Wealthy & Wise: Short Term Rentals, Long-Term Wealth

About the Video

As more real estate investors are gaining interest in short-term rentals, watch Adam Kintigh, our Senior Executive Corporate Analyst, and Cort Christie, the founder of NCH, discuss the ins and outs of short-term real estate rentals so you can take full advantage of your business profit by knowing all the pitfalls ahead of time.

Prefer to read? A full transcript is provided below.

CORT:

Hello and welcome to another edition of Wealthy and Wise. I’m your host, Cort Christie and today we’re going to be talking about short-term rentals. And if you own a piece of property that might be with Airbnb, or VRBO, that you’re marketing it through, there’s some really important things you need to understand about the liabilities that go along with owning a short-term rental property. And in addition to that, there’s some pitfalls that come along with taxes that many people don’t know about that might actually shock you and leave you owing a lot more tax than you actually thought you would owe just by getting into the short-term rental business. So, I have an expert here today to join us. We have Adam Kintigh. Adam, welcome to the program.

ADAM:

Thank you so much, Cort. Glad to be here.

CORT:

Oh, fantastic. And Adam’s been on the show a few times. You’re always a great guest. We love having you. And, you know, you’re an expert in this. You are a senior executive corporate analyst at NCH. You’ve been doing this for so many years, helping small business owners, helping real estate investors figure out how to structure themselves to protect themselves. And then also look at, you know, what are the tax liabilities of being in business or owning real estate and short-term rental properties has a whole other thing going on than just a normal structure for somebody that might be a long-term renter for a piece of real estate that they own. So, before we go into that, let’s just talk about the foundation, like what kind of liabilities do I need to be concerned about when I own a short-term rental property?

ADAM:

Yeah, that’s a great question. There’s huge liabilities owning any property, and as innocent as you may be, you own the property, you are responsible. I always find it interesting. Airbnb advertises they give you $1,000,000 of insurance for anyone that books through there. And I would be curious to find out how many times is there actually been a problem in Airbnb or VRBO of any of these companies actually pay out. So, it becomes a battle of the insurances. So, I tell everybody it’s so important to keep a good insurance policy. There are just so many things that can happen where the insurance won’t pay or won’t pay enough. That’s why we need to have LLCs. So, one of the important parts about structuring these is, most people buy the property sometimes as a primary residence and then later on decide to hang on to it and rent it out. And you start to look at the numbers of how much I can make with an Airbnb versus what I make with a long-term rental. And it is amazing the amount of money people make on an Airbnb versus the long-term rental. A lot of money there. So, they look for ways to increase the profit. And doing this through Airbnb is just a great option but it’s got to be done right, from a tax standpoint and from a liability standpoint.

CORT:

Absolutely. Well, and I think you mentioned they have a $1 million liability insurance policy to cover claims, but you think of all the things that can happen when somebody is throwing a party or, you know, drinking too much or, you know, having too many people over or allowing people they don’t know to come into the environment, what gets stolen, what gets taken, people get hurt. $1,000,000 is really nothing, especially when it comes to injury in a property when something goes wrong. So, I think that’s what’s really critical. You know, I think that you know, there’s so many different types of ways of holding real estate. You can hold it in your personal name. You can hold it in a trust, a land trust. You put it in a corporation if you wanted to or an LLC, you know, there’s some people that might choose to put it in to something even beyond that. Like, you know, I don’t know, it could be a just a living trust or something. But what’s your, what’s your one strategy that you send people mostly down the path of?

ADAM:

Yeah. So most people in buying the property, we have a 30 year fixed rate mortgage and the concern is always, OK, if I put this property into an LLC, as soon as the bank does an internal audit where they sell the mortgage and see your name is not on record, they could always come back and invoke the due on sale clause, say, where’s our money? And you could argue at them and then sell the property. I put it into an LLC that I own. They say, Yeah, but legally you’re not the LLC. Where’s our money? So, we always structure it. We put the property into a land trust, we call them a real estate privacy trust. So, by doing that, there’s a federal law called the Garn Saint Germain Act of 1982 that when we put property into a trust, the bank cannot invoke the due on sale clause. So, that’s number one. Now a trust by itself is, provides us with privacy but doesn’t protect us. So, we also set up an LLC that owns that trust. The lifetime beneficiary of the trust is an LLC so that I’m now protected. So, I have my LLC collecting the rent, paying the mortgages and taxes, whatever is left over I just write myself a check. Assuming I have a property manager managing this Airbnb activity that would be passive income and passive income automatically gets offset by my passive losses. My forced depreciation losses. So, I’m paying a lot less tax on that rental income that I’m receiving through the Airbnb.

CORT:

Now, there’s some problems potentially if you don’t set it up right, right? Or you spend too much time being involved in the property when it comes to tax liability. Talk to us about that.

ADAM:

Yeah, so everyone wants to be a great host and I want to share with you my favorite restaurants in the area and the activities going on this weekend. I want those good reviews, so I’m trying to do those things as a host. But the danger is that if I am actively managing that property and I’m not using a property manager, then my income is no longer passive income, it is now active income. And the tax trap is the active income is now subject to state, federal and Social Security and Medicare tax, which is a killer. So additionally, because I’m managing my own property now, my passive income is no longer passive, it’s active. So, my depreciation losses that normally happen on a long-term rental, those aren’t happening anymore. So, I’m really getting crushed in taxes. So, there’s very specific ways we can do this by having one LLC taxed is an S corporation that receives income from Airbnb. And then I’m effectively Airbnb arbitraging my own property. I’m going to rent the use of that property to myself, taking my active income, turning it into passive income. So now my depreciation losses will count on a big chunk of that money. It’s just a genius way to do it. Went over this with our CPAs many times. And the effectiveness and the, is this the right and best way to do it? And from a tax standpoint is absolutely the best way to do it. If you have a property manager, you don’t do anything, that is passive income we’ll keep it simple. But if you are managing property, we get huge tax benefits out of having the LLC taxed as an S corporation to receive all that income from Airbnb.

CORT:

And maintain that passive status. You know, I think you get that passive income, you’ve got the passive depreciation, one offsets the other, it benefits you so that income that you’re earning, you don’t pay anything on because of that depreciation that’s sitting there. And I think that’s what’s so important. But people can get caught in the trap because they’re renting short term. They’re the ones managing the property. They don’t hire a property manager. They think, well, I’m just using this platform. I’m on VRBO or Airbnb. They’re the ones that are doing the renting. It’s like, no, no, no, no. They’re just an online platform, a matchmaking service, if you will, that’s just connecting your property to someone that’s interested in staying in it for a short period of time. But somebody’s got to do the work. Somebody’s got to open the door. Somebody’s got to get the place cleaned. Somebody’s got to pay attention to the property and do the repairs and the fixes. And most of the time that’s the person that owns the property and they’re going to get hooked into that active status unless they set it up correctly the first time and take advantage of the strategy that you talked about. So, I think that’s really important otherwise you’re going to pay a lot more in tax. And you talked about, you know, all the levels of taxes that you have to pay when it’s active, including the 15.3 plus, plus on all the self-employment taxes that you have to pay that nobody would have expected in this case. Let’s talk about maybe some other tax benefits to having this property. You know, if you’re in the short-term rental market, are there other things that I could be writing off? And does this also get me into the trap of active versus passive? Like if I’m writing off supplies or writing off, you know, Internet and electric and all the stuff that goes along with being, you know, owning in a short-term rental because you’re not putting it in their name like you would as a long-term rental. You know, it’s in your name, the owner of the property.

ADAM:

Yeah. So, we looked at the passive income. If I’m renting it out long-term, I have a property manager in place that’s managing everything I’m hands-off. That passive income has passive losses. I’m not going to try and cram a bunch of expenses trying to write off my home office and my mileage, versus, if I have an LLC taxed as an S-Corp and I am managing my own property, now I’m absolutely writing off my home office. Got to have that annual board meeting every year, whether it’s in Hawaii at your kitchen table, got to have one. So now I’m starting to write those things off, even mileage to and from the grocery store. If I have to go buy supplies. I got to go to Sam’s Club and buy towels and cleaning supplies and all the things that I have to purchase. Now, I can write off my mileage. So, there’s a lot of things that you can write off, but it’s so important to work with the tax professional, make sure that we have the right guidance because it’s always those little mistakes that get costly later on, and especially with the Airbnb. Great opportunity to make a lot of money, but it’s also a great opportunity to really screw things up. I was talking to one of my friends today. He has an Airbnb and he was saying that he pays attention to what you can and can’t do. And even if you went to the airport to pick up a friend, you said, you know, I’m going to be there in Florida and while I’m there, you can stay at my Airbnb and I’m so nice that I’m going to stop by the airport and pick you up. That little activity may have just turned that into an active income business.

CORT:

Interesting. So you stepped out, you did some things that you thought were really nice to help a renter or a friend or somebody that’s staying in your unit, but now you’ve gone out of your way and you’re actually facilitating or spending more time in that business model, ultimately. Interesting. So, bunch of things that you need to pay attention to. And I think what’s so important is, you know, as you go down this path or if you already own a rental property and you’re short terming it like through Airbnb and VRBO, talk to an expert like Adam so that you can learn more about how to do it right. Get this set up properly, use the LLC taxed as an S entity, get the S election filed on it to make sure that you’re taking advantage of that passive income being properly classified. I think that’s really so important and I think, you know, now as we go further, we start talking about, you know, issues in relationship to jurisdictions like cities and townships and counties. And, in particular, I’d like to talk about two. One is Las Vegas. And the second one that you might not be as familiar with is Lake Tahoe. Now, South Lake Tahoe made some significant changes in one of the counties and they really wanted to limit how many people. So, they didn’t eliminate who could have short-term rental. They actually issued a certain number of licenses. So, f you didn’t get a license to have a short-term rental property, you were out. So, you just can’t go and buy one in that area and get to use it. And I know in Las Vegas there are some limitations based on how close you are, I believe, to the Las Vegas hotel corridor. What they traditionally call the Las Vegas strip. Can you tell us about that and just broadly, how people might have to be concerned, are watching how jurisdictions are looking at allowing short-term rentals?

ADAM:

Yeah, I think in Las Vegas especially is that eating into those casino revenues is probably not a good thing for individuals to try and do so you’re right. If you’re within a certain distance of the strip of Las Vegas Boulevard, can’t have an Airbnb. They’ve got here in Las Vegas some recent things. If you have a Fourplex, those are great rental units, but you now have to have a special permit. If you have a four plex here in Las Vegas in order to rent that out, go through a licensing process, taking a course on health and things that they do to generate revenue for our county and state. So that’s one of them. Having a decibel meter, we now have to have decibel meters in the backyard so that if there is a party that decibel meter, if it goes above a certain amount, the homeowner gets notified. We’ve got to be within the limits of what decibels during what hours of the day. So, it’s super important that, yeah, there’s great locations that you can get your properties, but we also have to start paying attention to the new rules. Because at the end of the day, Uncle Sam wants his taxes, whether it’s city or state, county, there are taxes involved with it. It’s got to be done right

CORT:

Absolutely right. I know there’s a condo, a large condo group in Las Vegas. And years ago, they had a bunch of people doing Airbnb and VRBO, short-term rentals, and the board of directors came in and changed the rules. So, everyone that owned one of these units now could no longer short-term rent the property had to be long-term. And I don’t know if long-term is three months or six months or what it was, but they basically blew up the opportunity for short-term rentals. And so, I think that’s just one of those things that you’ve got to watch about where you’re doing it and what the likelihood is somebody’s going to be upset about it. Now you’re talking about, you know, your neighbors and the noise that might go on in the community to pay attention to all these things. I still think there’s a great opportunity in this place. Now, in this world of short-term rentals. But talk to me about individuals that sort of take it to the extreme. And, you know, I’ve seen and heard of cases where individuals simply rent a property on a long-term basis and then with permission from that landlord, turn it into a short-term rental. So, they’re basically short-term renting, something they don’t even own. And their leasing it on a long-term basis. Tell me about that scenario and how often do you hear about that?

ADAM:

Yeah, it’s becoming more and more. There’s companies that teach people how to do this, and this is what we call the Airbnb arbitrage. So instead of buying the house, I’m going to rent the house and I’m going to put it on Airbnb and manage that. And the guy that owns the house is happy. His house is probably cleaner than if I had hired a long-term tenant… cleaning crews in every day or every couple of days to clean the property, keeping it well kept and maintained. So, he’s getting his passive income and might even be able to charge a little bit more where my person is now renting that property, putting it on Airbnb, has a lot higher profit margins with a lot lower risk. So, if the market dried up, worst case scenario, I might violate the mortgage agreement but I’m not getting my house foreclosed on. So, it’s really a good opportunity. And also, we look at the timing of this thing. I was talking with a client that has a property in Los Angeles and he said, Adam, I had no idea. But if I rented my property for 30 days or more, if that person decided to stay, I had to go through the eviction process to get him out of the property. So, rule of thumb now, he said, I learned the hard way, 29 days is the most I will rent the property in LA County. Las Vegas, we don’t have that rule, but there are counties that do. So, renting properties out also great opportunity to make money. But if I rent it from somebody, I’ve also got to be mindful of what are the rules in this area? Are there any little nuances that are going to bite me later on? So, great opportunity to make money, but also the risk involved as well.

CORT:

I would imagine San Francisco and some of these, what would we say, more left leaning jurisdictions that allow, that have rent controls and things like that. Or, you can’t displace somebody that’s renting from you. You’ve got to be really careful with that. That’s interesting. But I love this arbitrage concept because you might be renting a house for, you know, $2,500 a month and able to short-term it for $10,000 a month. I mean, it could be a lot of money in your pocket, especially if it’s well-positioned. I mean, if you can find it on a beach or find it near the Las Vegas Strip where somebody just doesn’t want, you know, just one hotel room for 500 bucks a night. They’d rather have a house with three bedrooms for 500 bucks a night. And at 500 bucks a night if you’re actually getting, you know, let’s say 20 days a month, that’s $10,000. That’s a lot of money. And people will pay that just to have more room, place to breathe, you know, maybe a backyard to sit out in because they don’t want to be stuck in a big casino with, you know, a lot of smoking and craziness going around. So, there are some really interesting things that you can do with that. And just another way to take advantage of the short-term rental market that’s out there, especially if you don’t have the money to buy your own house. You don’t have to, just go rent a house from someone else. Make sure they know what your intentions are because you will create some problems with yourself if you don’t and aren’t upfront with that landlord. But I think, I think that’s a really fun business. So, to sum things up, you know, those people that are in the short-term rental market really need to pay attention to a few things, the liability that’s in that business. Just make sure you do it right. Use a land trust to hold the property, use an LLC taxes an S corporation to receive the income off that property. Do it right, make sure it’s passive income so you’re not spending too much time actively managing it and get caught up and having to pay extra taxes. And then lose, you know, the offset against the depreciation that you might have if you own the property yourself. You know, that’s very, very important. And I think we want to reemphasize to everybody listening is you want to make sure that you do this right and you protect yourself and then you minimize the amount of taxes that you will have to pay from the income that you’re generating. But you want the right classification of tax, making it passive for yourself. So, Adam, thanks for educating us today. It’s been fun talking about short-term rentals and always you’re a wealth of knowledge. I appreciate that so much about you. And if any of you that are listening want to get a hold of Adam, just call NCH, reach out to them. Ask for Adam. And he’s an expert in so many things, but most importantly is an expert in short-term rentals. So, thanks for being on the program here today, Adam.

ADAM:

Thanks for having me.

CORT:

Absolutely. And for all of you tuning in, thanks for watching today. This is another edition of Wealthy and Wise. I’m your host, Cort Christie. Have a great day!

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DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.