The changes to the real estate market brought upon by the COVID-19 pandemic combined with the convenience and ease of use of online platforms like Airbnb, VRBO, and HomeAway have led to an explosion in the short-term rental market throughout the country. As such, many individual and business investors are looking to capitalize on this heightened demand by either converting their already owned properties into short-term rentals or purchasing new properties.
Prior to deciding to wade into the waters of the short-term rental market, potential investors should familiarize themselves with current laws related to short-term rentals in the city or municipality where the property is located. In an effort to curb the influx of short-term rentals, many cities and towns across the country have instituted regulations that limit or block certain short-term rentals. It is therefore important for the potential investor to understand the local laws to determine how best to utilize the property.
Short-term rentals are an attractive opportunity for many investors due to the potential to charge higher rental fees while simplifying and streamlining the marketing for the property through numerous platforms. Additionally, an investor can avoid a long-term landlord-tenant relationship that would limit the owner’s ability to evict the renter and/or use the property when needed. Despite these benefits, short term rentals bring with them an increased potential for wear and tear, property damage, and liability for on-site injuries.
Common Sense Steps for Short-Term Rentals
First, an investor must obtain the proper insurance coverages for both property damage and individual liability. Thereafter, an investor must also take steps to ensure that the property is properly supervised, managed, and maintained. Most individual owners do not have the time to handle day-to-day management and should therefore consider hiring a property manager to deal with the day-to-day maintenance and upkeep between rentals.
A property manager will play a big part in determining how financially successful a short-term rental property will be. Consequently, it is a wise investment to have a detailed property management agreement drafted establishing and detailing the duties, responsibilities, and payment structure of the property manager.
While a good property management agreement will be tailored to the specific property and property manager, at a minimum, it should in some way address the following issues:
- How long is the agreement in effect?
- When and how can the agreement be terminated? Can the owner terminate the agreement at will and/or for cause?
- Payment arrangement. How is the property manager being paid? In order to boost the gross returns and encourage the property manager to keep the property as profitable as possible, this can be tied to a percentage of the gross or net income generated by the property.
- How (and on what platforms) is the property going to be marketed? Who is in charge of maintaining the postings? Can the property manager enter into direct bookings outside of the platforms?
- How will rental rates be determined? Will there be any other fees, i.e. reservation fees, cancellation fees, pet fees, cleaning fees?
- Will security deposits be required? How will they be held?
- What physical bank accounts will hold the monies received from the property? Who will own and/or be responsible for said accounts?
- How will business and rental records be kept? Who will be entitled to see the records and how often will they be provided?
- Who will be responsible for maintaining, inspecting, and repairing the property?
- How will the property be “turned over” and cleaned between guests?
- Who will be responsible for purchasing and restocking the necessary household items for the property?
- Who will be responsible for guest relations?
Answering these important questions and entering into a detailed property management agreement will offer you the protections needed to avoid potential disputes and litigation. It will also be the backbone of a profitable rental business.
For further guidance and counsel on short-term rentals, or any other commercial or residential related property matters, please contact Jason Hawrylak (908-827-5537 or ) in OlenderFeldman’s Real Estate Group.
