Top Ten Considerations for Short Term Rental Owners
Consideration for Short Term Rental Owners
Operating a short term rental property can be an intimidating venture. Owners of rental homes are expected to comply with pertinent laws and property restrictions, or hire someone that can help them comply with their obligations. Avoid unnecessary legal risk and focus on maximizing their property’s potential by accounting for these top ten considerations from the outset.
Compliance with property restrictions, including CC&Rs
A property owner should review any property restrictions that apply to the property, including covenants, conditions and restrictions (CC&Rs) to determine whether the owner is prohibited from renting-out their property as an STR before doing so. For example, CC&Rs or Rules and Regulations can contractually prohibit property owners from using their property as vacation rentals by setting minimum rental periods (e.g. 6 months or 30 days). Failing to research the applicable property restrictions or violating terms in the CC&Rs can subject property owners to the risk of unnecessary litigation, injunctive orders from the court, fines, penalties, and the inability to rent the property at all on short term rental sites. The parties to these disputes can include the homeowner associations, neighbors, and other people involved in managing the rental property.
Forming Your STR Business Properly
Creating a business structure to transfer your property into can help manage risk from claims. Carefully consider the type of business structure before transferring the property. For example, the benefits and risks of setting up your business as a limited liability company are different from a sole proprietorship. By analyzing the benefits and drawbacks of different business types, you can align your interests and protect your assets effectively. Property owners should also consider whether the transfer has implications on financing and the other measures needed to effectively manage risk.
Written Agreements or Rules Regarding Acceptable Property Use
In any rental, we recommended having a written agreement with tenants governing the use of the property and/or rules. Written agreements should clarify the amount charged and duration of stay, cancellation policies and applicable fees, and what can be recovered in the event of damage to the property. Property owners should also consider what other rules might apply to the stay such as community rules, parking rules, nuisance/noise, and occupancy limits.
Legal Ownership of the Property
Determining the ownership of your rental property is an important decision because it can, for example, have certain business and tax implications. Reflect on whether your business should own the property or if personal ownership would be more suitable. Consider the implications of mortgage deed transfers and the potential advantages of estate planning: the property can easily be transferred to your intended heir(s) if you pass away.
Applying for Transaction Privilege Tax License
Securing a Transaction Privilege Tax License is a critical step towards running your STR property as a legitimate business. By understanding the significance of obtaining this license and filing monthly tax returns, you can ensure compliance with tax regulations and maintain transparency in your operations.
Other Tax Considerations
Adhering to tax regulations is vital for the success of your short-term rental business. Reflect on the importance of accurate record-keeping, business structures, and issuing 1099 forms for contractors. By proactively addressing tax considerations, you can avoid penalties and ensure a smooth financial operation.
Compliance with Pertinent Local Laws
Navigating city regulations is a crucial aspect of operating a short-term rental property. Explore the specific requirements of your city, such as property registration, noise and nuisance ordinances, notifications to neighbors, and providing proof of insurance. Understanding the importance of compliance will help you build positive relationships with local authorities and neighbors.
Insurance and Risk Mitigation
Safeguarding your property and mitigating risks through proper insurance coverage is essential. Reflect on the best insurance options for your property and the interests of all stakeholders involved. The record owner of the property should be named as an insured on the policy. Property owners should also be familiar with what is and is not covered by the policy and verify whether additional types of coverage are needed for the intended use. Analyze the benefits of corporate umbrella policies versus personal policies, particularly if you own multiple properties.
Direct Bookings
Exploring alternatives to popular platforms like Airbnb and VRBO opens up new possibilities for your short-term rental property. Reflect on the advantages of accepting direct bookings, such as increased control and potential cost savings. Consider the importance of establishing comprehensive rental agreements and implementing effective enforcement measures.
Guest Background Checks
When a booking is done through a direct booking process, the safety and security of your property and guests is still a top priority. It requires careful consideration. Reflect on the balance between guest privacy and your responsibility as a host. By contemplating the importance of implementing guest background checks within the proper legal framework, you can create a secure and trustworthy environment for your rental property.