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With July off to a pleasant start and our Independence Day celebrations behind us, it’s officially “mid-summer”. But, there is still time to consider renting or leasing your lakeshore property or cabin. And, with sites like VRBO.com (Vacation Rentals By Owner), HomeAway.com and even other vacation rental options like Craigslist – it is getting easier (and more profitable) to do so. However, before you decide to lease or rent, there are a few key questions you should ask your real estate attorney. In short, you want to be sure you are protected, and that you’re making a smart investment with your time and resources (so that you can avoid rental horrors like these). Here are our top five questions to ask before turning your “home away from home” into an income property:
Question #1 – “Can I rent out my property?” – It is important to assess whether or not the property can legally be rented or leased. For example, some lenders prohibit renting scenarios for two or three years if you purchased a home with a second home mortgage loan. Another example – If the home is part of a co-op, condominium or homeowner’s association, you may not be able to rent out the property to others. Also, you may need to make sure your property is properly registered at the state level, including any necessary taxpayer identification numbers.
Question #2 – What is the best way to rent out my lakeshore property? – Two popular options for rental owners are to 1) rent out the home as often as they like, using the space as an investment property, or 2) renting the location out for up to two weeks of the year, using any profits to cover expenses (e.g. property taxes, utilities for the year, etc.) In the latter, the owner does not have to pay taxes on the profit, as the government does not tax the first two weeks of rental income on any second home. The former scenario is actually viewed as a second form of income and is taxed after you rent the property for more than two weeks. You and your real estate attorney or tax consultant can determine which scenario works best for your particular situation.
Question #3 – Should I use an outside party to help manage the property? – A very important part of renting out your vacation property is to make sure there is someone available in the area who can give guests the keys, be present for any maintenance issues and coordinate clean up after guests depart. If you determine that you cannot be present to handle those matters, then you should seriously consider finding an outside party to help. You could hire a property management company or a real estate agent in the area to manage your property for a fee. Another option is to hire a trusted neighbor or nearby friend who could manage it on a per rental basis. Be sure, though, to build any of these expenses into your rental rates.
Question #4 – How do I address any potential liabilities? – The most important thing to do to help protect yourself and your property is to make sure you have or create a solid rental contract for your renters to sign. Always make sure you obtain the final, signed agreement and full payment before you hand someone the keys. Another way to protect yourself is to have landlord insurance to protect you against any accidental damage and third party liability caused by tenants in your vacation home. While there are plenty of free rental agreement resources out there to help you get started, it’s always best to have your real estate lawyer look it over just in case there are any holes or things you may have overlooked.
Question #5 – Can I give renters rules to abide by when staying at my property? – Yes, you can. And you should! In fact, it’s important to provide them with a set of instructions that they can clearly follow so that the experience is pleasant for not only yourself, but for your guests as well. With every property, there are certain things that you will want your rental guests to know about upon entering, such as how to use certain electronic components, where to place trash, whether or not to recycle, where extra linens and towels are located, what the rules of the neighborhood are (i.e. loud music, parties, pet waste, curfews, etc.), and other elements. Be sure to provide them with this information in a document or binder up front, along with a copy of the rental agreement.
Take the time to consult your real estate lawyer on the front-end, and you can save yourself a lot of time and energy and set yourself up for a rewarding vacation rental experience. For more information about renting out your property, drafting rental agreements or other legal questions, contact any member of Henson & Efron’s real estate practice group.