Owning a vacation rental property is a fabulous way to create income while enjoying the benefits for yourself and your family. Well-managed properties can easily produce tens of thousands of dollars in profits per year. When choosing your dream property, care must be taken to avoid some common pitfalls which otherwise can ruin your short term rental business.
Below we will go over some of the more common issues that property owners often face. Many apply to almost every property investment, while others are a bit more obscure. Keep in mind that governing rules and regulations vary significantly by country, state, county, and even local jurisdiction. Be sure you do your due diligence in your locale before purchasing that dream property.
State and Local Regulations and Fees
As vacation rental listing sites such as Airbnb and VRBO have grown in popularity, so have the number of regulations governing them. In some areas, notorious party houses have caused municipalities to limit short-term property rentals or ban them altogether.
Other areas have caved in to lobbying pressure from hotel companies that don't like the competition. In doing so, they have created hurdles for property owners. Additional licensing, fees, or regulations may be in place. Everyone wants a piece of the pie, including governments on all levels.
Be sure that you understand the climate in your area before proceeding with any purchase. A good tactic is to check the listings on Airbnb. If there is a fair number of listings, you can be confident that you can proceed safely with your purchase plans.th your purchase plans.
State and Local Taxes
Related to the previous topic are the collection of State and Local taxes. Along with the income tax that you will be paying for your property revenue, you can expect that localities will want their cut of your profits. We have properties located in areas that require state, county, and a "Lodging" tax, whatever that is. These taxes are money that you must collect from your guests when they stay, so be sure to charge them accurately. If not, you will be paying out of your pocket.
Most of the large listing sites will collect and submit these taxes on your behalf if you set up your property profile correctly. If you are self-advertising and renting, be sure to collect and pay these taxes.
Health Department Licenses
Health Department Licenses? Yup, welcome to the hospitality business! Most areas will require some level of licensing through your Health Department to operate. The theory behind this is that you provide lodging accommodations, so your property must meet specific health standards. If your area does not require a license, be thankful! The process requires submitting an application in our area, renewing annually with the $216 fee, and allowing an inspector to conduct site inspections at the property as deemed necessary.
This one should never be an issue if your purchase is made through a professional, competent Realtor. If you are purchasing without using a professional, be sure to read the fine print on the property disclosures. You do not want to buy your dream property to find out later that you owe $30,000 for the previous owner's street assessment.
Properties in communal areas such as condos and townhomes often have siding, decking, or common area assessments for all owners to share the expense. Be sure to make sure that the current owner is all paid up. Check with neighbors to see if they are aware of any new assessments that are coming soon.
Homeowners Association Bylaws
Vacation rental properties that are governed by a Homeowners Association require special consideration. Some associations have in their bylaws language that will restrict the number of properties that can be rented out or ban vacation rentals. Usually, this is to protect the community from unwanted noise and partying. For safety's sake, associations that allow short-term rentals may require that all guest's contact information is on file with the association before the visit in the event of an emergency.
The key here is to be sure to review any association bylaws before you purchase in a communal setting.
Some vacation rental properties are part of a larger resort complex. They are individually owned but share resort expenses via high HOA fees. A resort management company typically oversees common area maintenance and operates any restaurants and shops on the premises.
There may be a variety of rental options for owners of this property type.
Rent through the resort management company. Advantages are a hands-off approach for owners as the resort usually handles bookings, maintenance, and housekeeping. The disadvantage is the significantly reduced rental income for the property owner. Resorts often take 25%-50% of the rental revenue.
Rent through a separate property management company. Like the option above, the management company does most of the dirty work for a fee, but generally at a lower rate than what the on-site resort company would charge.
Self-Rent option where the owner runs the show and collects 100% of the revenue. This is by far the most profitable option, but also much more work.
So, where are the pitfalls here? In our experience, we have found that as more and more people try their hand at self-renting through Airbnb or VRBO, the resort management groups get anxious. They see their revenues decreasing and may try to take action to gain that business. We have personally experienced greedy resort groups' attempts to outlaw self-renting or renting through third-party management companies. They try to justify their actions by citing security concerns and other manufactured excuses. These attempts were resounding failures as they were met with vigorous opposition.
The last two items that we will cover are related, extremely important, and more challenging than they appear on the surface
The key to your rental business success will be your reputation, which is based mainly on your guest reviews. A couple of bad reviews can significantly impact your listing position in search results and guests' willingness to book your property. The biggest complaint that consistently appears in negative guest reviews is dirty accommodations due to substandard housekeeping.
When we first started our rental business, the biggest challenge, much to our surprise, was finding housekeeping help. In a blatant attempt to make a sale, our realtor told us that we would have no problem finding good help. This proved to be entirely untrue. The contacts we were given were dead ends. Our foray onto hiring sites such as Indeed produced no qualified applicants. We were our housekeeping for the better part of a year before we finally found our housekeeper through word of mouth. We pay her very well to ensure that she remains with us.
So what happens when the air conditioner in your rental unit goes out on a 90 degree summer day? Hopefully, you either have skills or have a quality handyman that you trust. What about an overflowing toilet in the middle of the night? Have your trusted service people lined up or plan on some unpleasant nights.
One way to avoid expensive service calls and guest inconvenience is preventative maintenance. Do frequent walk-throughs, so you know potential trouble spots. Clean out drains periodically, even if they do not appear not to be plugged. Do you want to roll the dice on getting one more season out of that 20-year-old microwave oven? Sometimes being proactive can save money and frustration in the end.
Being a vacation property rental owner can be a gratifying experience with the potential for significant income. Just be aware that there are potential hidden costs and plan proactively to keep your rental operation running smoothly.