It is an enticing prospect to use an extra room in your house, dedicated guest space or a second home as a short-term vacation rental, especially if you own property in a desirable travel destination. You just have to remember that it is a business and you should treat it as such. It’s important to have a smart financial plan that allows you earn more profits than headaches.
Unfortunately, many people go into short-term vacation rentals as a “fun thing to do” or think it’s an easy way to make a little extra cash off of their unused space. It is not a get-rich-quick scheme, and many homeowners find themselves losing money due to poor planning and execution.
One of the first things you need to do if thinking about using your house as a short-term rental is to calculate your operating expenses and weigh those against potential earnings. This cost structure will help you determine if your vacation rental is viable, and will also help you set rental prices. Let’s break down some of the primary expenses you need to consider:
If you are renting out part of your primary home, it’s a good idea to figure out the percentage of the home being used and apply that to a percentage of the mortgage, property taxes and other base homeownership costs. This will be important come tax time because you should be able to write those percentages of as business expenses. If you own a second home and use it solely as a short-term rental, then you’ll have more to write off. A second home that is used part of the time as a rental and part of the time for your personal use will get more complicated to figure out an accurate percentage of costs being applied for “business purposes.” Talk with your tax advisor if you are going into the short-term rental game.
Again, this may be a percentage calculation depending on any shared usage of the property. And again, these will be important tax-deductible expenses to track.
If you’ve ever rented an AirBnB, you know there’s usually a hefty “cleaning fee” tacked onto your bill by the time you finalize your reservation. Whether you pay for a professional cleaning service (recommended) or do the cleaning yourself, you have to factor in the expense with each tenant. In most cases, the cleaning is a break-even point and should not be a sneaky profit-grab on your part. Then, there may be other general property maintenance costs to consider:
Many short-term rental owners will hire a professional property management company to handle the day-to-day aspects of maintenance, cleaning and restocking. If that’s the case, then you’ll need to assess those fees as part of your cost structure.
I mentioned the restocking of consumable goods like toilet paper and shampoo above, but there are usually other permanent or reusable supplies you will generally need in your short-term rental. Examples include towels, linens, television(s), clock radios, furniture and more. It’s usually a great idea to keep extra towels and linens around to replace quickly if you don’t have time to do all the laundry in between daily guests. Keep track of any and all extra supplies you purchase specifically for the rental.
Most short-term rental owners are going to use services like AirBnB or Vrbo to advertise their rental listing and manage reservations, reviews, etc. With these services come extra fees. They may eat into your profit, but usually pay for themselves by giving you a convenient and effective method of getting your rental property in front of as many potential vacation renters as possible. You just have to remember to factor these expenses into your cost structure and business plan.
Certain states, counties and cities have special taxes for vacation rental properties, often known as “transient occupancy taxes.” Be sure to know your tax liabilities if planning to use your house as a short-term rental. Some HOAs might even require additional fees for rental use. You may be subject to local business licensing or periodic rental inspections.
I’m not trying to scare anyone from operating a short-term rental. In fact, they can be very lucrative if managed well. The important thing to remember is you have to go into it as a business and you have to plan wisely. Figuring out your cost structure will give you the baseline to make the investment as profitable (and hopefully as stress-free) as possible.
To talk about your short-term rental financial plan and specific tax liabilities/benefits, contact Illumination Wealth today. Let one of our trusted advisors walk you through the process and get you fully prepared for this excellent income opportunity.