How To Turn Your Property Into a Vacation Rental: Legal Issues to Avoid
Ready to form your LLC with confidence? Our trusted partner LegalZoom has packages starting at $0 + filing fees.
To turn your property into a vacation rental you should research short-term rental laws in your area, create a business plan, choose a name and business structure, and set up a business account.
Vacation rental websites like Airbnb and VRBO put a high-tech spin on the business of hosting overnight guests. Today, most homeowners with an internet connection can create a home-sharing rental property business.
Before starting a short-term rental business, learn more about becoming a host and the legal issues to address.
What Are Your Neighborhood’s Short-Term Rental Laws?
Potential vacation home owners must check the rules and laws of the area where they want to list a vacation rental property.
There are different sets of property-specific rules. Some apply inside your county or city. Some extra regulations apply to properties that are part of a neighborhood or a neighborhood association, co-op, or homeowners’ association (HOA).
When researching your local ordinances, codes, and HOA bylaws, pay attention to terms like “short-term rental” and “long-term rental.” Some areas do not allow short-term rentals, and if you open against the law or code, you may find yourself at the center of a lawsuit.
If There Is No Homeowner’s Association
Every potential host needs to check the rules established by their local department of state. These are available from your state. You should also look up local codes. Do they allow vacation rental businesses?
Some governments limit home-sharing options for business owners. Many regulate them through permits and licensing. Local regulations might:
- Cap the total days a short-term guest may stay on properties within the jurisdiction
- Limit noise and ban party homes
- Require compliance with zoning ordinances and waste disposal rules
- Require hosts to give advance notice of the business use of the property to nearby homeowners
Some local governments charge fees for short-term rental permits. People renting out parts of their primary residences can expect less restrictive rules than absentee owners can.
If There Is a Homeowner’s Association
The covenants, conditions, and restrictions (CC&Rs) of your homeowner’s association may or may not limit short-term rentals. Most property managers can speak to the community’s experiences and attitudes about home-sharing, besides the manager’s understanding of the rules.
Deed restrictions can affect houses and condos that belong to HOAs. Restrictive covenants might ban home-sharing businesses outright. Other restrictions can include:
- Allowable time periods for rentals
- Car and parking limits
- Limits on pets or children
- Rules about the operation of home-based businesses on the property
Violators can expect fines, which puts a damper on your rental income profit margins. The HOA board might also record liens on the unit. A lien is a cloud on the title. It keeps an owner from being able to take out new loans against the property.
Local rules and HOA rules overlap. For instance, cities and associations might cap the number of short-term rentals allowed in multi-unit properties.
Keep in mind that zoning laws are not deed restrictions. Zoning is created (and modified) by local governments, while deed restrictions are in the house title.
Changes to Local Laws and Regulations
Another critical risk involves local law and policymakers’ decisions to establish or tighten rules that limit property owners’ actions. The possibility of new limitations poses a risk to those needing constant cash flow from home-sharing to pay off debt. Unit owners in condo associations need to be aware of any changes voted into the governing documents by the board.
This raises the matter of whether a given location permits Airbnb-style rental accommodations in the first place.
Some cities, like San Francisco, require short-term vacation rental owners to register as hosts with the city’s Office of Short-Term Rental.
What Are the Risks of Owning a Vacation Rental Business?
Owning a rental property business involves many hazards, such as accidents, economic downturns, and local laws and regulations changes. Hosts must understand and prepare for these risks.
Accidental Hazards
Property owners can suffer losses when guests break or take items. Other issues include hazards like accidental fires, burst pipes, or floods. These can lead to days, weeks, or months of lost income. These risks can be offset by short-term rental insurance coverage, but Airbnb does cover every stay with $3 million USD in property damage protection. It also offers another million in accident insurance.
Hosts can also have their own house rules. For example, Airbnb allows hosts to have their own lawyers create the contracts. But, listings must be inclusive.
Economic Ups and Downs
Prepare for the market’s ups and downs. This is important to full-time hosts and those looking for extra income. After all, losing money is no small-business owner’s goal.
During economic downturns, people may decide to travel less. When they do travel, they might spend less. For a host, this means the cash flow stops.
In any vacation rental business, planning for possible downtime is important, particularly in the off-season. Also, an owner must cover the maintenance costs between stays.
Personal Injury
Personal injuries at a rental property are many. Slip-and-falls on uneven stairs or accidents on the property come back to you as the owner. Injuries do include dog bites if you plan to open your rental to dogs. Landlords and rental management companies that host short-term rentals may be liable for dog bites if they knew the animal was aggressive and allowed the renters to stay on the property.
Tax Obligations
Understand your local, state, and federal tax requirements before opening your home to renters. These include transient occupancy taxes (TOT) often required for short-term rentals. An accountant in your state with experience in rental businesses can help you meet your tax obligations.
Create a Short-Term Rental Business Plan
If you think starting your rental property business is worth it, create a business plan. If your property is in a desirable location, are there important scenic, recreational, and entertainment attractions nearby? Are there major corporate headquarters, convention sites, or other attractions for business travelers?
Follow these guidelines if you want to run a successful Airbnb business.
Name the Business
A business plan starts with a name for the new business. You might run the business under your personal name, or you might prefer having a business name.
If you decide to use a business name, run a search to ensure it is not already used by a similar business where yours will operate. Search the listings on your secretary of state’s website and the U.S. Patent and Trademark Office database. Look for the name on key social media platforms. Run a search on the web.
A corporation or limited liability company (LLC) name must register with the state. A sole proprietor may register a doing business as (DBA) name with state and local governments. There is a registration fee for either form.
Form the Business
The formation of a small business entity matters. It sets up personal liability protection and dictates how a small business owner files taxes.
- A sole proprietorship is a one-person business, with income reported on the owner’s personal tax returns.
- A corporation is a legal structure that protects liability and separates business accounts from personal accounts.
- A limited liability company (LLC) offers a legal buffer if the owner gets sued. Income may be reported on the owner’s personal tax returns as “pass-through” taxation. Or, an LLC may opt to get taxed as a corporation.
The owner should get an Employment Identification Number (EIN) from the Internal Revenue Service using the SS-4 application.
Strongly consider having a new business entity for each property you rent.
Ready to form your LLC with confidence? Our trusted partner, LegalZoom, has packages starting at $0 + filing fees.
Open a Business Bank Account
To operate a business and guard against personal liability, avoid co-mingling personal and home-sharing funds. You should open a dedicated business bank account using an EIN. Apply for a free EIN with the Internal Revenue Service (IRS).
After setting up your account, you can apply for a business credit card. This way, you can shop for your business needs on the business account.
Create Renter Contracts and Agreements
Prepare rental agreements that outline the terms of stay, house rules, and liabilities. This helps protect you legally in case of disputes. Listings and agreements must be inclusive. You can’t request a pet fee for service animals or emotional support animals.
Prepare for Legal Liability and Risk Management
Consider the legal liabilities of hosting guests, such as personal injury claims. You can offset any lawsuit damages by contacting an insurance agent to secure adequate insurance policy coverage for your rental.
Insurance coverage should include:
- Liability insurance
- Property insurance
- Short-term rental insurance
If your rental is in a flood zone or area with hurricane activity, consider flood insurance as well.
Prepare Your Property For Renters
Setting up a bank account is not the end of your preparations to start your short-term rental property business.
- Accessibility laws: Depending on your location and the type of building you rent, you might need to follow accessibility standards for guests with disabilities. Accessibility includes communication, sensory, and physical.
- Safety and compliance standards: Ensure the property meets all safety regulations, including fire codes, carbon monoxide detectors, and other local safety requirements. You likely need an occupational license and business license.
- Privacy concerns: Before installing security cameras or other monitoring technology, consult with an attorney. Cameras like Ring cameras on the outside of the home are typically allowed, but hidden devices inside the rental are not.
You must protect renter data in your application process and procedures. General Data Protection Regulation (GDPR) and the Payment Card Industry Data Security Standard (PCI-DSS) are industry-recognized best practices.
Set Up an Airbnb or Vrbo Account
Here’s what you need to list a business account online with these companies:
- A bank account
- A taxpayer identification number (Social Security number or EIN)
- Government-issued identification showing the host is at least 18 years old
A homeowner uploads identification and sets up a profile page to form an account. This enables you to register, describe, and price the rooms.
When the host is ready to list a cottage, an apartment, a luxury cabin, or a spare room, they can go to the host section of their profile. There, they can create a new Airbnb listing. There is no charge to list. A published listing can take up to three days to appear in search results.
Set Up Your Vacation Rental the Right Way
To set up a well-organized Airbnb or other vacation rental business, consider using our business formation tool. If you have case-specific questions as you form your legal entity, consult a local business attorney for peace of mind.
Small business owners must follow legal rules. Aspiring Airbnb owners can consult local real estate attorneys before investing in new property. Expert advice strengthens any business owner’s power to succeed and optimize returns.
Name the Business
A business plan starts with a name for the new business. You might run the business under your personal name, or you might prefer having a business name.
If you decide to use a business name, run a search to ensure it is not already used by a similar business where yours will operate. Search the listings on the Secretary of State’s website and the U.S. Patent and Trademark Office database. Look for the name on key social media platforms. Run a search on the web.
A corporation or limited liability company (LLC) name must be registered with the state. A sole proprietor may register a doing business as (DBA) name with state and local governments. There is a registration fee for either form.
Note: There is no need for an Airbnb owner to set up an Airbnb business website. An owner who registers and operates as a business simply needs to set up a business account on the platform.
Form the Business
The way a small business entity is formed matters. It sets up personal liability protection. It dictates the way a small business owner files taxes.
- A sole proprietorship is a one-person business, with income reported on the owner’s personal tax returns.
- A corporation is a legal structure that offers liability protection and separates the business account from personal accounts.
- A limited liability company (LLC) offers a legal buffer if the owner is sued. Income may nevertheless be reported on the owner’s personal tax returns as “pass-through" taxation. Alternatively, an LLC may opt to be taxed as a corporation.
The owner should obtain an Employment Identification Number (EIN) from the Internal Revenue Service using the SS-4 application.
Open a Business Bank Account
To properly operate an Airbnb business and guard against personal liability, avoid comingling personal and home-sharing funds. This is the reason for opening a dedicated business bank account using an EIN.
After setting up your account, you can apply for a business credit card. This way, you can shop for your Airbnb business needs on the business account.
Set Up an Airbnb Account
What are the requirements to start your own Airbnb business? Here’s what you need to list a business account online:
- A bank account
- A taxpayer identification number (Social Security number or EIN)
- Government-issued identification showing the Airbnb host is at least 18 years old
To form an Airbnb account, a homeowner uploads identification and sets up a profile page as instructed by the platform. This enables rooms to be registered, described with check-in times, and priced.
When they’re ready to list a cottage, an apartment, a luxury cabin, a spare room, an actual air mattress space in a home, or even an RV, the owner should go to the host section of their profile and create a new Airbnb listing. There is no charge to create a listing. A published listing can take up to three days to show up in search results.
FAQs About Starting an Airbnb Business
Frequently Asked Questions
Homeowners rent out guest homes and rooms on the Airbnb platform to earn extra money. Is owning an Airbnb profitable? If the surrounding area has plenty of attractions, and the homeowner can keep reservations coming, the investment can pay off.
Homeowners’ level of activity on the site, and positive guest reviews, earn visibility. Higher visibility brings more earnings.
Some Airbnb offerings are basic and inexpensive. Others — the designated Airbnb Plus accommodations — are luxurious. Guests pay higher nightly rates for more amenities, elegant touches, and a record of positive reviews.
Real estate investors who would otherwise have sought long-term renters can potentially earn more with Airbnb. In environments with an array of tourist attractions — such as major festivals or federal nature preserves — owners might rent a property out for several hundreds of dollars a night. Luxury cabins can go for as much as $1,500 a day. These figures are indicated in 2022 reporting by Bloomberg. According to AlltheRooms.com, a Malibu mansion can earn $10,000 a month in host fees.
The average daily rate is $164 in 2022, according to AirDNA. U.S. national average daily rates have risen 1.7% year-over-year. Note: Airbnb takes a service fee of 20%.
To get a location-specific idea, you can do a search for Airbnb city-by-city pricing information. You can also plug in your details on Airbnb’s price page for hosts. Keep in mind that economic changes related to the pandemic can cause prices to fluctuate.
How much does it cost to set up Airbnb? The answer varies widely. It may depend on the season, size, style, and location of the unit(s). Factoring in the maintenance, furnishing, and cleaning needs, the costs can be significantly higher than those of a regular, long-term rental property.
Local governments impose construction, design, and maintenance standards for structures. For some buildings, compliance can be costly. Some local jurisdictions require the hiring of a licensed inspector to attest to a rental property’s habitability.
First, while creating an Airbnb for little upfront money is possible, there are some startup costs. Accommodations must be state-licensed. The county must give you permission to operate one, which means homeowners should expect registration fees. Owners of short-term rental properties may also need to pay occupancy and sales tax to the state.
Owners might consider purchasing short-term rental coverage through their insurance policies. This is separate from standard homeowners insurance. Some cities require evidence of this kind of business insurance coverage whenever a property owner establishes a rental business.
Additionally, there’s time and sweat equity. Homeowners must invest in their spaces. A camera that takes high-quality photos is important. The owner might also want to invest in a pro cleaning service. Listed accommodations must be safe, tidy, and attractive to potential guests. Units should be well furnished. They should offer utilities, wi-fi, entertainment, a stocked fridge, coffee-making equipment, and clean linens.
Once the home-sharing business gets started, the owner must earn great guest reviews. A stellar reputation on the platform will optimize the investment. All this attention takes time away from other potential opportunities and investments.
Check Airbnb’s Community Center for more information on costs. You’ll also find advice there from experienced Airbnb hosts in your preferred location.
There are numerous hazards involved with owning an Airbnb business, such as accidents, economic downturns, and changes in local laws and regulations. Hosts must understand and prepare for these risks.
Accidental Hazards
Property owners can sustain losses when guests break or take items. Other issues include hazards accidental fires, burst pipes, or floods. These can lead to days, weeks, or months of lost income. Such risks can be offset by short-term rental insurance coverage, but keep in mind that Airbnb does cover every stay with $1 million USD in property damage protection. It also provides another million in accident insurance.
You can also look into a business insurance policy tailored to the risks of a short-term rental property business.
Can the host make the house rules? Yes. In fact, Airbnb offers hosts the option to have their own lawyers create the contracts for guests. Note: Listings must be inclusive.
Economic Ups and Downs
Prepare for the ups and downs of the market. This is important to full-time hosts and those who are just looking for extra income. After all, losing money is no small business owner’s goal.
During economic downturns, people may decide to travel less. When they do travel, they might spend less. For a host, this means the cash flow stops.
It’s important to plan for possible downtime in any vacation rental business, particularly in the off-season. Additionally, an owner must cover the costs of maintenance between stays.
Changes to Local Laws and Regulations
Another key risk involves local law and policymakers’ decisions to establish or tighten rules that limit what a property owner may do. The possibility of new limitations poses a risk to those who need a constant cash flow from home-sharing to pay off debt. Unit owners in condo associations need to be aware of any possibility of changes voted into the governing documents by the board.
This raises the matter of whether a given location permits Airbnb-style rental accommodations in the first place.
A potential Airbnb owner must check the rules and laws.
There are different sets of property-specific rules. Some apply to properties that are simply part of a neighborhood. Other rules apply when a property is part of a neighborhood association, co-op, or homeowners’ association (HOA).
If the Property Isn’t Part of a Homeowner’s Association
Every potential host needs to check the rules established by the Department of State. These are available from the particular state in which the property is located. The potential host should also look up local codes. Do they allow vacation rental businesses?
Some governments limit home-sharing options for business owners. Many regulate them through permits and licensing. Local regulations might:
- Cap the total days a short-term guest may stay on properties within the jurisdiction
- Limit noise and bar party homes
- Require compliance with zoning ordinances and waste disposal rules
- Require hosts to give advance notice of the business use of property to nearby homeowners
Some local governments charge fees for short-term rental permits. People who rent out parts of their primary residences can expect less restrictive rules than absentee owners can.
What regulations apply to your city? Begin your research on the city-by-city Airbnb regulations webpage.
If a Homeowner’s Association Is Involved
Within associations, the Covenants, Conditions, and Restrictions (CC&Rs) may or may not limit short-term rentals. Most property managers can speak to the community’s experiences and attitudes about home-sharing, in addition to the manager’s understanding of the rules.
Deed restrictions can impact houses and condos that belong to associations. Restrictive covenants might bar home-sharing businesses outright. Alternatively, some restrictions set forth:
- Allowable time periods for rentals
- Car and parking limits
- Limits on pets or children
- Rules pertaining to the operation of home-based businesses on the property
Violators can expect fines. The HOA board might also record liens on the unit. A lien is a cloud on the title, and it keeps an owner from being able to take out new loans against the property.
Local rules and HOA rules overlap. For instance, cities as well as associations might cap the number of short-term rentals permitted in multi-unit properties.
Note: Zoning laws are not deed restrictions. Zoning is created (and can be modified) by local governments. Deed restrictions are permanently embedded in the house title.
Some brokers offer mortgage loans designed for Airbnb-style investment properties in strong real estate markets. This means the lender expects the property to be near local attractions.
Applicants need to show strong credit profiles and large cash reserves. Borrowers might need to prove a certain length of short-term rental hosting history or standard leasing experience. The required down payment can range from 15% to 30%.
Borrowers for these investment properties can be expected to pay more than the standard mortgage rates available for a primary residence.
“As you do the math to calculate the cost of your mortgage and compare it against the revenue potential of your property," First State Community Bank observes, “you might determine the financing isn’t favorable enough to create a solid return on investment."
Set Up Your Airbnb the Right Way
It’s essential that small business owners adhere to legal rules. Aspiring Airbnb owners can consult local real estate attorneys for laws and regulations before investing in new property. Expert advice strengthens any business owner’s power to succeed and optimize returns.
If you are ready to start your business, you can let our trusted partner LegalZoom handle your business formation filing for $99 plus filing fees.
FindLaw will earn a commission if you purchase business formation products through these affiliate links.
Meet FindLaw’s trusted partner LegalZoom, an industry leader in online business formations
Let’s start your free LLC!
Join the millions who launched their businesses with LegalZoom.
LLC plans start at $0 + state fees.
Prefer to work with a lawyer?