Make Money Renting your Home to Tourests

Vacation Rental in Orange County

Get paid to clean your house

Basically this opportunity exists because it is hard for people with larger families to afford hotel rooms; and a lot of people like to stay in a home environment.  This is an example of where there is a cost advantage to being a small operator.  People renting out their homes don’t typically need to pay for payroll taxes, workers comp insurance, bed taxes, business licenses, …  This is a bit off topic, and becoming a landlord is a bit outside of the scope of this website.  But if you have a nice apartment or house near the Magic Kingdom or in a city that has the word BEACH in its name, you can make bank by renting it out. For instance, there are an estimated 700 homes in Newport Beach and about 300 homes in Dana Point that are used as short-term rentals on a regular basis.  Mammoth and Big Bear have about 2,800 and 1,200 respectively.  (fn1)

Price War We have listed three listing services.  You currently get a lot for your money because each service is trying to get big fast.  The logic behind this is that their will be one dominant player in this space like Amazon is for books.  

FlipKey by TripAdvisor

FlipKey is a newer entrant into this space.  You will find out in their video that there two advantages over the services below.  First, they say there are no upfront cost.  So if your place does not rent, that’s okay.  You’re not out a lot of money.  Just list it for what YOU think it’s worth.  Or at least we assumed that no up front costs meant no costs if your place does not rent.  Secondly, it’s also listed on a mega site TripAdvisor.  Users will search for hotels and then say “that’s too much for my family!  I might as well rent a house.”  And the link to their vacation rentals is right there on the site.  So this will generate a lot of organic traffic from folks who had not thought of or heard of “vacation rentals” before.  According to a May 2014 Consumers Report Article, Flip Key “reputable listing site” because they conduct landlord background checks and verify the property meets the specifications listed.  Home Away and VRBO offer renters $10,000 of insurance against fraudsters for an additional fee.

When we looked at their website, there is a $25/month fee link for your first listing. (with discounts if you list for an entire year or you list more than one place.)  So “no up-costs” doesn’t mean no listing charge.  But their Pay-Per-Booking Plan charges a 3% fee.  It doesn’t look like you have to pay the listing fee if you go with this plan.  Either way it seems like a good deal as you would have to pay about 3% for credit card processing fees if you rented this on your own.  (Most guests know that they should pay with a credit card.)  It appears that you need to pay for the listing fee if you want to use FlipKey’s payment tool.  And unless you have a business bank account, that’s the way to go.

And they make it clear that each unit must be a “self-catering unit” with a bathroom and kitchen for the exclusive use of the guests.  You cannot rent out timeshares or a room.

VRBO   Vacation Rental by Owner .com

The website www.vrbo.com is probably the best known website for renting out homes.  They have been around since 1995 and claim to be the #1 vacation rental site.  According to their website, owners who list their house make and average of $15,000.  But since people are more likely to click on and click on the first ad they see, they have five levels of membership.  The more you pay, they higher your property comes up on their search page.   They charge $349.00/yr for their basic listing service to $999 for the service that ranks you at the top. 

Check out their website to see what your neighbors are getting in rent.  People are willing to pay because if you have a large family hotels restrict the number of people in each room, and decent hotels in Orange County are expensive.  Less expensive hotels have are being used as emergency housing for people who have fallen on hard times…. Motel 6 across the street from the Magic Kingdom goes for $82 (per night/2 bed room) before taxes and fees during the summer.  And most people would rather stay in a house than a hotel.

 

 

Home Away . com

Another site to look at is HomeAway.com The charge $329/yr for a membership, but they are geared for real estate agents,   You can join as a property manager for your own property.  You can get an idea of what stuff is going for.

AIR B and B .com

http://www.airbnb.com  This lesser known website has two advantages.  It lets you list for free so there is no annual fee and they take care of payment.  The guest pays them directly, and if the payment goes through you get your share of the rent.   This is the big site for renting rooms in New York City.  They have added a social network aspect to the site which allows you rate guests and guests rate accommodations.    If you want to block a guest from coming back, you can do that.  Some people blocked guests because they were messy.  And you are selling yourself as much as your room.  Successful landlords had a photo of themselves, and guest reviews which extoll how friendly they were.

The focus on internationally known cities like Huntington Beach.    And on their information page, they say that they charge only 3% of the rental fees for a successful booking and apparently are offering $50,000 in free insurance.  But when a deal seems too good to be true, it probably is.   This looks too good to be true, or there may be some hidden costs.  Consider the fact that the typical merchant charge is a bit under 2% for credit card transactions,  they would only be making a bit over 1% cut  for the booking.   And they offer service including a great looking website and phone lines people can call.

While some of the other services restrict their listings to self contained units with a kitchen/bathroom, Air B&B is the go to place for people who want a room.

 

Surf’s Up You need to think about security after your renter leaves.   But with the new re-keyable deadbolts, that’s not an issue.  This model has a combination code and you can re-key it in a matter of seconds by inserting a special tool.

It allows you to give your renters a code to get in, and you can change it when they leave.  Or you can simply re-key the lock in less than 1 minute and give each tenant a new key.  And it fits in the standard hole that’s already in the door; and you can istall it without special tools, just screwdrivers. (fnA)

iTrip.net

http://www.itrip.net/  This website in offers a highbred service for renting our your high end  home.  They have partnered up with local real estate agents, who only work with vacation rentals on the site, and the manager deals with all the details.  They referred to as “Boutique Level Service” which includes cleaning, taking photographs, listing, taking credit cards, giving renters information for a better vacation, and inspections.  You don’t have to do anything with their Turn Key Service.  The guests interface with their manager; and their maneger takes care of lite maintenance.  You have access through an owners portal where you can block out dates for your own use, and see how your rentas are going.  In Newport Beach, their agent is Newport Beach Vacation Properties.   But there is a catch.  (1) we did not notice the commission level stated on their website.  We assume it’s a bit higher because the other listing services are just that–listing services.  itrip.net gives you a manager that does the work for you.  (2) they cater to wealthy travelers from the east coast and Europe so they “Only Accept the Very Finest Units to Our Program.”  From what we saw on their website in Newport Beach  this means million dollar homes that have been recently built or updated.  But they did have some nicer condos in other areas.  Another advantage is that since it’s being handled by a Real Estate agent, he/she can deal with tenant issues and that allows you to rent out for more than 30 days.

 

Threat of City Regulations

The internet sites, make it easy to get started.  Just sign up.  And they are usually operated out-of-state, and not responsible for local regulations.  Although vacation rentals have been happening for a long time, they are becoming more popular as people from wherever can rent on-line.  But as they become more popular, cities are starting to regulate this practice in the more exclusive areas.  Renters tend to be younger people who might not “fit in” to the mostly upper income–mostly White communities.  They are often families who have saved their money and could not afford to rent a hotel in such a nice area for their larger families.  Or they seem nice, but their plan is to have a big PARTY!!  While most homeowners go out of their way to screen tenants, sometimes people will sneak  in and turn the home into a party house.  The homeowner has every incentive to not let this happen as rent for a few days cannot offset the damage from a party can cause to a house.

The Sun Newspaper of Seal Beach has been covering these issues.  The city of Seal Beach requires a Conditional Use Permit if a residence was being rented out.  That law has passed and now if you want to rent out your home or rooms in your home you will be required to get a Conditional Use Permit (CUP) from the city’s planning commission.  You will aslo have to get a city business permit, pay the occupancy tax, and you or your manager  will have to be on the premises if you are renting out units in a multi-unit building.    Getting a CUP requires legal notices to be sent to the nearby residences and the home owner would have to go through what was described as “not an easy process.”   In a recent Sun Newspaper article, it was reported that theBeck Family wanted to turn their 17th street duplex into a vacation rental.  They planning commission did not give them a permit, so they appealed it to the city council.  They were turned down at the city council.  Issues that were brought up were noise complaints and not enough parking. (fn2) Down the coast in Newport, the city plans to make homeowners responsible for police citations to an address–even if tenants or visitors are causing the problems.

But, as stated in the Sun Newspaper article, vacation rentals have been a tradition in the community and some owners use them to make their mortgage payments.   Note According to a Fox 11 report, basically there are six licensed rentals as of July 2013.  They were grandfathered in.  But there are a lot more people advertising on theses sites.  For the most part people enjoy their Seal Beach vacation without causing a lot of problems.  But the city does not have vacation police that look for people who just don’t look like the belong in a SB house.  Enforcement is ad hoc based on complaints.  video:

http://www.myfoxla.com/story/22920405/is-vacation-rental-ban-helping-or-hurting-seal-beach?autoStart=true&topVideoCatNo=default&clipId=9126453 

 

And some people in Dana Point are working on the issue.  According to an OC Register Article, the city has estimated there are 286 short-term rentals even though “short-term rentals are currently banned in the city.”  There is little or no enforcement of the ban as city leaders are trying to respect homeowner’s rights, but they will allow community associations to enforce the rules (Remember that stack of paper you signed when you purchased your home?).

While cities can ask for reasonable taxes, it’s not clear that cities can stop people from renting out their homes for short periods of time.  That would be taking value away from owners and the city might need to compensate owners for their lost income or decreased value of property.  Also, holding the homeowner responsible for the actions of visitors might sound like a good idea, but simple logic will tell you that it might not hold up in court.  Just think if you could rent a sports car from Avis and Avis would be responsible for all your speeding tickets.  But it looks like these issues may have to be decided after a long period in court.   Either way, the point might be moot because the websites listed above don’t inform the city that you have rented out your house; and for the most part renting out homes for short periods of time has been going on for decades without the official approval of a city.

Check out these books before you get started

Bed and Breakfast

Another possibility if you have nicer a large house and some un-used bedrooms is to advertise your rooms as a Bed and Breakfast.  One place to advertise is here: http://www.bedandbreakfast.com/Innkeepers/whyjoin.aspx .  Unlike occasional vacation rentals, you will have to get city approval to rent out rooms in your house and have to pay an occupancy tax.

Most of the B&B’s also have a website that shows potential guests a lot more than can be put up on the listing site.  Looking at the websites, it looks like the hosts are as important as features of the house.  You need to present yourself as welcoming, interesting and fun.  You don’t have to entertain your guests, but they are staying at a B&B because they want to avoid that bland corporate owned hotel feeling.  In addition to that, people will want you to prepare breakfast and clean the room.  Rooms go for about what you would expect to pay for an above average hotel room, so this might not be a huge money maker.  It all depends on your house and what makes it special.  B&B’s tend to be large historic houses in iconic locations.

 

Tax implications of renting out your home

We are not tax experts, so to get the real info go to irs.gov and check out topic 415 and publication 527.

According to the publication, if you rent your house out for less than 15 days “You are not required to report the rental income and rental expenses from this activity.” That’s because… well we are not sure why.  How about it’s written in Publication 527?

Property rented less than 15 days. If a property is rented less than 15 days, it’s primary function is not considered to be rental and it should not be reported on Schedule E (Form 1040). You are not required to report the rental income and rental expenses from this activity. The expenses, including qualified mortgage interest, property taxes, and any qualified casualty loss will be reported as normally allowed on Schedule A (Form 1040). See the instructions for Schedule A for more information on deducting these expenses.”

If you rent your residence (home) out for 15 days or more, you have to report the income, but you also have the advantage of taking deductions on Schedule A.  But you can not deduct more than the total amount of rent you received.

If you do not use the property for more than 14 days of personal use, the property–cabin, condo, timeshare… qualifies as a rental property and you get to file Schedule E.  You can have a loss to offset some of your other income, based on the Schedule E.

Either way, if you are in a high tax bracket or have an expensive property, you can reduce the amount of total state and Federal income tax you pay.  For instance you can deduct cleaning supplies for making your house ready for the tenants, advertising, website membership costs, and any extras such as those little soaps and shampoos you might want to have in the bathroom.  But you basically get to deduct a lot of stuff you would have to pay for anyway: mortgage interest, property taxes, lawn care,  utilities, insurance…   And it looks like in Pub 527 you can also deduct depreciation on your home.  ( Taking depreciation will reduce your basis, and hence increase your capital gains when you sell.  But there is a big exemption for capital gains on a personal residence so the depreciation deduction may not affect your future taxes.  See a professional who knows about this, or it might just be cheaper to not pay a professional to create depreciation schedules and forget about it.)  This is done on a pro-rata basis based on how many days your home is rented (rented days) and the number of personal days.  The only catch is that if this is your home your deductions are limited to the amount of income your receive.

If you have a clear delineation of areas in your home, you may have the option of writing off you deducting expenses based on the ratio of rental area even if the “rental area” is not rented.  Your property could be considered a Bed and Breakfast, so it would come under lodging/ hotels .  We’re not sure about this, but you should see a qualified CPA or EA to figure this out.

 

What if your guests don’t want to move out?

 Most of these rentals sites are national and international.  In most cases, home owners in other states  do not have to deal with anything like California’s Landlord/Tenant laws which favor people who want to live in nice places without paying rent.  We checked out this document from the Department of Consumer Affairs which attempts to clarify California’s tenant landlord law and was written before vacation rentals became popular.  (Note that if you live in LA the laws are much more tenant friendly, and the city will actually pay a for a legal service to tell your tenant how to avoid paying rent.)  You want to be sure that your visitors are Guests under the law and do not become tenants.  If they become tenants, could spend months evicting them and end up loosing thousands of dollars.

Again we are not attorneys so this is just our non-educated personal opinion.  but based on the language on page 3 of this document it seems like if they stay or pay for more than thirty days they become a legal tenant.  On page three it states that a guest is defined as ” 1. You live in a hotel, motel, residence club, or other lodging facility for 30 days or less, and your occupancy is subject to the state’s hotel occupancy tax. 2. You live in a hotel, motel, residence club, or other lodging facility for more than 30 days, but have not paid for all room and related charges owing by the 30th day.”

Okay this is not 100% clear because we assume renting out your house or part of it as a B&B would make it an “Other Lodging Facility.”

Another thing to think about is the craigslist/tenant switching scam whereby someone with keys to your house rents it to another party.  When the police shows up to kick them out, they say to the officer “Gee wiz Mr. Policeman, I have a lease and I paid my rent.  See my receipt and lease.  I don’t know who this person is but she came into my home without permission and claims to own the house. But this house belongs to the nice person who leased it to me.”   At that point, you have to give 30 days notice and hire a good eviction attorney.  If they are professional deadbeats, they can get six months of free rent and then might damage your house to get revenge for not letting stay free of charge any longer.  In the case of an innocent person who replied to an ad on the internet, you might want to give them moving expenses–they have also been ripped off and cannot afford to move.

fn1 Estimates are found in this article http://www.ocregister.com/news/rentals-378383-city-term.html

fn2 Sun Newspaper Feb. 14 2013 City Denies appeal of vacation rental CUP by Charles M. Kelley

fnA Disclosure, we get a small commission if you buy from Amazon from our link.  We get no other compensation for promoting websites on this page.

Fox 11 story about seal beach vacation rentals.

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