Vacation Rental Homes Come With A Window On Red Tape

Investor's Business Daily

Do you dream of buying a piece of paradise, a vacation rental? Beware the bureaucracy.

Short-term rentals — properties that rent nightly, weekly or even seasonally — are often subject to specific usage, nightly tax and permit rules. And these regulations vary from state to state, county to county, town to town and even among property associations.

"I really suggest that buyers thinking about buying a vacation home or condo do their research," said Margit Tolman, a real estate agent and property manager for ERA Pacific Properties in Maui.

Astute local property managers and real estate agents can help tutor you. But here's a study guide on vacation rental issues and rules, whether you're considering a condo that rents for $75 a night, or an East Hampton mansion that rents for $100,000 for the Long Island summer season.

Permits And Taxes

Rule No. 1, most vacation rentals are subject to a nightly tax, sometimes called a bed tax. This can be charged by a state, county or city. Owners must pay the tax, a percentage of their rental fee, monthly, quarterly or annually, per the rules of the taxing body.

In the Lake Tahoe ski and mountain area of Truckee, Calif., vacation rental owners pay a 10% bed tax to the city of Truckee each quarter on any rental of less than 30 days, says Rich Lewis, co-owner of Truckee Mountain Vacation Rentals.

In Hawaii, Maui County vacation rentals (properties rented for less than six months at a time) are subject to nightly tax of 13.42% (4.167% in general excise tax and 9.25% in a transient accommodations tax), Tolman says. The tax payment schedule is set up with the county and can be monthly, quarterly or yearly.

In Florida nightly bed taxes that counties charge run 2% to 5% of rental cost and are collected monthly, says Dale Peterson, owner of Dale E. Peterson Vacations, a rental management firm in the Florida Panhandle beach hot spot of Destin.

Property taxes for vacation rentals can be higher too. In Maui, owner-occupied properties pay a lower tax than vacation rentals and long-term rentals. And in Florida, an owner-occupied property gets a homestead exemption, lowering the property tax, says Peterson.

Vacation rentals also may require a permit from the county or town and/or permission from a homeowners association (HOA). Truckee vacation rentals don't need a permit. In Maui, condos in approved hotel and vacation rental zoning districts can be rented to vacationers short term. But owners of properties and homes seeking to do business as a bed and breakfast or single-family vacation rental must get a permit from the county. The B&B ordinance was updated in January 2009 and the short-term rental home ordinance was approved by the mayor in May 2012.

Tolman says getting a short-term rental home permit on Maui takes time and costs $1,500 to $2,000 if the process goes smoothly. If zoning issues or questions from neighbors arise, it can cost a lot more.

On New York's Long Island, owners in the Hamptons have been renting their homes with little regulation for generations. However, in some communities, new rules are now coming into play. The town of South Hampton now requires permits for vacation homes, which cost $200 and must be renewed for $200 every two years, says Dawn Neway, a real estate agent and property manager with Douglas Elliman Real Estate in East Hampton, N.Y. The permit application is very detailed, requiring information about code compliance, floor plans, smoke detectors and more, she says.

In East Hampton, the town doesn't require a vacation rental permit, but town ordinances prohibit certain types of rental sharing arrangements. For instance, "no more than four unrelated people can share a rental," Neway said. So a house rented for the season could have eight people sharing it, but four would have to be family.

"It gets complicated," Neway said. "They're trying to crack down on a bunch of people doing a share house." And in both East and South Hampton, rentals must be at least two weeks. Neway says it hurts owners and renters by "stopping families from coming out for a week.

Rental owners also need to be up on event and parking restrictions from towns and HOAs.

In the Hamptons, depending on the town, you need an event permit for gatherings of more than 100 people, Neway said. And parking can be restricted for events or just for rental houses.

Rental Management

So how do you attract short-term renters? Around the country, traditional rental management agency fees typically run 10% to 25% of the rental cost. The fee covers the agency advertising and booking the rental, and setting up cleaning and managing issues (lockouts, complaints, repairs, etc.) if needed.

More and more owners are handling at least part of their own bookings online, via websites like VRBO, TripAdvisor (TRIP) or FlipKey.

By necessity most property managers will work with owners who do some of the bookings themselves. However, in Maui, any vacation rental must have a local representative on-island, either a professional property manager or a local friend or handyman. In South Carolina's Folly Beach, a local agent able to respond in 30 minutes to any problem is required for vacation rentals, according to the town's website.

If owners book a rental online without the aid of a property manager they also use, typically they don't pay the management fee for that rental. But arrangements vary place to place and company to company.

In the mountains, driveways need to be clear of snow, the water needs to be on and customer-savvy owners will have the heat on for their renters before they arrive. So Lewis offers his owners who've booked a rental themselves, "an open and close service for $25," he said. And he will arrange a cleaning of the property after the rental and bill it to the owner for $35 an hour.

Marketing And Decor

Savvy vacation rental owners maximize bookings by offering specials to fill in slow periods and off seasons. Lewis says he offers specials on Craigslist and other websites on the premise that a discounted rental is better than an empty house.

"I tell my owners something is better than nothing," he said. "Everybody is looking for a deal and you've got to be customer-friendly.

Another nuance: VRBO homes sold to a new owner lose their previous rental reviews and rating. The new owner must create a listing.

"The rental experience is created by the owner" so a new owner can change the experience, good or bad," said Victor Wang, spokesman for HomeAway (AWAY), which runs VRBO.com and Homeaway.com.

What decor helps a vacation rental property? Managers say fresh furnishings — a beach house should be cozy, clean and light and bright.

"You can practically double your rent if you throw away your La-Z-Boy," Neway said.

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