By: The NBI Team
Tuesday, October 20, 2020
5 Tips For Clients Considering Short-Term Leases
The additional income from short-term leases is always helpful, but there are plenty of factors a homeowner should consider before agreeing to a short-term lease on their property. When advising clients, the following tips could help them maximize returns and avoid any legal headaches along the way.
1. Research City and County RestrictionsFor years, regulators took minimal interest in this market. However, city, county, and state governments have begun turning their attention to short-term leasing. Complaints from neighbors and lobbying from traditional hotels have pushed some city and county governments to strictly limit the availability of short-term leasing. Until recently, Santa Barbara, California outlawed short-term rentals on beachfront property entirely. Other cities maintain strict limitations on this type of rental.
City or county limitations on short-term leasing could directly impact a client’s property. It is important to determine if regulators will allow this use of the property before advising a client to move forward with their rental plans.
2. Obtain Necessary LicensesOther requirements must be met, even in jurisdictions that allow short-term rentals. Most cities and counties will require the property owner to maintain a business license related to the rental. Some cities even require specialized short-term rental licenses for these properties.
As discussed in attorneys Mark Hazelbaker and Timothy J. Walsh's NBI course Airbnb, VRBO, and Short-Term Lease Agreements: What You MUST Know, the consequences for operating without the appropriate license can be steep, involving hefty fines and even potential injunctions. These financial setbacks are not helpful to clients seeking an additional stream of revenue.
3. Screen Tenants CarefullyMany first-time real estate investors ignore the potential issues that might come with choosing the wrong applicant when renting their property. It may be tempting to lease their property to the first person that shows interest, but the wrong applicants could result in more trouble than they are worth.
The screening step begins with rental documentation. If a client wants to avoid renting to teenagers or pet owners, it is best to spell out those limitations upfront. While careful screening is vital, attorneys must also ensure clients do not reject applicants on a discriminatory basis. Property owners have faced a range of discrimination lawsuits based on their short-term lease rental properties. For example, the Miami Herald has reported on a legal battle over an applicant that was rejected due to their use of a service dog. Walking a client through appropriate screening options can help them avoid bad renters and costly lawsuits.
4. Understand Tax ImplicationsTax implications might be on the minds of a client when they consider a short-term lease, but they may not be aware of the potential full range of compliance they have to face. Short-term leasing typically impacts a client’s income tax bill. What’s more, it could also require payment of self-employment taxes. In addition to these traditional tax issues, certain jurisdictions have tax laws that target short-term leases specifically. Some cities require landlords to pay the same lodging taxes that hotels face. The failure to prepare for these tax liabilities could result in surprise tax bills down the line. Assisting a client with their tax questions is one of the best ways to aid them in the short-term leasing process.
5. Assess LiabilityClients considering short-term leases for their property typically focus on the additional income this arrangement could provide. Unfortunately, they should also fully understand the potential liability they could face as a short-term landlord.
As a property owner, a client could be liable for a wide range of premises liability claims. If the property falls into disrepair, they might face civil liability for any resulting injuries. Breach of contract claims are also a possibility. Anything from the tenant’s right to have their deposit returned to the condition of the property could lead to a lawsuit.
Because of these risks, attorneys must advise their clients on the potential liability they could face. If they operate the rental property through a limited liability corporation (LLC), they could avoid any personal liability on one of these claims. Should a client fail to set up the appropriate legal entity, they could find themselves personally responsible for any claims related to the rental. An attorney should not only advise them of the potential liability, but also guide them in addressing those risks.
These are only a few of the ways an attorney can limit a client’s liabilities through a short-term rental. To learn more about better serving clients, see the complete NBI course catalog for more information.
This blog post is for general informative purposes only and should not be construed as legal advice or a solicitation to provide legal services. You should consult with an attorney before you rely on this information. While we attempted to ensure accuracy, completeness and timeliness, we assume no responsibility for this post’s accuracy, completeness or timeliness.