Reset Retirement Expectations with Short-Term Rentals

Short-term rental host: is this the new retirement job description?

Until a few years ago, managing a residential investment property involved installing a tenant for a year at a time and then hoping that the monthly rent was worth the wear and tear on the property. Many retirees hoping that an ‘armchair investment’ meant an ‘easy chair’ investment found that managing local rentals was more like a hot seat.

With the increasing availability and popularity of full-service property managers like TurnKey, short-term rentals now offer the potential to gain retirement revenue from investment properties – sometimes even primary residences – with significantly less work and worry. Short-term rentals can deliver a significant supplement to traditional retirement income sources, say financial planners, with the right structure and planning.

Here are 4 things you must explore before deciding whether or not to rely on a short-term rental as your sole retirement income source:


Income vs. Freedom

The math of vacation rentals can be enticing – hosts in Maine, for instance, averaged $6,900 in gross revenue in 2017, according to Airbnb, as reported in the Portland Press Herald – but don’t start by assuming that rentals will bridge a retirement income gap, says Jim Heafner, a certified financial planner and president of Heafner Financial Solutions in Charlotte, North Carolina.

Start by figuring out how much money you spend annually now, he recommends, and then tweak according to the amount it will take to support long-anticipated activities (like travel and hobbies) and the amount you might save by, say, not commuting.

The wild card is how you will spend your time retirement and where you spend it.

Your vacation home might have been a retreat while you were employed, but that does not mean it will always be your first-choice destination when you have time to travel further and longer. Heafner says that vacation homes often end up unexpectedly vacant, prompting owners to shift to short-term rentals to “try to make it pay for itself, but that’s hard to do,” he says.

The very amenities that make vacation homes attractive to guests drive up the cost of owning the home. Beach houses come with high and ever-rising insurance; Heafner’s own beach condo now costs him $500 a month for flood insurance. The cost of property insurance is higher for a rental or rarely occupied property. Wear and tear are greater with increased (and often indifferent) traffic.

It all adds up to a lot of oversight and ongoing concern, even if you are not managing the property hands-on, says Heafner.

And for some people, that feels too much like work. The nearly-retired often think that they will just downshift to part-time work but, once retired, find that even a reduced schedule grates, he says.

“There is a different level of tolerance for work in retirement,” says Heafner. “It can’t be too stressful or demanding, and that means different things to different people.”

And when that work is tied to a property, it can make retirees feel tied down, not grounded.

“You want to control your asset, not be controlled by it,” says Heafner.


Hands-On or Hire a Property Manager?

Managing a short-term rental may or may not be compatible with your expectations for daily life in retirement, but you will need to become conversant with ongoing issues of market rates, local regulations, and safety.

As municipalities focus on the practical implications of short-term rentals, many are introducing guidelines and regulations. The city of Wilmington, North Carolina, for instance, now requires rentals to submit to safety reviews and other rules for commercial properties. You will need to monitor a variety of factors to ensure that your rental is in compliance with local laws, even as you handle daily chores of communication, cleaning and coordination.

Local and national property management firms can shoulder some of that burden. Property management firms do more than market rentals and collect and manage money. They also provide market intelligence about emerging municipal rules and restrictions; the competition and market rates for rentals like yours; and can flag upcoming maintenance and improvement projects, such as a balky dishwasher that might need to be replaced.

And, of course, a property manager can pay for itself by helping to keep the unit rented when you are not on-site. If one goal of the rental is to provide a stream of income for travel, hobbies, and other lifestyle ‘extras,’ a management firm can clear your schedule for the activities you want to pursue.


Identify Hidden Barriers

Converting part of your existing family home into a short-term rental comes with its own complications. Unexpected barriers to short-term rentals can surface in the form of zoning ordinances, local rental ordinances, and homeowners’ associations, says Kelly Welter, a partner with the Las Vegas CPA firm SerlKeeferWelter, LLP. She has spoken with homeowners who tried to “rent under the radar” and ended up with crazy” penalties for flouting homeowners’ association rules.

And, says, Welter, remember: if you hope to make bank on the northern house you leave in the winter when you are in the south, so are many other homeowners. Rental income tracks with demand, and if your house is available when plenty of others are also available, the potential revenue will be spotty – if it materializes at all.

Short-term rental income can also complicate how and when you draw income from other retirement sources; your income taxes; and how you estimate and use tax deductions and depreciation tools, say Welter and Heafner.


Generational Bridge

Many families have high expectations for banking memories of times together at vacation homes – the kind of benefits that don’t fit on spreadsheets. That complicates the cost-benefit math, says Allvine, and that’s a prime opportunity to experiment with short-term rentals assess the payoff of carrying a property from one generation to the next.

“Renting can be a first step toward breaking up with a home that has a lot of memories,” she says.

How you feel when renting the house during a stretch when the family is using it less can be an indicator as to whether it is worthwhile to hold on to it – for your own use in later retirement, when you have more time, or for the next wave of young families. That’s also the time to think through ownership structures so you don’t get caught between the gears of changing rules for capital gains exemptions, she adds, should you decide to sell the house.

“In the first 10 years of retirement, your adult children are in their careers and you are traveling,” says Allvine, citing short-term circumstances that might make a second home ripe for short-term rental. “But as soon as there are grandchildren, you’ll use that lake house again, and renting can be a bridge to the next cycle of intense family use.”

Take the time to evaluate a vacation rental property before solidifying it as part of your retirement strategy, and future you will thank you.

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