As we cruise through a warm and sunny (and so far little smoke) here in Montana, a lot of you are already starting to plan your late summer vacations and what happens in your life this fall. I love planning next years trips right now, so I get the best pick of places to stay, and finish off the year off with fun times to look forward to.
On the subject of staying in great places, I'm sure you’ve heard great things about being an AirBnB host from at least someone you know. You'll make lots of money, it will be completely booked all summer, your guests will end up paying for the place and then some... it’s totally win-win.
Isn’t it? Let's dig in.
Short Term Rentals and You
Using your personal home, in whole or in part, as a short-term rental can certainly help pay the bills, but the truth is that short-term rentals also have issues you have to consider. It’s not as easy as just throwing up the listing on AirBnB and hoping for the best. You’ll need to do the necessary back end work before getting started, otherwise you may find yourself in some trouble and with expensive problems that eat all your profit. And if there's no profit, what's the point?
Still, it can be a good solution for some homeowners. Before you list your spare room, make sure you’ve considered these five things that might complicate your situation:
Does your mortgage allow you to rent the property without penalty? Many loan programs that help people buy with a low downpayments have restrictions on renting the building. If the short-term rental you’re offering was purchased with you as an owner-occupant, there is likely language in your agreement that spells out what constitutes a breach by turning your house into an “investment property.” Generally, if you rent your property for more than 14 days in a year, you risk having to face the music.
Despite what many websites may say about a lack of punishment for using your home as a rental when it goes against your mortgage agreement, remember your mortgage likely has an acceleration clause that explains under what conditions your loan will essentially be revoked, with the entire balance due immediately. If you can’t cough up those hundreds of thousands of dollars, your bank will foreclose.
Find the paperwork, then scour it (and have a friend or three take a look, too) before you move any further. You should have gotten a copy at closing, check the packet the closing company sent you home with. Hopefully you can move past this hurdle easily.
Do you have the right Insurance coverage? Even if your mortgage lender is ok with your using your place as a vacation rental, you’re still going to need the blessing of your insurance company. Although places like AirBnB claim to offer insurance, the truth is that it’s very hard to convince to pay out on claims. AirBnb is notorious for favoring tenants over owners in situations like this. It's also not a great idea to bank on a third party policy that may not carry specific instances. Message me and I can share an insurance option with you.
What do your neighbors think? The number of articles that have been written about neighbors pushed beyond the brink by AirBnB and other short-term rental guests is staggering. Even if your homeowners association and zoning allows for short-term rentals (check with your HOA and planning and zoning), if your neighbors are becoming perturbed because your guests are real jerks, you may have bigger problems on your hands. Every day there's a new article about a city that has just imposed strict regulations on short-term rentals.
Check your zoning, then possibly talk to your neighbors about your goals with the short-term rental, including the timeframe in which you intend to have guests and for how long they’re likely to stay. Starting a conversation with your neighbors about your vacation rental plans before things turn into a dumpster fire can make having an AirBnB-listed property less of a dramatic situation. Review city documents and agendas to see where your location stands with upcoming restrictions.
It’s also important to check with your municipality about how long a guest can stay before they become a bonafide renter. In many areas, a “guest” automatically turns into a renter if they occupy the property for 30 consecutive days. You’re then assumed to have a month-to-month rental agreement, which means that you will have to actually evict them if they refuse to go quietly.
Can you refinance your property? This is a tricky question, especially with rates on the rise. Still, you may need to refinance at some point, even if it’s not today. The bad news is that many lenders won’t count the AirBnB income you’ve generated when calculating your debt to income ratios.
Luckily, there are a few banks that are capable of dealing with AirBnB income properties. Even if your lender is open to a refinance, you may be forced into a commercial loan because you rent your property out too often, effectively making it an investment property in the eyes of the bank. If you purchased using a loan eligible for a streamline refinance, you may not have to explain the AirBnB stuff at all.
Do you really want a rental? There are so many people out there that believe owning investment property is key to a better retirement, increased wealth and easy peasy income. Not everyone is cut out to be a landlord, whether you have short or long term tenants.
Owning rentals, especially short-term rentals, is a lot of hard work. From stocking consumables like soap and toilet paper to keeping things in good repair, doing background checks on applicants and keeping your taxes straight, it’s not a low-stress investment. This is why so many property owners rely on property managers to handle the day-to-day stuff.
At the end of the day, even if your PM is doing everything right, you’ll have a decent work load of your own. If you’re not all in on owning a rental, don’t do it.
AirBnB Team, Assemble!
Getting all your AirBnB ducks in a row should also include finding home pros to help in case there’s an emergency. You'll also want to be sure you have a handyman, housecleaner and other people on tap when needed. This can be challenging if you aren't well connected with these people, or at least willing to pay a pretty penny for their services.
Let's talk a bit more about what's involved before you take the leap. If you still decide to go for it, you'll be ready and armed for success!