Vacation Rentals

Owning a vacation home can be a very pleasant experience but it is not a decision that should be taken lightly.  There are many facets to consider in owning a vacation home, such as the everyday maintenance of the property, marketing and advertising of the home, the servicing of clients’ needs and the costs involved.

There are also many regulations that the home has to comply with and an owner should never lose sight of the fact that the State, County and sometimes City administrators will view the home as a Business and will regulate it as such.  In the next few pages I will itemize certain criteria that you need to consider and adhere to if you wish to purchase a home.

Resale Purchase vs New Construction

Purchasing a resale home usually means that the subdivision is completed, and it is imperative that the Realtor establishes that the subdivision is zoned correctly to be able to operate as a short-term rental community.  Many homes are sold fully furnished so it  may not need much in the way of furnishings.  Dependent on the age of the property it is usually prudent to purchase a home warranty policy to cover all the electric appliances in the house for the first 12 months, in case repairs are required.  These policies can usually be obtained for between $400.00 to $450.00 but they are certainly a worthwhile insurance policy.  They can be renewed each year if required.

New construction is normally more expensive than resale properties but some people prefer to be able to choose everything from scratch, from the house design, the colors and the carpet, tile or vinyl designs.  The shape and choice of the pool can be designed and any additional extra features as upgrades can be determined.  All very exciting options but the Buyer will probably have to wait about 6 - 9 months for the house to be fully completed and ready to take occupancy.

With a new home the Builder will carry a warranty on everything for the first 12 months, but one of the major draw backs is that the subdivision will be in a building phase for quite some time and this can affect the rental potential of the home, as there  will be a need to inform the guests that building is still going on around the home.  Here in Florida the builders normally like an early start before it gets too hot so 7am starts are not unusual.  Certain phases of the building process are noisier than others so there may be banging and hammering that may disturb the guests relaxation by the pool.  On a positive note however, many renters prefer to occupy a new home because they are “new” and all the furnishings are not showing signs of wear.

With both options, location is the major factor before choosing the subdivision and it is imperative that the subdivision is zoned by the County for use for short term rental homes.  The perfect location for a vacation home is to be close to shopping, restaurants and most importantly the Theme Parks . To say that the home is within 10 minutes to Disney is always a plus in the marketing of the home.

We are also seeing the evolution of the tourist market each year and builders are very much aware of the developing trends.  The tourist patron is becoming ever more sophisticated in their demands for the accommodation that they will use on vacation.  Builders have responded well to these demands and we are now seeing new subdivisions actively providing the features that the clients demand.  For example, people like the security of manned, gated communities and where the subdivisions are “resorts” rather than just a group of houses together.  The quality of the features being offered by the Resorts is also getting better with each new development that comes on line.  Guests like the choice of staying on site with plenty for the children to do than constantly having to pay the entrance fees for Theme Parks, which are getting quite expensive.

 

Federal, State, County and City Regulations

All aspects of the US Government regulate the use of a vacation home as a short term business venture, and the owner will need to apply to each department for various Licenses.  (A good Management Company will have all the necessary forms and will usually process all the applications for their owners, so no need to panic just yet.)

Federal: A TIN number registers the owner as a US tax payer for foreign investors, and Social Security numbers for US citizens.  Each year the owner(s) will be required to submit a US tax return regarding the income generated from the home.  For US citizens a form 1099 should be produced by the Management Company or Rental Company for the home, showing the income generated from the home to include on the Federal Tax Return, and a form 1042S form will be produced for foreign investors.  It is recommended that owners engage a US accountant to produce the tax return for their home.

State: A Sales Tax number is required for payment of Sales Taxes to the State on the rental income received from operating as a short-term rental home.  This amount is currently 7% and a one off $5.00 application fee is required.  The Sales Tax is usually included as part of the cost of the rental that the guest will pay to the owner who is then obligated to remit it to the State of Florida.

  A License to operate the home as a Short Term Rental will be required and this is issued by the State.  Before this License is issued the house will be inspected by an officer of the Division of Hotels and Restaurants to ensure that it complies with the regulatory codes in force by the State of Florida.

The initial application fee is $220 with an annual renewal in April each year of $170.00.

County: A Tourist Development Tax number is required for payment of the County Sales Taxes from the rental income received from operating as a short-term rental home.  Each county can differ on the percentage they require but for example in Osceola County the rate is currently 6% and a one off $5.00 application fee is required. (Again the guests pay for this tax as part of the accommodation charges)

  A County License is also required for the operation of the home as a Business, and this application can only be made once the State License and the State Sales Tax Numbers have been received.  No additional inspection of the property will be made as the proof of a State License shows that the property has passed the regulatory standards required. An annual renewal of $30.00 is required each September.

City:  A City License is only required if the house purchased falls within City limits.  This is a $50.00 per year License and is also renewable each September.

Marketing and Advertising the Home

Most Management Companies will assist in providing rentals for the homes but they will obviously take a commission off the rental amounts, so the more rentals a home owner can obtain themselves the more revenue they will be able to retain and the more independent they will feel if at any time they need to change Management Companies.

There are many ways that they can market their home, and some advertising is better than no advertising at all, so here are a few tips to get started:

Virtual Tours of the homes are an inexpensive but fantastic advertising tool as it means that the potential client can “walk through” the home to get a better feel of the features and also any resort features.

Travel AgentsCopies of the virtual tours can be burnt onto CDs to hand out to people and more importantly give out to local travel agents in the home owner’s area to advertise the home to their clients.  Agree an acceptable commission payment to the travel agent for their referrals.

Photo Stillsprovide the opportunity to create flyers, or an album for passing around and also in being able to e-mail them to clients. A virtual tour and a set of professional stills will cost between $150.00 to $250.00 dependent on the number of bedrooms the home has.

Flyersare a great way of putting photos of the houses on notice boards in work canteens, local shops and restaurants, and can be included in any mail sent out by businesses owned by the owner of the house.

Business Cardsshould be carried at all times and handed out whenever possible, convert some into fridge magnets and send them out to all business contacts, family members and friends.

Web sitesThe internet is a phenomenal tool, reaching millions world wide, and if an owner is not confident in launching their own web site, there are many large companies that allow you to take a page on their site to advertise the home.  This is where the professional photos can be utilized to their full potential.

Staff MagazinesIf an owner works for a company that has a staff magazine, this is one of the best publications to advertise within, and usually not as expensive as newspaper publications.

RecommendationsThe best form of advertising is word of mouth from a satisfied customer.  Talk to guests after they return home, get feed back and offer them a discount off their next visit and a referral fee for anyone that books through them into your home. If they do not already have a CD of the home’s virtual tour send them one or give them the link to pass onto friends and relatives.

Purchasing Requirements

The criteria for financing here in Florida can differ dependent on whether the Buyer is a US citizen or a foreign investor.  For US citizens considering finance the minimum deposit required is 10%, and for foreign investors it can vary between 20 – 30% for the deposit.  The larger the deposit the lower the interest rate you will be able to achieve.

If the Buyers does not wish to finance in Florida they can possibly raise the value of the home to be purchased against the equity in their own homestead, and then the Buyer will be treated as a Cash Buyer here, and in the case of new construction the Builders sometimes offer a discount off the purchase price if financing is not required.

Most mortgage lenders will require the deposit to be in a Floridian bank account prior to closing together with approximately three to six months mortgage payments in reserve in the account.  Most mortgage lenders would prefer to process the monthly payments via a bank account, but coupon booklets are also available if mailing a check is the preferred method of payment.

Most mortgage companies also like to include the collection of 1/12th of the property taxes and household insurance together with the mortgage principle and interest payments.  This gives them the safe guard that when the renewals fall due for the property taxes and insurance these bills are paid by them and thus ensuring that no tax liens can be placed ahead of their claim to the property, and that the house is fully insured at all times.  It is also a very efficient way of budgeting for two of the largest bills that are encountered on the homes each year.

Another requirement for a contract will be a Social Security Number, this is not a problem for US citizens as they automatically will have one allocated.  However foreign investors will have to apply for a Tax Identification Number, known as a TIN number for short.  This application can take up to 6 to 8 weeks if mailed away, but if the Buyer(s) is/are in Florida it would be prudent to complete the application papers as they need to be Notarized together with a copy of the photograph page of the passports, and these can be mailed to processing administration centers.   The applicant will need to know their own tax identification number from their own country, for example in the UK this is known as a National Insurance Number for submission on the W7 application form.

The US Government will cross reference with the Country of residence and complete a back ground check on the applicant through their own Government before a TIN number will be issued, hence the lengthy application period.  Once issued the TIN number will be their unique tax reference number in the US for life.  It will be used each year for the submission of a US Tax Return.

 

Management of the Home

There are many Management Companies to choose from to provide the maintenance requirements for the homes and each will have their own contracts.  Please ensure that these are read thoroughly and ask questions if you are not sure how the system will operate. Establish lines of communication and levels of expenditure agreed before the Property Manager has to ask for permission to spend the owner’s money for repairs or replacement items, and also the level of Escrow funds required to be held by the Management Company.  It is prudent to give a Limited Power of Attorney to the Management Company but specify what the document allows them to do, DO NOT give a General Unlimited Power of Attorney as the owner still needs to keep some control of their investment.

Some Management Companies want the homeowner to pay all their own bills from a bank account, whereas others will be happy to offer this service for the owner.  Whichever method is agreed there will be set bills that need to be paid each month, and these are:

 

Management Fee

Pool Service

Lawn Service

Pest Control Service

Cable Service

Telephone Service

Utility Bills

Sales Taxes

Cleaning Fees

Homeowner Association Dues

 

There will be supplies and repairs that will also appear but owners should ensure that there are sufficient funds with the Management Company to cover the regular bills.  Also agree what will happen to excess funds above the agreed Escrow limit, choose whether these should be remitted by check or a credit deposit made to a bank account.

US citizens are allowed to make two maintenance visits per year to the home, but checks should be made with the owners’ accountants as to what can be written off against taxes.  It is recommend that some time is put aside during the vacation to attend to small maintenance jobs that you can be managed by the owners, a little painting, replacing towels or linens as required, power washing etc.  Always remember that first impressions do count and that there is a lot of competition out there from other homeowners.