Written by: Geoff Curran, CPA/ABV, CFA, CFP® and Alex Golubev, CFA
The last few years have seen tremendous growth in the short-term rental housing economy. Services like Airbnb and VRBO connect homeowners and travelers around the world. While vacation rentals aren’t anything new, home-sharing platforms make it more convenient than ever for homeowners to earn extra money on their personal residence or vacation home. Airbnb fosters accountability and transparency by inviting hosts and guests to review and rate each other on criteria like cleanliness, following house rules, and ease of communication. A whole ecosystem of services has also sprung up to streamline and improve host operations (Smartbnb, AirDNA, NoiseAware, Vacasa, Evolve and many more). However, vacation rental remains a highly competitive and regulated industry.
Hosts in the Airbnb space face many challenges for success. Setting up homes for vacation rental, optimizing rental rates and cleaning properties between guests eats into time and money. Once rentals are rolling, even successful properties can hit speed bumps. Tourist demand is often seasonal or focused on appealing properties in central locations. Low barriers to entry can also reduce profits as more hosts enter the market and/or authorities create regulations to raise the bar. Short-term rental earnings have curbed in highly-regulated tourist hubs like New York, LA, San Fran, Barcelona, Berlin, and Amsterdam.
Given the popularity and potential of Airbnb, clients have started asking whether it makes sense to rent out their homes. We always encourage our clients to consider how renting their property will affect their life. If renting out your home helps you support your lifestyle and travel more, then exploring AirBnB could be an exciting opportunity.
AirDNA is a great starting point for researching vacation rentals in your area. AirDNA can help you assess the earnings potential of your home, whether you’d like to rent out your entire place or just share a room. Dipping a toe in the water of home-sharing during your next trip out of town is a great way to start!
The checklist below provides helpful points to consider before renting out your property:
- Home Insurance: Check with your home insurance provider to ensure that your insurance coverage is still adequate and will remain in force if your home is rented out. The strategy of doing nothing and asking for forgiveness later just won’t work with insurance companies if you have a claim.
We reached out to Sue Greer from Propel Insurance for her perspective on managing liability. She emphasized watching out for “contract language that can limit, or void, coverage entirely when the property’s occupancy is other than what was noted on the signed application.” It’s also important to ensure that your other liability coverage like umbrella insurance will still cover any accidents that may happen on your property if it’s rented out.
- Security: It’s important to make sure that your home is secure and that any irreplaceable valuables are properly locked up when others are in your home.
- Locks: Digital locks are a great tool for avoiding sharing keys with guests, and they provide a simple way to setup new codes for each guest.
- Alarm: You still need to actively use your alarm with guests coming and going. The good news is that alarm companies permit you to change codes digitally so that each guest has their own unique code.
- Safe deposit box: Valuables that you won’t be taking with you, like jewelry and essential documents, should be stored in a safe deposit box at the bank.
- Internet Network: It’s also important to maintain internet security. Remember to create a guest network, and change the wireless password when guests leave.
- Co-host: Since most people rent out their home when they are out of town, it can be very helpful to find someone local that can help if there’s a problem in your absence. This could be someone to clean the property between guests—or even to break up an unruly party! Airbnb can help you find a co-host for 7-20% of the revenues depending on the services provided. There are also many new short-term rental operators that offer co-hosting services.
- Maintenance: With guests coming and going, wear and tear can accelerate, and accidents can happen. Having a high security deposit helps mitigate costs in case of accidents. Given that home maintenance costs anywhere from 2% to 5% of your home’s value each year, setting aside a portion of your rental income to cover maintenance is a good idea.
- Tax reporting: If your home is rented out for greater than 14 days a year, you’ll need to include the income and expenses on your tax return. Make sure to keep track of all your expenses incurred throughout the year related to the rental activities. This includes repairs, supplies, cleaning costs, new appliances and lawn care, just to name a few. Importantly, you can also claim some of your utility costs as an expense, including cable TV and internet, in proportion to how much of the year the home was rented.
If you have questions about this checklist or any other parts of your financial life, we recommend reaching out to a Merriman advisor. We can help with the decision to rent your home and with managing all the moving parts. You’ll have to share all the adventures you’ll be able to take once you explore Airbnb!