Four important questions to ask about buying a vacation property to rent

There’s no question that the vacation rental business is booming. In the United States alone, revenue in this market is approaching $18 billion, with a projected annual growth rate of 6.6 percent.  If you’re thinking about investing in a vacation rental property (or renting out property you already own), here are the top four questions to ask before you purchase:

Is a vacation rental a smart investment?

Buying a vacation rental home can be an attractive investment option. Not only will you have a place to call home in a location you already love and visit frequently, the property can be an excellent source of income for you between visits. The income from travelers renting your property will often cover a significant portion (if not all) of your ownership costs while you reap the benefits of long-term appreciation.

Of course, your rental only generates income when it’s occupied. Popular websites such as Airbnb and HomeAway connect guests to your property and offer tools to make interacting with your renters and managing your property easier. If you’d rather not do it yourself, a property management company can help with finding renters, handling logistics and maintaining the property between guests.

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Keep in mind that, unlike stocks, real estate is not a liquid investment. Buying and selling a home takes time and involves transaction costs. There is often a lot of negotiating and compromising to be done as well. That, however, hasn't stopped millions of people from turning their short-term vacation homes into incredible long-term investments.

What are the laws governing short-term rentals in my community?

The rapid rise in short-term rentals has caused some communities and homeowner associations (HOAs) to restrict or even ban them. Many communities prohibit owners from renting out their homes for fewer than 30 days. If you’re not in an HOA community you’ll likely have more leeway, but some cities and states are starting to impose regulations on vacation rentals as well.

It’s the owner’s responsibility to learn about short-term rental laws, and failure to comply with those regulations may result in fines and other penalties. While researching changing local regulations can be challenging, a call to your HOA property management company, a visit to your city hall website and conversations with local friends and neighbors who use their home as a vacation rental can help provide clarity. There are also technology platforms that track changing regulations and fees. Do your research prior and ask experts in the short-term rental space about these types of questions.

Which taxes and fees am I required to collect from my guests?

As a short-term rental property owner, you are responsible for collecting any local lodging taxes required in your area. State and local lodging taxes can vary widely, and can change with little notice.

The right lodging tax software can manage the complexities of your tax and business requirements in your specific location — so you can focus on managing your property. The right tool will offer a full range of solutions, including determining the vacation rental taxes and reporting requirements as well as calculating and filing returns on a monthly or quarterly basis.

Who will you charge lodging taxes to?

If you do decide to purchase a vacation property with an eye toward short-term rentals, the short answer is anyone who rents from you. Whether you or your property is located in California, Maine or anywhere in between, the local and state lodging and occupancy taxes must be remitted to remain compliant.When you enter the short-term rental market, lodging tax collection will need to be a part of every rental agreement and transaction you make.

Is a vacation rental property the right move for you?  If you secure the right guidance, ask the right questions and perform your due diligence in the area, it just might be a smart and rewarding investment.

Rob Stephens co-founded Avalara MyLodgeTax (formerly HotSpot Tax) in 2002 out of his own necessity to understand and manage compliance with his rental property. Avalara MyLodgeTax (http://www.mylodgetax.com/) is a leading provider of tax compliance solutions for the vacation rental industry.