6 Special Considerations for Vacation Rentals

Are you thinking about purchasing a short-term rental in a resort or vacation area? Or otherwise getting involved in the short-term vacation rental business? Understand what you’re getting into before you buy. There are a number of specific considerations rental real estate investors should be aware of before purchasing these properties. Continue reading to learn about six of these considerations.

1. Enjoy the Property Yourself

Considerations for those who want to purchase vacation rental propertiesFor many people, the best way to own a vacation rental property is to enjoy it themselves. That is, purchase your own vacation home because you enjoy using it yourself.You can rent it out when you’re not using it to offset the expenses of ownership, but it’s very difficult to make a short-term vacation rental a cash-flow positive property in its own right.

2. You Need Additional Insurance

Most landlords understand that a standard homeowners insurance policy isn’t sufficient if they plan to treat their property as a residential rental. That’s why they get special landlord insurance policies.

But even your standard landlord insurance policy won’t provide adequate coverage if you own a short-term vacation rental. In these cases, you’ll need something closer to commercial liability insurance.

Here’s why: your landlord or homeowners insurance doesn’t cover business activities conducted in the dwelling. But in a vacation rental, everything that happens on the property is commercial activity!

Furthermore, in most cases, your personal umbrella insurance coverage won’t protect you against claims arising from your business. You’ll have to get this protection from a separate policy in addition to your personal liability plan as it isn’t designed or priced to provide commercial coverage.

3. Marketing Costs More Than You Might Think

Marketing a vacation rental is a resource-consuming but necessary task. In most cases, vacation rentals have a lot of competition from local hotels, motels, bed and breakfasts and RV parks. Many of these businesses have professionally designed websites with excellent photography, so it’s necessary for vacation rental owners to do some marketing of their own to make their properties stand out.

Well-produced video tours of vacation rentals can help book renters. While these videos aren’t free and usually aren’t cheap, remember that nothing is more expensive to a vacation rental owner than a cheap-looking website that doesn’t adequately sell their property!

Vacation listing websites help you book renters but they can take up to 30 percent in commissions. While this may seem high, remember that each booking can involve dozens of inquiries for each renter. If you don’t hire someone to field these inquiries, you’ll have to do it yourself.

You probably don’t want to rely on a listing website alone for your marketing. If you do, you may be costing yourself a lot of rented nights each year. Here are some relevant facts from the Vacation Rental Property Marketing Blog about vacation rental owners’ marketing expenses:

  • Vacation rental owners spent an average of $1,150 per year marketing their properties in 2011.
  • Half of all vacation rental owners only use listing sites to market their properties. This group experiences annual average occupancy rates of 54 percent.
  • Vacation rental owners who combine listing sites with their own websites bump their occupancy rates up to 76 percent, on average.
  • 94 percent of all vacation rental owners believe they could be doing more to promote their properties.

4. Keep Your Renters Happy

Meeting the high expectations of vacation renters requires a ton of effort. Today’s renters expect pristine furnishings and conditions inside and outside the property. Depending on your niche, market and how you have marketed your vacation rental, you’ll need to have a system in place to ensure that it’s completely cleaned up and ready to re-rent every few days.
This means clean linens, pristine kitchens and bathrooms, wiped-down furniture, and a dwelling that smells fresh, pleasant and clean from the second each new group of renters walks in. This takes an intense housekeeping effort ? and costs a significant amount of money.

There are significant costs associated with failing to keep your renters happy. If a renter shows up at your vacation rental for their dream weekend and the air conditioner isn’t blowing cold air or if the water heater is having problems, you don’t have a couple of days to fix it as residential landlords usually do. You or your handyman have to make repairs quickly and effectively within an hour or so, max. Otherwise, the renter may file a chargeback with their credit card company or trash your vacation rental’s reputation on Yelp, HomeAway.com and other websites future renters may visit.

5. Don’t Get Blindsided by Furniture Costs

Prepare to furnish the entire vacation rental property at once after you purchase it. Most residential landlords don’t have to worry about this, of course, so the costs often take new vacation rental landlords by surprise.

Attractive, comfortable and well-made furniture is expensive. You can easily spend $20,000 to $40,000 on furniture and d?cor on a medium-sized rental house. That’s enough to eat up the first year of rental income that in-demand vacation properties can earn.

6. Take the Long View on Vacation Rentals

While the high expenses associated with purchasing, marketing and furnishing vacations rentals and limited peak tourist seasons found in most resort areas make it difficult to turn vacation properties into profitable rental income generators, you still get the benefit of long-term capital appreciation.

Additionally, if you’re able to get a great deal on a future retirement home today and can offset the costs of ownership in the years prior to retirement by renting it out, purchasing a vacation rental could be an excellent way to go.

The Perils of Associations Using Unlicensed Contractors

Associations are on the hook if an unlicensed contractor gets injured on the jobHere’s one of those issues that keeps turning up like a bad penny: the use of unlicensed, unbounded and uninsured contractors on association projects and properties. Sometimes it’s a matter of ignorance or laziness on the part of association managers or board members who should know better. Sometimes it’s a matter of a board member or manager routing business to a friend or relative or just someone willing to provide a kickback in exchange for the work.

Regardless of the reasons behind the use of unlicensed contractors, it’s a bad idea because it’s part of the fiduciary and oversight duties of any condo or HOA board of directors to ensure that all projects done under their auspices are executed by licensed and bonded contractors and that the work is done in accordance with the proper permitting procedures.

Here’s why: Unlicensed contractors generally don’t carry the vital forms of insurance that exist to protect consumers – and by extension, the homeowners in your community.

Example: Gutter Repair Goes Wrong – and Gets Expensive and Litigious

Imagine you bring in an unlicensed contractor for some rain gutter repairs. It?s a minor job, and you expect no complications. Your association manager recommends the repair and further recommends a contractor they’re familiar with, ACME Services, to do the contracting. The price looks a little steep, and a board member mentions they have a buddy at Sluggo Construction who can do the work for much less.

The board approves Sluggo’s low bid, and their crew show up to do the repair. All seems to be going well, but one of the workers, Jim, fell off a ladder and wrenched his back. He now has an insurance claim.

Here’s what happens next: Jim can’t work with an injured back, and he’s got some medical bills. So he files a workers’ compensation claim against Sluggo Construction. But Sluggo’s not a licensed contractor so they aren’t carrying the required workers’ compensation coverage. Jim may or may not have individual health insurance in place, but it’s not supposed to cover workplace claims.

Eventually, Jim’s lawyer advises him to file suit. But not against Sluggo. They know Sluggo has no money and no assets they could collect against. Without insurance, a judgment to collect would be worthless.

So, who’s got the deep pockets in this case? Your condo or homeowners’ association.

If you don’t hire a licensed, bonded, street-legal contractor, and something goes wrong, you are going to be in the line of fire. Because your HOA represents and is entirely made up of the owners in your complex, your owners are the ones who will be left with the liability.

Make maintenance less messy – get a quote from a professional association manager and learn how they can be your maintenance mogul >>

Your HOA could be forced to issue a special assessment to pay this worker’s medical bills and compensation for lost wages – maybe for years – because your board of directors failed to perform oversight and insist that all work be done by licensed and bonded contractors with all requisite insurance protection in place.

If your board or management company allows the use of an unlicensed contractor, and a worker gets hurt, you can expect courts to hold your association and management property jointly liable as employers.

Your risk isn’t limited to workplace injuries, either. If you get cheap and hire unlicensed contractors, and the workmanship is deficient, or if one of your tenants or residents is hurt because a roof or deck collapsed, you’ll have no recourse against the contractor. If they don’t have workers compensation insurance, they probably won’t carry contractors’ liability insurance either.

Minimum Due Diligence for Contractors

At a minimum, before you authorize any third-party contractor to do any task, you should ensure that either your board of directors or your property manager carries out the following due diligence:

  • Get the state contractors’ license number
  • Verify with state officials that the license number is valid.
  • Make checks payable to LLCs and corporations, not to individuals.
  • Don’t pay huge deposits up front (escrow is normally fine, or materials charges).
  • Get proof of insurance – both workers compensation and contractors’ liability insurance.
  • For larger projects, you may ask the contractor to put up a ‘completion bond,’ or ?surety bond,? which pays your association in the event the contractor can’t or won’t complete the project according to contract.
  • Put contracts in writing.
  • Have the contractor obtain necessary permits and show them to the board’s representative. Sure, the association can get the permits, but they won’t be granted without insurance in place. This is a useful reality check to screen out unlicensed and irresponsible contractors, while also limiting the association’s liability.

Limit Your Liability: Don’t Use Unlicensed Contractors

If the association gets sued, association members could have an opening to sue incompetent or corrupt board members who use unlicensed contractors for projects over a specific amount established by law (usually about $500 depending on the state).

As a board member, you have a fiduciary duty to act with reasonable prudence. If your association is damaged because of liability incurred because you failed to perform ordinary due diligence to see if a contractor is even licensed, you could be sued for violating your fiduciary duty as well. This could be a covered claim under directors & officers’ liability insurance, but if you’re a board member, you don’t want to be in that position.

The obvious lesson here is always, always use properly licensed, bonded and insured contractors.

The Danger of Using Unlicensed and Uninsured Contractors

One of the first principles of gambling is this: Never take a risk you can’t afford to lose. Or, as Warren Buffett once said of an investment that went spectacularly wrong: “Never risk what you have and need for what you don’t have and don’t need.”

There are great dangers that come along with hiring unlicensed contractorsWhen you hire an unlicensed contractor to do work on your property, or you fail to secure the necessary permits for that work, you are doing just that.

Here’s why: When a general contractor takes on a job, they’ll hand off parts of it to one or more subcontractors. But the general contractor has overall responsibility for legal compliance, safety, quality of workmanship and just about everything else that happens on the job site.

General contractors therefore take on a ton of responsibility. With that comes an equal measure of potential liability. That’s why licensed and responsible general contractors carry a lot of insurance, from contractors’ liability insurance to workers compensation insurance.

All these different forms of insurance coverage ultimately protect the customer if things don’t go according to plan. In fact, states generally won’t even issue a contractor’s license if the minimum level of insurance isn’t in place.

All subcontractors will either have their own insurance or they’ll be operating under the general contractor’s license and insurance coverage. Either way, you as the customer will enjoy a substantial level of protection simply by virtue of using a licensed and bonded contractor. Their insurance protects you from having to bear the financial consequences of a job gone wrong, or a workplace injury, but only as long as you use their services.

What Can Go Wrong With Unlicensed Contractors?

Many things can go wrong on a construction job, from injuries to shoddy workmanship to destruction of power, sewer or water lines. Ultimately, all issues are the responsibility of the general contractor. The general contractor and their insurance carriers are the primary payers in the event something goes awry on the job.

Now here’s the dirty little secret: If you don’t hire a licensed and insured contractor to handle your project, you’re the general contractor!

If your unlicensed contractor breaks a sewer line, you’re responsible. If a worker gets hurt and can’t work for two years, and there’s no workers compensation coverage in place, you are on the hook for that workers’ medical bills and lost wages.

What’s more, your standard homeowners insurance or landlord liability insurance isn’t going to cover you for these events. Most of these policies exempt damage caused by the knowing use of illegal or unlicensed contractors.

Make maintenance less messy – get a quote from a professional property manager and learn how they can be your maintenance mogul >>

Consequences for Landlords

Landlords should be very wary of property management companies that make use of unlicensed or uninsured contractors. When they do, they are potentially putting you at risk, too.

If your property manager brings in an unlicensed or uninsured contractor, and something goes wrong, courts have generally held the property owner liable along with the property manager.

The Danger of Hiring Friends as Contractors

Hiring friends as contractors doesn’t make the liability and risk issues go away. Everyone can enter an arrangement with the best of intentions, but when your buddy falls off the ladder and files a claim with their insurance company, they may well pay the claim and then go after you in subrogation proceedings (the area of law in which insurance companies fight to get reimbursed after paying their customers’ claims).

In one California case, Mendoza v. Brodeur, a homeowner asked his neighbor to do some work for him on his home. But the neighbor got hurt on the job. The homeowner thought he was hiring an independent contractor who had his own insurance. The court rejected that reasoning, and found instead that the homeowner was the neighbor’s employer and therefore should have had workers compensation coverage in place to cover the possibility of injury on the job. Since workers compensation wasn’t there, the homeowner has to cover the costs personally.

Summary: the Risks of Hiring Unlicensed Contractors

Failing to hire an insured, licensed and street-legal contractor could potentially cost you everything you own. If the worst happens, you could be sued into bankruptcy, and most state laws only allow you to keep a very limited amount of wealth or property once you declare bankruptcy.

Most homeowners insurance policies specifically exclude damages arising from the work of unlicensed contractors, so they will not protect you. You may be able to isolate investment properties from your own personal holdings via the skillful use of entities. But you could still lose the property in a bankruptcy proceeding if you don’t have the liquidity to pay a judgment.

Using an unlicensed contractor to save a few dollars may be tempting in the short run – but the potential risks far outweigh the benefits.

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