Essential Considerations for Short-Term Rental Operators

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Rentals for vacationers and travelers through platforms such as Airbnb, VRBO, HomeAway, and Vacasa have seen a surge in popularity over the past few years, and offer an alternative to the traditionally available options like hotels, resorts, and hostels. With the increase in consumers seeking alternative options, more and more property owners are embracing the opportunity for additional income through renting out a room in their home or apartment, or entire homes, apartments, and vacation properties. However, with this opportunity comes numerous regulations and potential risks as well – Airbnb has reported owners’ homes sustaining substantial property damage and theft due to unauthorized parties or other incidents. The best way for a short-term rental host to ensure compliance with all applicable laws and regulations and safeguard against these concerns and other potential perils is to plan ahead, and make sure they are protected to the best possible extent.

Creating a Tailored Rental Agreement

While short-term rentals are not “leased” by a landlord to a tenant in the traditional residential property rental model, there is nothing stopping owners and operators from laying out expectations and rules in a formal agreement for their short-term rental units.  In fact, the best way for a short-term rental operator or host to protect both themselves and their prospective rental customers is through a short-term rental agreement tailored to the specific property which clearly defines the expectations and duties of both parties.

Important terms and matters to be addressed in such an agreement include:

  • Rental Term – duration of stay, check-in and check-out times, and access information.
  • House Rules – everything from guest limits and age requirements, to terms of use, safety measures, pet allowances, smoking, and more.
  • Liability and Damages – damages to property and furnishings, potential personal injury to renters or guests, maintenance and repairs, indemnity, and requirements for conditions of the premises.
  • Assignability – subletting or transfer of property during rental term.
  • Cancellation/Termination – under what circumstances, penalties, damages, force majeure.
  • Other unique characteristics or requirements pertinent to a specific short-term rental property.

Legal and Regulatory Compliance

Another primary concern for short-term rental owners is ensuring compliance with all applicable laws and regulations, at the municipal, county, state, and federal level. Additional unique regulations may apply if the rental property is a part of a homeowners or condominium association. Many cities and counties impose restrictions on rental properties, and some have even adopted specific regulatory schemes pertaining to short-term rentals. It is also important to consider local zoning laws, rental caps or limits imposed by a homeowners association or similar entity, and potentially applicable hotel-related laws, depending on where the rental property is located.

The rapid rise of short-term rental marketplaces and widespread engagement in the market by consumers will no doubt also lead governmental bodies to address the emerging industry with newly-implemented legislation and regulations. In just the past two months, Seattle has seen the passage of two new ordinances specifically targeted at regulating the short-term rental industry. It is imperative for short-term rental operators to stay aware of and compliant with new developments in the applicable law.

Financial Considerations

Anyone interested in operating a short-term rental property, whether as a primary business or as a source of secondary revenue, is likely doing so in order to generate additional income. It is quite important to understand all relevant financial obligations and implications before undertaking the operation of a short-term rental in order to ensure the investment is a profitable one. The costs of operating a short-term rental property could include, among other things:

  • Acquisition and Startup Costs – initial investments may include the purchase price of the potential rental property, furnishings, marketing materials and advertisement, remodeling, and zoning and permitting.
  • Taxes – in addition to income taxes and property taxes, property owners may also be responsible for other applicable taxes, including transient occupancy tax, sales tax, and local taxes on short-term rentals.
  • Management Costs – whether a property owner chooses to manage a short-term rental property themselves, or employ a property manager to do so, there are costs associated with the management of any rental property.
  • Insurance – mortgage insurance, liability insurance, and other property damage coverage are another important expense in protecting your investment.
  • Seasonal Fluctuations – short-term rentals, especially those catering to vacations, are subject to fluctuating occupancy at different times of year, which can affect cash flow.

The burgeoning short-term rental market presents new opportunities for property owners – current or prospective, but with these opportunities come important legal and business considerations. Being mindful of these factors and protecting your investment can be the difference between a successful business opportunity, and an expensive mistake. Feel free to contact Helsell Fetterman with any real estate, land use, business or related needs.

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