It goes without saying that today’s business environment is an extremely challenging one. This is particularly true in the ground transportation industry, where competition is fierce, costs are constantly increasing, and customers have been cutting back on transportation usage. In response to these challenges, many people are looking for ways to supplement their income and/or to find new sources of extra income. One method that many are turning to is the use of short terms rentals via Airbnb and VRBO.

A short-term rental may involve renting out an entire house or apartment, or one or more rooms within a property. The property may be the owner’s primary residence, or a secondary property, such as a vacation home or investment property. Short term rentals can be a great way to bring in extra income, however that’s only true if you do your homework. This includes properly investigating potential tenants, discussing possible gaps and limitations in your insurance coverage with your broker, and reviewing any local laws and rules applicable to short term rentals in the jurisdiction where your property is located.

Verify and Vet Out Potential Tenants – Before entering into a rental arrangement with someone, it’s important to find out as much as you can about your prospective tenant. After all, your real property is likely some of, if not the most valuable property you own. While Airbnb and VRBO each provide information about prospective tenants, at the initial stage this information is minimal. In fact, unlike VRBO, Airbnb does not provide direct contact or identifying information about the tenant until the booking is completed. While this protects Airbnb’s commissions, it doesn’t necessarily protect you or your property. Both companies let you read reviews about a prospective tenant, however many first time tenants don’t have them.

Once you have basic information about a tenant, you should conduct an Internet search using the name, e-mail address and telephone number for additional information such as where the person is employed, and where they reside on a permanent basis. The results of the search may help you to rule in or rule out a prospect. The importance of vetting prospective customers cannot be underestimated. There was an unfortunate story in the news two years ago about a Canadian family that rented their home to what they thought were to be four adults in town for a wedding. Shortly after the homeowners turned over the keys and departed, dozens of cars and a large party bus with over 100 people inside pulled up to the house. The drug-fueled orgy that followed caused over $150,000 in damage to the house and its contents, and rendered it uninhabitable for months. To its credit, Airbnb assisted the family and the insurance company behind its “Host Guarantee” paid for the damage. Nevertheless, incidents such as this highlight the importance of investigating who you rent your property to.

Utilize a Good Rental Agreement  – Regardless of whether a property is being leased for a year or rented for a week, a written agreement setting out all of the essential terms is necessary. Such terms include, without limitation, the property address, check-in/check-out dates, number of adults and children occupying the property and their identities, the rental rate, security deposit and payment due date. Any rules that go along with the rental should also be detailed (e.g. whether pets are permitted; whether smoking is permitted; local codes governing noise and parking; etc.). While you can find sample rental agreements online, I recommend that you have an attorney prepare your agreement to make sure it complies with state and local laws and codes, and with any applicable homeowners’ association covenants and/or rules.

Insurance  – Before renting out a property, it is also important to check with your insurance broker or attorney to determine if rental use is covered. Insurance companies generally consider the risk of loss to be greater where a property is rented, as opposed to the same property being used and occupied solely by the owner. Some homeowners’ policies cover a rental use within specified parameters and for limited time frames, while other do not cover rentals at all. Lastly, while some companies such as Airbnb provide some level of coverage, there are numerous exclusions, and I do not recommend that such coverage be relied upon exclusively.

Safety – Prior to renting, and to minimize the chance of accidents and the potential liability that goes along with accidents, you must also take steps to ensure that your property is safe for renters. Smoke detectors, carbon monoxide detectors and fire extinguishers should be installed as required by local code and periodically checked. Heating units, hot water heaters and similar equipment should be serviced and checked to ensure that they are functioning correctly and safely. Electrical systems should be examined and any violations corrected. Windows and doors should lock properly and securely. Anything that might pose a hazard should be addressed before renters arrive.

Deal Direct  – If at all possible, deal directly with renters rather than though the rental apps. In fact, VRBO does not restrict users of the app from dealing directly with each other. It allows you to have some room for negotiating on rental fees because there are no service fees charged to the renters. In addition, direct dealing allows you to hold the security deposit rather than security being posted with the app on a credit card. In circumstances where you are holding security, you do not have to go through the app’s process in order to retain all or part of a deposit to pay for damage.

Be Aware of Local Laws, Restrictions and Regulations – Applicable laws, rules and regulations vary from place to place, and even within the same building. Before beginning to rent your property on a short-term basis, you should determine all local laws and rules that apply to your property. Some municipalities require you to register your rental, pay a fee and comply with certain safety related guidelines in order to lawfully rent. There are often laws or rules that address a minimum duration and other guidelines for rentals as well.

New York State’s Multiple Dwelling Law, for example, prohibits renting out a “Class A multiple dwelling” (i.e., a residential unit in a building with three or more units) for periods of fewer than 30 days. There is an exception in the law that permits rentals to persons for less than 30 days if the tenant shares the unit with a permanent resident who is present during the rental. In New York, there are also special rules that apply to rent stabilized and rent controlled units.

Finally, make yourself aware of all of the tax implications as well. Income earned through short terms rentals is subject to federal and state income tax, sales tax and other local taxes and surcharges, including hotel occupancy tax in certain jurisdictions.

Conclusion – Anyone can go on Airbnb or VRBO and rent out their apartment for a week while they’re away on vacation. Most people who do this casually are lucky to earn some extra income without their apartment and belongings being damaged; some are not so lucky. If you intend to rent a vacation or other secondary property as a serious source of additional income, it’s important that you treat your rental as a business, because that’s what it is. Prepare the property so that it is safe for renters. Consult with your insurance agent to make sure the property is properly insured, and upgrade the coverage if it is not. Have an attorney draft an appropriate rental agreement, and ask that he or she review it to ensure that it covers all applicable laws, rule and regulations. Lastly, I cannot underestimate the importance of doing your due diligence when contacted by a potential renter. Get as much information as you can before making a decision whether or not to rent, and trust your instincts when making that decision.

Roberta C. Pike, Kenneth R. Tuch and Laurence I. Cohen are partners with Pike, Tuch & Cohen, LLP, with offices located at 1921 Bellmore Avenue, Bellmore, New York 11710. The firm specializes in commercial and employment litigation, including misclassification, wage and hour, employment practices, franchising and business practice matters, and transactional matters. The foregoing is provided solely as general information, is not intended as legal advice, and may not be applicable within your jurisdiction or to your specific situation. You are advised to consult with your attorneys for guidance before relying upon any of the information presented herein.

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Article by Kenneth R. Tuch

Kenneth R. Tuch is a partner with Pike, Tuch & Cohen, LLP, a Bellmore, NY-based law firm.

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