Rent Your Home for Fun and Profit
Websites such as Airbnb make it easy to rent out a spare room, a wing of your house or a backyard cottage.
Beth Everett and her husband, Glenn, built a cottage in their backyard in 2014 for their son Jordan to live in when he’s home from college. But while the studio sits empty, visitors to Portland, Ore., can rent the cozy space through Airbnb for $99 a night. Fox Lair, as it’s known, offers heated floors, a small sitting area decked out with guitars and bongos, and plenty of eclectic artwork. Everett estimates that in 2015 they earned about $9,000 from a steady stream of visitors, which she used to help pay for editing and cover designs for her self-published books, the Lee Harding mystery series. “It was the easiest money I ever made,” she says. “And it was fun.”
Airbnb wasn’t the first website to help owners, or “hosts,” rent out their homes directly to travelers. But the rental site has made it easy for anyone, in any city, to offer up a couch, a spare room, an in-law suite or the entire house for a short-term rental, generally defined as fewer than 30 days. “You don’t have to have a six-bedroom house in Florida,” says Joseph DiTomaso, CEO of AllTheRooms.com, a search engine that aggregates both traditional accommodations and short-term rentals. “You can rent out a room while you’re traveling for a week and make money to pay for your trip.”
A plethora of websites compete with Airbnb. The sites typically charge a service fee of at least 3% of the rent (and sometimes substantially more), but some lend a hand with the marketing, take care of collecting taxes in some locations and offer insurance. Airbnb, along with other sites, collects payments from your guests and deducts fees and sometimes taxes before sending the rest to you. Third-party services, including Guesty, Pillow and Proprly, offer to help make your gig as a landlord easier by managing your listings, delivering keys to guests, cleaning your place and more, often for a small percentage of the rental income.
Navigate the Rules
Start by checking with your homeowners association, condo or co-op board (or landlord, if you’re a renter) to see if short-term rentals are allowed and under what conditions. Your city or county may also have restrictions, but in many jurisdictions, laws that apply are rarely enforced—or they haven’t been updated to address sharing-economy rentals.
Several cities have made changes to deal with the new realities of home sharing. Last year, for example, San Francisco passed a law allowing rentals of fewer than 30 nights by residents who follow a set of strict rules. In New York City, rentals of fewer than 30 days are legal in apartment buildings if the host is there.
Your city may charge a registration fee, require you to secure city permits and business licenses, and enforce zoning rules that may prohibit short-term rentals. Sometimes that sounds more intimidating than it actually is. In Portland, where Everett lives, you’re allowed to rent out part of your primary residence as long as you register with the city and jump through a few hoops, such as notifying your neighbors and keeping a log of your guests. And you may have to undergo an inspection to ensure your rental meets safety standards.
Right now, laws governing short-term rentals tend to be enforced only if the neighbors complain because, say, your guests throw a raucous party. But that may be changing. “I am seeing increasing oversight and enforcement of short-term rental ordinances, particularly for tax collection and code enforcement,” says Paula E. Meyer, a real estate lawyer and owner of Paula E. Meyer & Associates, in Tustin, Calif. If you flout the rules and get caught, the extra bucks you make could be gobbled up by fines and other penalties.
Vacation rental websites generally take a hands-off approach to local laws, leaving it to you to work out the legalities of subletting your home. Your city council or local government website is the best place to start your research. Airbnb also has summaries and links for about 50 U.S. cities on its “Responsible Hosting” page.
Figure the Taxes
Whether you’re renting out your couch or an entire villa, your guests usually have to pay taxes to the city, county or state—and sometimes all three. The taxes go by different names: sales, lodging, occupancy or hotel taxes. Some rental services, including Airbnb and FlipKey by TripAdvisor, automatically deduct and pay these taxes for you in locations that have agreements with the services. That’s one reason Everett prefers Airbnb over VRBO, a website on which she used to list her cottage. The city and county split an 11.5% “transient lodging” tax, and the state takes another 1%.
If you list with a site that doesn’t take care of taxes for you, services such as Avalara MyLodge Tax can help you calculate what you owe. Avalara charges about $150 a year to file taxes on your behalf, but the amount changes depending on how many monthly or quarterly returns your city and county require.
Unless you rent out your home for 14 or fewer days a year—say, when a big convention comes to town—you’ll owe income tax on your rental income, too. Airbnb collects payment from your guests before sending it to you and may send you a 1099 form at tax time if your income and reservations exceed a certain amount. Regardless of whether you get a 1099 form, report your rental income on Schedule E of your Form 1040 (your state and city will probably want to know about your rental income, too). You can deduct costs directly related to your rental, such as the state and local taxes you pay, advertising expenses, and even new sheets and towels. You can also deduct a portion of expenses that you pay for your entire home, such as utilities and potentially homeowners insurance. Consult IRS Publication 527, Residential Rental Property (Including Rental of Vacation Homes), for more details.
Check Your Insurance
You want to be protected if a guest steals something or suffers an injury and holds you liable. And if a guest starts a fire or causes water damage, you want to be sure your insurance will pay for repairs. Tell your insurer how often you rent and whether you live in the home simultaneously; insurers might see it as a plus if you’re there when renters are.
Your homeowners insurer might be fine covering the occasional paying guest, says Jeanne Salvatore, of the Insurance Information Institute—but get that approval in writing. Or your agent might advise you to switch to a “dwelling fire” policy, which typically costs about 25% more than homeowners insurance, to account for the extra risk you take on as a host.
To add liability protection, Spencer Houldin, president of Ericson Insurance Advisors, in Washington Depot, Conn., recommends an umbrella policy of at least $1 million, which typically costs $150 to $200 per year.
Take simple precautions as well, such as concealing valuables. And be clear about your house rules to cut down on incidents that wouldn’t trigger an insurance claim but would still hurt your wallet. A few bad experiences prompted Everett to impose some restrictions. For example, she instituted a no-guests policy when renters invited guests who drank too much and trashed her place.
Airbnb includes coverage for liability and property damage, up to $1 million each. Other rental sites sell or include insurance as well. Whether you choose to rely on this coverage depends on how comfortable you are trusting your home to an insurer you may not know much about. “It’s a good backup, but don’t rely on it,” says Houldin. “I would much prefer to work with my own insurance company.” Also, if you list your home on multiple websites, you need coverage that will apply to all guests.
Everett priced a couple of commercial policies, but the premiums were more than double her homeowners insurance. For now, she is sticking with Airbnb's coverage.
Everett says she loves getting texts alerting her to new bookings. She often brightens up the rental with fresh flowers and hands out coupons for free beer at her favorite restaurant. “You get really lovely people whom you want to keep in touch with forever,” she says.
The Big Three Sharing Sites
The sites below are the best-known home-sharing economy services. Other smaller or specialty sites include HouseTrip, Kid & Coe, Onefinestay, Rent Like a Champion, Roomorama and Wimdu.
Airbnb. Rents out private rooms or entire structures. The service fee is 3% per booking. Airbnb holds payments from guests until after check-in and collects and pays occupancy taxes in certain cities. Property and liability coverage are included at no extra charge. Hosts can impose a security deposit as well.
HomeAway. The site, which also owns VRBO, rents out entire structures only. The service fee starts at 8% per booking, or owners can pay a $349 annual fee instead. Homeowners can buy tailored vacation-rental insurance called HomeAway Assure. There is no assistance with taxes. Hosts can impose a security deposit.
FlipKey by TripAdvisor. FlipKey lets you rent out private rooms or entire structures. The service fee is 3% per booking, or owners can pay an annual fee that starts at $399. The site holds payments from guests until after check-in. TripAdvisor, which owns other sites as well, collects and pays occupancy taxes in certain cities. No insurance products are available. Hosts can impose a security deposit.