Vacation Rental Ownership for Beginners
Back when I worked as an exclusive buyer’s real estate agent, most of my clients were looking to purchase vacation homes. Almost every home that we looked at, the selling agent included in his or her sales pitch, “And it would make a great vacation rental”.
So just WHY do people consider renting out their vacation homes to strangers? Well, duh – ninety-nine percent of the time, it’s money, of course. (Although, I say 99% of the time, because, one of my properties is that 1% — we started renting it out because, as an old house, it needed to be lived in… to have the systems used regularly, instead of sitting and rusting away 50 weeks out of the year).
With the popularity of AirBnB, I’m seeing people all around me jumping on the bandwagon to purchase vacation rental homes. It sounds so easy — buy a house in a vacation location, list it on AirBnB and sit back and rake in the cash.
And then I sit next to the woman at the vacation rental conference. We exchange information — she has a lovely home on a lake. She’s been renting it as a vacation rental for about 20 years. For a lady of a ‘certain age’, she seems very internet savvy about listing on all of the different rental websites. We chat for quite awhile. Then she says… “You don’t actually make a profit from your vacation rental, do you? I’ve never met anyone who actually made a profit.”
I think she hit the nail on the head — most folks who purchase homes specifically as a vacation rental will most likely be out of business within a few years or so. Most naively go into rental business not realizing the work that goes into it. Yes, you can break even. You can even make a profit, but not without lots of work and elbow grease (both the physical and mental kind). Here is just a short list of things to consider before you sign on the dotted line an go into the vacation rental business:
1) Legalities. I think that too many people go into business… and YES, it is a business, without really thinking it through. Depending on where you live in the United States, you may need to register with your town, county or state, obtain a business license, pay sales tax and most definitely pay income taxes. Yes, that’s right. If you rent out your vacation home for more than fourteen days per year, you will have to declare the income and pay income taxes on the rents. You will be a landlord. Of course, expenses and trips to the house can sometimes be written off, but talk to your accountant!
2) Insurance. Then there are things to consider such as insurance. (My first 10 years in the rental business, I had the wrong kind of insurance — I was darn lucky I was never sued). In most cases, your regular homeowners insurance isn’t going to cover you if a guest trips over a tree stump and breaks a leg and sues you. Your insurance company will determine that you are renting your home as a business and they will only cover you as a homeowner. So, insurance shopping you must go… Luckily, with vacation rentals becoming more popular, more companies offering commercial coverage for short term rentals are becoming a tad easier to find, although, often they are double the price of regular homeowners insurance.
3) Safety. Once insurance is taken care of, safety issues must be addressed. Smoke detectors, CO2 detectors, fire extinguishers and/or fire blankets should be up to date and tested regularly. Upstairs rooms should have two means of egress — one of my rentals was an old house and I needed to enlarge a window to make it big enough for someone to escape in case of fire. Bannisters and deck railings must be secure. If an owner is going to provide kayaks or bicycles (or even a highchair or crib), make sure that the insurance will cover the liability and there are no recalls. Providing kayaks and bicycles adds another set of safety concerns — remember to provide PFD’s and helmets and make sure that someone inspects the equipment in between EVERY rental to make sure everything is in good working condition.
4) Cleanliness and Cleaners. Okay. So now you have insurance and have taken care of all of the safety issues in your home and on your property. The next step is to concentrate on cleaning. It is a new world — the world of yelp and reviews. If your home isn’t clean, you will hear about it. And the entire world may hear about it, if the guest is so inclined. Since owning vacation rentals, I find myself much more understanding when I find a spare dust bunny in a hotel room. Changeover days are usually weekends and, believe me, those cleaners work hard! They may have multiple homes to clean in a very small sliver of time and they never know what kind of mess they might walk into. Cleaning standards for vacation rentals need to be a higher standard than just an ordinary house cleaning. You should also consider having a spring deep cleaning, especially if your property has been closed up for the winter. When you find a good cleaner — treat her (or him) well.
5) Property Managers. Speaking of cleaners, unless you live near to your vacation home, you’ll need to start interviewing and hiring a local team to service the property. Sometimes a neighbor can step in and do the work (make sure you reward him/her handsomely). Sometimes you’ll need to hire a property manager. You’ll need someone to do the changeover cleanings, someone who can do the yard care, pick up trash and someone to be available in case of questions or emergencies that can’t be handled from afar. Sometimes there will be real emergencies. Hurricanes. Broken water heaters. Dry water wells. A St. Bernard will pee on a sofa . Yup. It’s all going to happen at some point and you’re going to need someone reliable to be on it immediately. (By the way, did you know that there is a company that will ship you a new sofa in boxes via UPS? Homeware.com – awesome!)
6) Decor. Decorating is usually the fun part. Once upon a time, vacationers didn’t really expect much in the way of decor in a vacation rental. But, like everything else, times have changed. Travelers don’t want to lounge on threadbare sofas and feel the springs coming through the bed mattresses. Most rentals these days supply linens and towels so these must be provided, clean and unstained. You don’t need to spend a fortune, but a small investment usually pays off.You never know what particular amenities that a guest may want (and you can’t please everyone). But there are some no-brainer amenities that should always be included depending on your area (ie. in Maine… a lobster pot). There are some items that will need frequent replacing— towels, washcloths, fitted sheets, pillowcases, mattress covers, potholders, dishtowels – usually need to be replaced every year if not more often.
7) Advertising, Marketing and Booking. You might want to hire someone to do your bookings and handle the management of rents and guests or you may want to do it yourself. You certainly can take some pictures yourself and put them on a listing site – AirBnB, VRBO, Flipkey are just a few of the dozens of listing sites that are out there. You’ll need to decide on rates, whether or not you want to charge a security deposit, what amenities you want to offer, the number of guests that you can host. Then you need to be available when an inquiry come in — I’ve found that in the northeast, most inquiries seem to come late in the evening or on weekends. The more quickly you can respond, the better the chances of getting the booking. From my experience, older folk like to communicate more and sometimes like to hear your lovely voice on the phone. Younger folk (and I’m talking about under the age of 50), usually like to do everything online quickly via the internet. Each year, more and more of my bookings are quickly done online with little conversation with the guest.
8) Finances. As far as finances go, PLEASE speak to an accountant, but generally, you’ll want all income and expenses to be kept in a separate bank account from any other household funds. You’ll also want to keep careful records as much of what you spend on your rental home may be tax deductible at the year end (but that is what your accountant will determine). Even some of your own vacation may be a write-off if you spend more time of the day working than lounging (I only WISH I had time to lounge when I’m at my rentals). Your attorney and/or tax professional should also advise you if it’s wise to put the property in an LLC to further protect you from liability. I am not an attorney nor an accountant so I’ll just leave it with the advice to get advice from the appropriate professional.
Are you discouraged yet? I don’t mean to be discouraging. But, unless you pay a property management and booking company to run your rental business for you, it is a job. Even before I opened my rental business — when I just rented out my two (at the time) vacation homes, I spent a geeky amount of hours improving my properties and marketing my properties. I find it fun. Will I make a profit after all is said and done? Maybe. Will I retire rich from my vacation rental properties? Hardly.