Matthew Durfee travels frequently for his work with a nonprofit. However, at age 25, he's not looking to stay at expensive hotels. Instead, he scours Airbnb for low-cost rooms that fit his budget and provide a convenient place to land each night.
The Dimondale, Michigan resident recalls the great room he scored in Nashville for $63. Then, there was the shed that was converted into a small house in Portland, Oregon. Sometimes his room requires he share space with several people. Other times, there are fringe benefits. Durfee remembers one host who was gone during his visit. "She left me three mini quiches to eat," he says.
While Durfee is finding deals, the people on the other side of the equation are making money by renting out their unused space. It seems like an attractive way to boost income without much effort, but tax and property experts say renting out your house or a room could cost you if you don't pay attention to the following five things.
You need to adhere to local zoning, permitting and taxing rules. Don't assume you can simply list your house for rent and start collecting money. Many cities have specific rules that must be followed, including where in the community rentals are allowed, what permits are required and whether an occupancy tax must be collected.
"The problem is these things are changing often," says Stacy Brown, franchise operations manager for Real Property Management in Salt Lake City. Using a listing site like Airbnb may help since it provides some guidance on the laws in major markets. They may even collect necessary occupancy taxes on your behalf.
However, even with these services, property owners should double-check the regulations for themselves since noncompliance can result in hefty fines. Portland, for instance, issues fines of up to $5,000 to homeowners who don't have the proper permit.
Your homeowners insurance may not be enough. Even if your city allows renting out your property, you may be leaving yourself open to significant losses if you don't have the right insurance. A homeowners policy may not provide coverage if a renter is injured on the premises or steals something from the property.
"I would suggest [people] talk to someone in the property management space," Brown says. They can provide insight into which policies and what level of coverage may be appropriate to properly insure a short-term rental property. Without it, a personal injury on the property could result in significant legal and medical bills that must be paid out-of-pocket.
You might have to pay income tax on the proceeds. Money earned through Airbnb and similar rental arrangements is usually taxable. "Oftentimes, clients are unaware there is a tax effect at all," says Brian Michels, a certified public accountant and expert on the question and answer platform Just Answer. "It can completely change someone's tax picture."
Lizabeth McGrath, a director at the New York City-based accounting firm Friedman LLP, says you don't have to worry about paying income taxes if you rent out your property less than 15 days of the year. But once you hit that number, the money you earn needs to be declared as income. That applies even if it's only a single room in the house that's being rented.
For property owners who need to pay income tax on their earnings, the silver lining is that expenses related to the rental can be deducted. Proper record-keeping is key to minimizing taxes. "Look into decent accounting software to run it like a business," McGrath says. Alternately, consider hiring an accountant to track the details.
Set clear expectations, don't rush into owning rental properties and other valuable lessons.
You could lose a valuable property tax exemption. Income taxes aren't the only tax issue you need to consider before renting out your property. Many states allow for a homestead exemption or other reduction in property taxes for a person's primary home.
"A home is considered to be a personal use," McGrath says. Once you start making money off your home, a state or municipality may consider it a business instead. The grounds upon which someone might lose a homestead exemption can vary and don't necessarily align with the days required for income tax payment. Check with the local or state taxing authority in advance of renting out your home. That way, you won't inadvertently make the expensive mistake of losing your exemption.
You may need to spend money to attract renters. The whole point of renting out your home is to make money, but that might be hard to do with dated furniture and shabby interiors. "One of the first things people do on these websites is look at pictures," Michels says.
In order to compete with other listings, you may need to update your home, make repairs and replace dated features. While those improvements can increase the value of a property, it could be a gamble to assume you'll recoup the costs in rental fees.
The advent of sites like Airbnb and VRBO make it relatively simple to list a home or room for rent. However, don't let the promise of extra money cause you to ignore other factors that could cost you big time later.
10 Ways Millennials Are Changing Homebuying
The generation that's taken over homebuying
The Great Recession delayed many millennials from being able to buy a home, but the generation isn’t locked out of property ownership the way it was a few years ago. The National Association of Realtors defines the millennial generation as people born between 1980 and 1998, and according to the 2019 NAR Home Buyer and Seller Generational Trends report, they make up 37% of all homebuyers in the U.S., the largest share of any generation. Over the past five years as millennials have become a significant portion of U.S. homebuyers, they’ve also helped shape trends in location and home type preference, helped usher in technological advances and embraced new platforms that make a home purchase feel more user-friendly. Here are 10 ways millennials are changing the homebuying process.
Updated on Feb. 26, 2020: This story was published at an earlier date and has been updated with new information.Text communication is key.
Text communication is key.
The telephone was once the primary form of communication between real estate agents and their clients, but the younger generation that has grown up with internet and cellphones will likely prefer more text-based modes that make it easy to multitask. “A lot of my clients already work in tech, so their expectation is they’re going to work with an agent that can at least keep up with them in terms of communication,” says Dana Bull, a Realtor with Harborside Sotheby’s International Realty in Marblehead, Massachusetts, who specializes in working with homebuyers. She says millennial homebuyers prefer to text and email their agent more often than older generations, and it’s reasonable to expect they’ll be comfortable using real estate-related apps.Research is a natural part of the process.
Research is a natural part of the process.
When it comes to researching neighborhoods, checking out listings online and doing a deep dive into the fine print of a pending deal, millennial homebuyers are known for doing their homework. Jill Levin, a Realtor with Coldwell Banker Legacy in Albuquerque, New Mexico, says she recently represented some buyers in a deal that went particularly smoothly because the buyers read every disclosure and document sent to them and asked questions beforehand – something she doesn’t see from older buyers who feel experienced enough that they don’t need to read into the details. “There’s way more information today now, and (homebuyers) really, really should be paying attention,” Levin says.The hub for advice is online.
The hub for advice is online.
While apps and online search tools are an integral part of the homebuying process for all consumers these days, millennials are the first generation to grow up using technology broadly in everyday life. The familiarity with smartphones, social media and the internet make communication, finding out information and contacting professionals easier. Millennials are also inclined to shop around for everything from real estate agents to mortgages to contractors. In HomeAdvisor’s State of Home Spending report released in June 2019, the majority of millennials, Generation X and baby boomers research home remodel project costs on the internet, but millennials do so by the largest margin (77%).Homeownership is focused on building wealth.
Homeownership is focused on building wealth.
While purchasing a home involves plenty of hurdles for younger buyers, many of them are choosing to become homeowners because it helps them build wealth in the long term. “There is still interest in buying a house because I’ve got a job, I need a place to live, rent is expensive and I should put my money somewhere,” Bull says of the millennial homebuyer mindset. As they build equity in their home, they’re in a better place to purchase a larger house in the future or use the profit of a sale for other investments.Kid-friendly housing makes a comeback.
Kid-friendly housing makes a comeback.
Homeownership isn’t the only thing that millennials are doing later in life for financial reasons. Millennials are also marrying and having children later than previous generations. But as millennials get older, more are getting to the point where they’re starting families. While a condo in the heart of downtown worked for many first-time millennial homeowners when they were single, home preferences change as soon as kids come into the picture, Bull says: “People are starting to step up into that next level of a single-family home and maybe out in the suburbs.”Walkability is a must.
Walkability is a must.
Even with many millennials leaving urban centers, one feature they won’t compromise on is walkability. “They want more activities in the area, they want walkability, they want the convenience of shopping without having to use their cars a lot,” Levin says. Even in more suburban settings, many millennials are showing a preference for areas that offer residential and commercial spaces within walking distance. Bull says the areas catering to these homebuyer preferences have been dubbed “hipsturbia,” where suburban towns offer an active downtown or main street area with the live-work-play atmosphere many people don’t want to lose when they move out of a major city center.Eyes are on garages and kitchens.
Eyes are on garages and kitchens.
Luxurious features and finishes in a house are ideal, but millennial homebuyers are making their must-have lists a bit more realistic. In a survey of 1,000 Americans who plan to purchase a home in 2020 by real estate information company Clever, millennials' preferred home features focused on details that make life more convenient, especially as they start families. When asked which features are a requirement for their new home, millennial respondents placed a garage, large kitchen and space to grow into as their top three priorities. Details like hardwood flooring, a fireplace, pool and dedicated office space were among the lesser-desired details.High home prices don't deter eager buyers.
High home prices don't deter eager buyers.
Affordability is still an issue for many millennials, especially among the younger members of the generation. But that doesn’t mean millennials are uninterested or afraid of purchasing a home – it’s just a matter of the right timing, the right location and the right home. Between consistently rising home prices and a lack of inventory as homeowners choose to remain in their homes longer, the housing market remains extremely competitive, Bull says, especially in the Boston area where she works. But the millennials who are financially ready to purchase are willing to rise to the challenge. “They’re used to being aggressive to get into the college they want, and then get the job they want,” Bull says, which primes them to make a strong offer if they see a home they like.Low down payments solve savings issues.
Low down payments solve savings issues.
The Clever survey found 70% of millennial homebuyers plan to make a down payment of less than 20%. Low down payment programs have grown significantly in the past 10 years and are now a major part of home purchases – NAR’s 2019 Profile of Home Buyers and Sellers reports that the median down payment for a home in the U.S. is 12% of the purchase price. While low down payment programs help resolve the lack of savings, homebuyers putting less than 20% down should be sure to factor into their budget the added monthly cost of private mortgage insurance.Parents play an important role.
Parents play an important role.
For younger millennials and even Generation Z, which is made up of people born in 1999 and later, coming up with the cash for a down payment is one of the biggest obstacles to becoming a homeowner, even at less than 20% of the purchase price. For millennial first-time homebuyers and the rare Gen Zer getting into the market, financial help from a loved one is often what makes a home purchase possible. “Parents are getting involved a lot – I still see a lot of situations where parents are gifting money or helping in some other way,” Bull says. “I don’t see that changing at all.”Here are 10 ways millennials are changing homebuying:
Here are 10 ways millennials are changing homebuying:
- Text communication is key.
- Research is a natural part of the process.
- The hub for advice is online.
- Homeownership is focused on building wealth.
- Kid-friendly housing makes a comeback.
- Walkability is a must.
- Eyes are on garages and kitchens.
- High home prices don't deter eager buyers.
- Low down payments solve savings issues.
- Parents play an important role.
With more than a decade of reporting experience, Ms. LaPonsie’s work has been featured on MSN, CBS MoneyWatch, Yahoo Finance, NerdWallet and numerous other sites on the web. She has been a guest of Consumer Talk with Michael Finney and The Steve Pomeranz Show.
A native of Michigan, Ms. LaPonsie received her bachelor’s degree from Western Michigan University. You can follow her on Twitter or connect with her on LinkedIn.
May 11, 2020
U.S. News analyzed the 150 most populous metro areas to rank places to live by category.