo of hotel companies and labor unions that teamed up to pass New York’s short-term rental restrictions. While New Orleans prohibits property owners from renting their homes to anyone for less than 30 days in most of the city, it increases the minimum number of nights to 60 in the French Quarter. The obvious explanation for singling out the French Quarter is that it’s the hospitality epicenter of the city. Whatever the intention, whether protectionist or paternalistic, laws affecting home-sharing and home-based businesses are banishing two important ways that people are reasonably, and productively, using their homes.

IV. The Regulatory Consequences

The results of heavy-handed regulatory approaches to home-based businesses and home-sharing are predictable: less options for home-sharing, fewer home-based businesses, higher prices for consumers, and inertia rather than innovation.

There are also enforcement costs. In order to implement its home-sharing rules, the city of Santa Monica, California established a full-time task force. Its first year of enforcement alone was estimated to cost nearly half a million dollars. Despite devoting a staggering amount of resources to enforcement, it took more than a year for the city to convict its first homeowner: Scott Shatford, a 13-year resident who had written a book on home-sharing. Local prosecutors charged him with a crime, fined him $3,500, and put him on two years’ probation – all for merely sharing his home with willing consumers.

The costs of regulations for home-based businesses and home-sharing are most acutely felt by the small businesses and individuals who are the least capable of navigating and paying for the costs associated with a labyrinth of regulatory requirements. Research from the Mercatus Center and Rutgers University demonstrates that the per-worker cost of complying with regulatory requirements is higher on small businesses than it is on larger firms. Home-based businesses often employ few workers, if any – but they must navigate local zoning restrictions, permit requirements, and other regulatory obstacles before they can operate. The same is true when cities impose outrageous fines, complex permit requirements, and outright bans on home-sharing; bigger businesses can better afford to absorb the costs.

Yet there are few, if any, public benefits associated with these regulatory responses. A common justification for regulating both home-sharing and home-based businesses is that the practices create negative externalities for neighbors and communities, such as “party homes” or traffic concerns. But any interest the public has in safe and quiet neighborhoods can already be protected by existing laws. If a home-based business is attracting customers that create parking difficulties, local parking regulations already afford an avenue to address that problem. If an individual home that is being rented by visitors is too loud, then existing noise ordinances and nuisance laws provide ample remedies to affected neighbors and municipalities. But one-size- fits-all bans or near-bans go far beyond addressing public safety concerns.

The benefits of allowing home-sharing and home-based businesses, by contrast, are significant. Prior to Miami Beach’s functional ban on home-sharing, studies showed that the practice had a $253 million impact on the local economy. The impact can be particularly acute for individual homeowners. Several home-sharers rent guest houses or rooms in their home to offset the costs of homeownership, particularly in high-priced residential markets. In 10 of the largest U.S. cities, more than half of Airbnb hosts now say they couldn’t afford homeownership without the extra money they make from home-sharing.

Home-based businesses are also an important way that many Americans earn a living. As a practical matter, these businesses make work available to stay-at-home parents, the handicapped, and others who find it difficult to leave their homes. In some industries, operating from a brick-and-mortar office simply isn’t necessary. In others, it’s prohibitively expensive, especially for those operating on razor-thin margins. The vast majority of home-based businesses are small businesses; they are set up because of the relatively low cost of entry or the accessibility or practicality required by those who might not be able to engage in full-time off-site employment (for instance, stay-at-home parents or the disabled). Small home-based businesses often grow into major economic drivers. Some of America’s most venerated firms started as home-based businesses, including Apple, Google, and Amazon. Those businesses might not have been able to grow into the venerated firms they are today if they had not been allowed to start in someone’s home.

Despite the obvious benefits associated with a permissive attitude toward home-based activities and the high costs of heavy-handed regulation, prohibitions abound. Fortunately, there are several actions lawmakers can take to ensure that these long-time practices – made easier and better through communication technologies – continue to thrive.

V. Home-Grown Solutions

A patchwork of policy solutions have been proposed to protect home-based businesses and home-sharing. Significant progress has been made at the state level, which – for two reasons – is arguably the most appropriate locus of such reforms. First, statewide reform ensures uniform protections for homeowners throughout the state. A person who operates a home-based business in one city, for example, can move to a neighboring city without facing new regulatory effects on her ongoing business. Similarly, a homeowner who rents a second home in another part of the state, particularly in states with wide seasonal weather variations, can do so without varied regulatory restraints.

Second, speaking generally, state lawmakers are less likely to be swayed by local special interests and concerns from NIMBY neighbors. Instead of giving substantial weight to parochial concerns, state lawmakers are more likely to accept arguments that both home-sharing and home-based businesses create desirable economic opportunities.⁷

Despite the low cost and myriad benefits of home-based businesses, reforms protecting home-based businesses have not generally been comprehensive. Many such reforms focus on particular industries. For example, cottage food laws have been passed in several states, allowing small farmers, home bakers, and others to sell small quantities of locally grown or homemade goods. In just the last decade, nearly 20 states have enacted different versions of cottage food laws. Colorado has a particularly robust cottage food law,⁸ as do several other states.⁹

Utah has taken a broader approach. Under Utah law, a municipality may not charge a fee for residents to operate a home-based business if that business has no greater external impact than would occur with normal residential use.¹⁰ Under this law, cities are also prohibited from requiring a license or permit for a business that is operated by a minor, such as a lemonade stand.¹¹ Utah also prohibits cities from requiring licenses of nonprofit home-based operations.¹²

In 2018, the Arizona Legislature considered a measure, the Home-Based Business Fairness Act, that would have broadly protected home-based businesses. Like Utah, the bill identified no-impact home-businesses, but went one step further than Utah’s statute. Under the Arizona measure, cities could not require home-based businesses to obtain costly permits and licenses without evidence that the business caused disruption above and beyond normal residential use.¹³ The measure did not ultimately pass, but it serves as a model legislative solution at the state level.¹⁴

As noted above, most policy action on home-sharing has been in the direction of restricting home use. Nonetheless, there have been some positive developments.

In 2016, Arizona passed the most comprehensive home-sharing measure in the country.¹⁵ Arizona’s home-sharing law prohibits cities and towns from passing outright bans on home-sharing or otherwise treating short-term rentals differently than other home uses. The measure allows cities to take enforcement actions against noise, traffic, and other nuisances as cities already do.

Other states have proposed or adopted similar measures. In 2018, Indiana passed a statewide law that prohibits cities and towns from banning home-sharing of a homeowner’s primary residence.¹⁶ Tennessee lawmakers proposed legislation that would prohibit local bans on home-sharing, but ultimately passed a narrower version that protects homeowners who were already lawfully renting their homes from new local bans on home-sharing.¹⁷

At the local level, Colorado Springs stands out at the rare exception of a city that has moved to protect home-sharing, rather than restrict it.¹⁸ Under an ordinance that was unanimously passed in late 2018, homeowners in Colorado Springs are free to home-share – so long as they obtain an annual permit, pay sales tax on rentals, maintain property insurance and an emergency point of contact, and follow the same local rules regarding noise and nuisances as other property owners.

At the state level, Arizona’s reform is a model one, ensuring that homeowners throughout the state (and others who wish to visit it) are protected against local overreach. Colorado Springs has also done what municipalities everywhere should seek to do by concentrating on creating quiet, clean, and safe neighborhoods; this approach focuses on enforcing reasonable rules that apply to everybody, rather than arbitrarily limiting the rights of homeowners and preventing those seeking a home-sharing experience from doing so.

California made a modest step toward protecting home-sharing in 2017, when it liberalized its rules for accessory dwelling units (ADUs), which are sometimes known as “granny flats” or “in-law suites.” These units provide homeowners with another means of sharing their homes, whether with family or with other paying visitors. The new law permits one ADU per single-family home, and it eases the permitting process by making it ministerial. That law further waived what had been one of the biggest impediments to building an extra unit: parking requirements. Historically, homeowners who sought to build a granny flat were forced to construct or otherwise supply parking spaces for the unit – no easy feat in crowded cities like Los Angeles. That requirement alone made it significantly more expensive and onerous to construct an ADU. Under the new law, cities cannot require more than one parking spot per unit, and units that are located within a half-mile radius of a transit stop or within a block of a car-sharing location  are exempt from parking mandates altogether.  In 2019, the state prohibited cities from imposing owner-occupant rules, further freeing home-owners to rent out space on their property.

Recent reforms in Portland, Oregon have been similarly successful. In 2009, the city waived some ADU development fees and reduced the cost of a permit by as much as $15,000. The result was that, by 2015, the number of ADU permit applications tripled, and the city now approves more than 100 each year. This provides yet another way that people may earn money by sharing space in their residence.