Renting Out the Family Vacation Home
April 24, 2019
If you own a family vacation home in the mountains of Tahoe or anywhere else in the country or world, congratulations! The incredible memories made during family getaways can truly last a lifetime for so many generations. Since they are only used occasionally, many family homes sit unoccupied for the majority of the year, providing a ripe opportunity to transition the property into an income producing asset. This transition is often filled with a number of unforeseen complexities, which must be carefully navigated while converting a family’s second home into a Vacation Home Rental (VHR).
Obtaining Proper Insurance Coverage: Property and casualty insurance on a second home is typically less expensive than a primary home since it is not occupied every day of the year. A home used for VHR requires an added level of insurance coverage – one that covers losses incurred when you are in the home, when the home is vacant and, most importantly, when the home is occupied by a short-term renter. Not having proper insurance coverage is a significant risk, as the insurer can deny a claim if a loss occurred while it was being utilized as a vacation rental. To complicate matters further, obtaining a policy can be even more difficult if the property is located in a high fire zone, such as the entire Lake Tahoe basin.
Rental Income is Passive Income: If you rent the home for more than 15 days per year, the income generated can be offset by a portion of the expenses incurred and partial depreciation on the property. The amount you can offset is determined by a ratio of days rented versus utilized personally, and must be calculated for each tax year. Therefore, it is important to track each day someone is in the home, and to talk with your tax advisor to ensure you are filing the proper tax schedules. In addition, in the event the business expenses and depreciation exceed the income generated, this will result in a passive activity loss. Passive losses can only offset other passive income, such as those generated from another rental property, unless you are a real estate professional. They cannot offset gains or income produced by an investment portfolio or other active activity. Unused passive losses carry forward into the next tax year.
Consider This a Business Start Up, and Start Ups Have Expenses: Depending on the current state of the home, cosmetic improvements might be necessary to add to the appeal. This can include repainting walls, updating hardware, adding artwork and replacing furniture. Additionally, there could be costs associated with securing your personal property from renters, such as securing closet doors or the kitchen pantry, and setting up external security cameras. There are also some basic items you need to stock the home if you do not already have them, such as cookware, utensils, hotel quality bedding, linens and towels. All of these items are nominal in cost, but when you are bulking up an entire house at once, the costs quickly add up.
The Administrative Burden of Local Ordinances, Permitting and Property Management: Assuming local ordinances do not prohibit VHRs, you first need to look into the permitting and licensing requirements of the local government. Applying for and maintaining a VHR permit is something you can handle yourself or defer to your property manager to maintain. Some property managers handle the entire VHR process – permitting, bookings, revenue collection, occupancy tax payment, property maintenance and repairs, and vendor coordination. Full service management is typically paired with higher commissions, often as high as 35% of the gross revenue. Another option is local property management, leaving you to handle the bookings yourself through one of many short-term rental sites, such as AirBNB, VRBO and Home Away. It is always best to shop around for property management solutions and be sure to ask what additional costs are charged to the homeowner outside of commissions.
The Paramount Importance of Photos and Positive Reviews: Many of the same considerations addressed while staging a home for sale apply when staging a vacation home for photos. Décor, modern furniture, lighting and camera angles all contribute to the look and feel of a home. The listing photos sell the home to potential renters, so they must look great! Great photos draw in renters to your listing, and reviews validate their decision to book. Having poor reviews will significantly reduce your income potential and make for a bad rental experience for the homeowner.
Real estate can prove to be both an income and lifestyle enhancing asset if handled appropriately. If you’re contemplating renting out your vacation home, be sure to talk with your professional team of advisors regarding the financial and tax implications of that decision.
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