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
A new generation of homebuyers
As the millennial generation, also known as Generation Y, takes a greater role in the housing market, young people’s preferences are starting to shape the way real estate business is done. The real estate portal Zillow predicts that millennials will overtake baby boomers as the generation purchasing the largest number of homes this year, making their preferences even more important. Here's a look at 10 ways millennials are changing the homebuying process.
Don’t call us, and we won’t call you.
For decades, the telephone has been the real estate agent’s tool of the trade. But younger homebuyers don’t want to talk. They want texts – and some prefer email. Dealing with these tech-savvy buyers has posed a challenge for the nation’s real estate agents, who are considerably older than the homebuying population they serve. A National Association of Realtors survey of its members in 2012 found that only 3 percent of agents were under 30 and 81 percent were older than 45, with 25 percent over 65.
We've done our homework.
More than 50 percent of millennials search for homes on their phones and, among those, 26 percent end up buying a home they found that way, according to the NAR. “With millennials, we do not control information,” says Player Murray, managing broker at Berkshire Hathaway HomeServices York Simpson Underwood Realty in Raleigh, North Carolina. “What they need is for us to interpret the information.”
We don't like surprises.
Younger buyers want to know what to expect and when. “I see them wanting to understand what’s going on at any time in the process more than any other generation,” says Paul Reid, a Redfin agent in Southern California’s Inland Empire region.
They also like timelines, checklists and charts. “If they don’t know what’s coming around the corner, it could cause paralysis when they get there,” says Murray, who's also a member of Berkshire Hathaway HomeServices’ REthink Council, a group of 15 young agents nationwide formed to help the company meet the needs of younger customers and recruit young agents.
We want customer service, and we want it now.
Millennials expect to be partners in the home search, and they want quick answers to questions. “They want information, and they want valid information, and they want it right now,” Reid says. “They’re the generation of Google at your fingertips.”
Is there an app for that?
Younger buyers live on their smartphones and use them as a key tool in their home searches. Apps are often their preferred method to check listings and collect other information. Redfin is an example of a company that's incorporating apps and other tech tools into its services. Customers can ask for home tours online or via the company’s app, as well as sign up for alerts about new listings and use their phones to search for open houses. The Redfin Deal Room lets customers keep tabs on the process of their transactions 24/7.
What did your other clients think?
Many millennial homebuyers get recommendations on agents from their parents, but they also do some research online before they ever call an agent. They want to see testimonials on an agent’s website, as well as read online reviews.
You call that social media?
As far as millennials are concerned, a Facebook page with listings is something their grandmother would do. They expect agents to engage them on social media. “They need to feel like they’re a part of your business,” Murray says. “Just reposting an article that’s been posted 1,000 times across the country isn’t enough.”
Tell us what data you want, and we’ll text it right over.
Unlike older buyers, young people are not bothered by being asked for bank statements, employment verifications or other personal data required for mortgage approvals. “The younger people are used to having to supply everything about who they are,” says Don Frommeyer, chief executive officer of the National Association of Mortgage Professionals and a mortgage broker in Indianapolis. “They’ll give you everything.”
No stainless steel appliances? Reject.
Younger buyers sometimes have trouble seeing the bones of a home and often don’t know which features can be changed easily at a minimal cost. That’s an area where they value guidance from agents. If they’re buying a home that needs work, they also value referrals to contractors and vendors. “You’ve got to be able to provide resources to them,” Murray says.
Yes, we can afford that.
Finding a home they can afford in the location they want is a challenge for many younger buyers, especially in cities, says Nela Richardson, chief economist for Redfin. Some are embracing the sharing culture by seeking homes with rental units or rooms that can be rented out on Airbnb or other services. “I think we’re going to see millennials solve that problem in a different way,” Richardson says.
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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.