4 pitfalls of owning a successful nightly rental

As the Internet and sharing economies continue to grow, an increasing number of property owners have, or are considering, the new business models offered by the likes of VRBO and Airbnb.

It is all about increasing personal cash flow. And though the additional revenues are attractive, the consequences of these programs also have some downside. And some have drawbacks many haven’t considered.

I’ve been in and around the nightly rental business for over 30 years now. I’ve owned them, managed them, sold them, counseled owners on operations, and on and on.

Some of the first Internet-based vacation rental websites were hatched in my real estate office in the mid-1990s. I’ve seen plenty of evolution and iterations.

But as property owners consider pursuing one of these avenues in their own home or a distant resort location, there are some things to consider.

1. Local jurisdictions will increasingly want to collect bed tax or transient occupancy tax on any rentals less than 30 days. These bed taxes can range from 5 to 25 percent of the rental rate.

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Local governments can and do peruse the Internet and appropriate websites to find almost anyone and everyone who is involved in various nightly rental operations.

If an owner utilizes any marketing (including Craigslist, trade and occupational magazines, and HomeAway sites) they will likely be identified by the local code compliance division. Bureaucrats will increasingly chase these escaped taxes. You can count on it. Expect it.

Most local governments will also require a special business license to collect the bed or “transient occupancy” tax. This is an added expense. But just filing for the license puts them on notice of rental activity.

From there they will require monthly or quarterly reporting of rental revenue and remittance of taxes collected. And if an owner forgets to file or remit, the fines can be substantial — even if no taxes were collected. The necessary collection of taxes alone can often drive some owners back to third-party management companies.

2. This rental activity can become a full-time (or overtime) occupation or preoccupation. I have had more than one Mammoth Lakes condo owner (and client) build up such a highly successful rental program (via the likes of VRBO) that they decided to sell their property; and not because there was some extreme profit to be made.

They had simply created an unruly monster. The fielding of emails from prospects, communicating with bookings, and scheduling cleanings and maintenance became overwhelming. And if there are unanticipated problems (and there always are), then the time consumption can easily double.

Owners with highly desirable properties can build up significant demand including excessive inquiries. Owners with less desirable properties can be inundated with time-wasting bargain hunters. And repeat customers are great, but they can become exacting and are likely to become discount seekers.

For many owners, these operations can become a delicate balance between increased revenue and time constraints.

3. Besides having strangers stay in your “home,” all of this renting creates wear and tear on a property. And this inevitably irritates many property owners who take pride in their properties or have certain personality types.

Renters rarely treat properties as well as an owner, and that is an unrealistic expectation. The owner must budget for replacements just like a quality hotel. It is the cost of doing business. But that can be beneficial in keeping the property fresh and modern.

An owner moving into such an enterprise must learn the value of durable surfaces and simplicity. Successful hotel operators are excellent mentors.

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Any replacements such as flooring, paint and furnishings must be considered for functionality before aesthetics. But the two can be married. But abuse, accidents and theft do happen.

The owner’s cleaning crew becomes the front-line “eyes and ears” and is a critical relationship. Especially with resort properties for identifying problems such as damage so an owner can make claims on security deposits.

Or for an item that needs specialized maintenance. It is important for an owner to find the right people to facilitate the “turnover.” But that is just more time consumption.

The bottom line: If an owner is one who likes everything to be perfect, then renting might not be a wise choice. It is important to have appropriate expectations and expect the best but prepare for the worst.

4. Besides the collection of bed tax, there are other tax implications. A serious conversation with one’s accountant is warranted. Converting properties from nonrental properties to rental properties can have lasting tax impacts.

Rental income and depreciation can be great for the gross income picture but can have other ramifications in the property owner’s grand taxation scheme. Sometimes it can work beautifully, and other times not so well. It is better to understand before rather than after.

As the sharing economy grows and is increasingly pushed forward by new Internet-based marketing, the demand and desire to rent vacant housing space to willing and able customers will only expand. There will be opportunities all around. But it’s a case of “owner beware.”

Paul Oster is broker-owner of Re/Max of Mammoth, has held public office in both planning and tax appeal, and is author of www.MammothRealEstateBlog.com and www.PaulOsterRealEstate.com.

Email Paul Oster.


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