Interested in renting out your yurt, tiny house or couch? Now there are several options homeowners have to make extra income. For those looking to purchase a second home, renting out to vacationers is a great way to afford an additional property. And for a growing number of travelers, renting a private home offers more choices, comfort and privacy than hotels and often costs less.
There’s no question that the vacation rental business is booming. In the United States alone, revenue in this market is approaching $18 billion, with a projected annual growth rate of 6.6 percent.
While there are plenty of opportunities in the vacation rental business, there also are plenty of questions about how to succeed. If you’re thinking about investing in a vacation rental property (or renting out a property you already own), here are the top four questions to ask before you purchase:
Is a vacation rental a smart investment?
Buying a vacation rental home can be an attractive investment option. Not only will you have a place to call home in a location you already love and visit frequently, but also the property also can be an excellent source of income between visits. The income from travelers renting your property often will cover a significant portion (if not all) of your ownership costs, while you reap the benefits of long-term appreciation.
Of course, your rental generates income only when it’s occupied. Popular websites such as Airbnb and HomeAway connect guests to your property and offer tools to make interacting with your renters and managing your property easier. If you’d rather not do it yourself, a property management company can help with finding renters, handling logistics and maintaining the property between guests.
Keep in mind that, unlike stocks, real estate is not a liquid investment. Buying and selling a home takes time and involves transaction costs. There is often a lot of negotiating and compromising to be done. That, however, hasn’t stopped millions of people from turning their short-term vacation homes into incredible long-term investments.
What are the laws governing short-term rentals in my community?
The rapid rise in short-term rentals has caused some communities and homeowner associations to restrict or even ban them. Many communities prohibit owners from renting out their homes for fewer than 30 days. If you’re not in an HOA community, you’ll probably have more leeway, but some cities and states are starting to impose regulations on vacation rentals, as well.
It’s the owner’s responsibility to learn about short-term rental laws, and failure to comply with those regulations may result in fines and other penalties. While researching changing local regulations can be challenging, a call to your HOA property management company, a visit to your city hall website, and conversations with local friends and neighbors who use their home as a vacation rental can provide clarity. There also are technology platforms that track changing regulations and fees. Do your research and ask experts in the short-term rental space about these types of questions.
Which taxes and fees am I required to collect from guests?
As a short-term rental property owner, you are responsible for collecting any local lodging taxes required in your area. State and local lodging taxes can vary widely and change with little notice. Understandably, it can be confusing (and risky) to try to keep up with them on your own.
This is where a lodging-tax-compliance automation tool can be invaluable. The right lodging-tax software can manage the complexities of your tax and business requirements in your specific location — so you can focus on managing your property. The right tool will offer a full range of solutions, including determining the vacation rental taxes and reporting requirements, as well as calculating and filing returns on a monthly or quarterly basis.
To whom should I charge lodging taxes?
If you purchase a vacation property with an eye toward short-term rentals, the short answer is anyone who rents from you. Whether you or your property is in California, Maine or anywhere in between, the local and state lodging and occupancy taxes must be remitted to remain compliant. Many real estate investors overlook the fact that lodging or occupancy taxes need to be paid to rent the home in compliance with city and state tax agencies. Short-term rentals can offer much greater income potential, but liability can add up quickly if these taxes are not collected and remitted on time. When you enter the short-term rental market, lodging tax collection will need to be a part of every rental agreement and transaction you make.
Is a vacation rental property the right move for you? If you secure the right guidance, ask the right questions and perform your due diligence in the area, it just might be a smart and rewarding investment.
About Rob Stephens, co-founder and general manager of Avalara MyLodgeTax. A finance expert for the rapidly growing short-term lodging marketplace, Rob Stephens co-founded Avalara MyLodgeTax (formerly HotSpot Tax) in 2002 out of his own necessity to understand and manage compliance with his rental property. Avalara MyLodgeTax is the leading provider of tax compliance solutions for the vacation rental industry. Rob has owned and managed his own vacation rental in Vail, Colo., since 1999.