Getting Started with Short Term Rental Direct Bookings: Permits, Rental Agreements & Taxes
How to establish a direct booking model for your Short Term Rental without a Property Management Software (PMS) Tool
Why are direct bookings so popular?
As booking platform commissions & fees continue to rise, guests are eager to find ways to save money on travel. Hosts are faced with the challenge of taking on the additional fees and raising rates, or keeping rates lower while pushing the fees onto their guests. Offering a direct booking option will enable you to capture more revenue, have more control and flexibility with your rental, and establish your brand.
Property Management Software (PMS) tools are specifically designed to help rental property owners and managers streamline their operations by creating a centralized calendar, providing reservation and channel management, and streamline/automate the booking journey. Most PMS tools also provide direct booking options, by allowing users to create a Direct Booking website, capture and manage direct bookings, and facilitate payments. The downside is that these tools can often be complex and expensive. A more recent shift in the market has resulted in PMS tools starting to implement booking commission models. As a result, hosts with smaller portfolios may benefit from standing up a direct booking model without relying on a PMS tool.
Not sure where to start? Let’s break it down.
The most basic components needed for direct bookings are:
Permitting
A Rental Agreement
Taxes
Guest Communication
Booking & Reservation management with Calendar Management & Syncing
Invoicing & Payments
Additionally, you can also choose to implement:
A Direct Booking Website
E-mail & Marketing Campaigns
Reviews & Guest Feedback
Permits & Regulations
If the state or locality where your rental home is located requires any permits or licenses in order to rent to guests, make sure to register and receive approval for these pre-requisites before proceeding. Many places have regulations in place specific to short term rentals, so it’s also important to review these.
Awning provides a great starting place for understanding what regulations exist in each state here.
Rental Agreements
Disclaimer: I am not a lawyer and this is not legal advice. A short term vacation rental agreement is a legally binding contract; therefore, it is highly advisable that you have your agreement drafted or reviewed by a licensed attorney, before finalizing any legally binding document. Your short-term/vacation rental agreement should be revised and updated to adhere to changing local or state laws.
If you are connected with a Realtor or Realtor’s Association, they often provide attorney-reviewed forms/agreements for realtors to use. It’s worthwhile to ask your realtor if they have access to this template, as it can often be a great starting point for writing your own lease agreement. Another option is to draft your own rental agreement.
When drafting your own agreement, here are some of the essential elements your agreement should include:
Parties Responsible: This typically defines who the Owner & Guests of the home are. It should include full name, permanent address, contact details (email & phone number), and a copy of the guest’s ID such as a driver’s license or passport.
Premises: Provide the exact location of the property and occupancy limit. Additionally, you can choose to include the current condition of the property and an inventory sheet. An inventory sheet should list items found in the property such as, furniture & appliances, as well as their current condition.
Rental Party: List all of the persons who are in the guests’ rental party and their relationship to the guest, that will be staying in the home during the term. It is also helpful to document the total number of adults, children, and infants who make up the rental party.
Age Requirements: Outline your minimum age requirements for the guest who is executing the agreement. Here are some sample clauses related to age requirements.
Term: Outline the start & end date, as well as the start & end time (check-in & check-out time), for the rental term.
Rent: The total amount due for the term, the late fee, and termination terms if the guest does not pay.
Financial terms: Provide a breakdown of Rents, Fees, Taxes & Deposits, as well as their due dates. This is where you should specify any additional fees, like a pet fee, linen fee, or additional guest fee.
Trip Insurance: If you plan to offer trip insurance to your guests, specify the cost of the insurance and ensure that the guest has a place to accept the insurance.
Rules & Policies: Outline and house rules in your agreement that you want to hold guests accountable for. Be as explicit as possible. It’s okay to create a separate attachment to list all of the rules and ask guests to sign the document. Here are some sample clauses that you can leverage, related to violations of the agreement.
Rent Disbursement to the Owner/Host & Third-Party Fees: Outline the terms for how the guest will pay you, including any 3rd party fees, such as credit card processing fees or returned check fees.
Security Deposit: If you require a security deposit, define how it will be collected, what it can be applied to, and what are the terms for returning the deposit.
Deposit Account: If you plan to collect a refundable security deposit or rent in advance of a stay, it is important that the funds will be stored in a way that aligns with your cancellation policy. If you offer any sort of refund-eligible cancellation period, the rent funds should be stored in a separate trust account until the refund-eligible cancellation period has ended. It is recommended that security deposits are always kept in a separate trust account, and depending on the location, this can be required by law. Some states also have legislation around whether the trust account is required to be interest bearing, if it’s optional, or if an interest bearing-account is not allowed. If the trust account is interest bearing, it should be disclosed in the rental agreement. Additionally, the location of the institution in which the trust account is registered, should be specified. More information on this is available here.
Payment Methods: It’s helpful to be transparent with guests about how the invoice will be issued, payment terms, and payment methods accepted. If there are any special terms associated with a payment method, such as a credit card surcharge fee, this should also be called out.
Pets: Be explicit about whether pets are or are not allowed on the premises. If allowed, clarify the maximum number, type of pet allowed, and any weight limits. Outline any rules for guests with pets, such as not leaving them alone in the home or picking up & disposing of pet waste. Here are some sample clauses.
Quiet Hours: If your town/locality has quiet hours, it’s a good idea to list them. If your home is in a condo/townhome situation, it’s also a good idea to establish quiet hours. The last thing you want to do is upset your neighbors by having loud guests. Putting quiet hours in the rental agreement makes them enforceable if you have to terminate the agreement due to non-compliance.
Cancellation Policy: Define your cancellation terms. You should include the conditions under which the rent amount (or partial amount) can be returned to guests, in addition to those cases where the host reserves the right to cancel the reservation unilaterally.
Home Sale / Premises Transfer: Every state/locality has its own legislation around this, so it’s important to understand what laws you need to comply with. That said, you should include a clause focused on what happens to the reservations if the home is sold. In my state, rental agreements that take place less than 180 days after a home sale has been recorded, must be honored by the new owners. Any terms reserved after 180 days do not have to be honored by the new owner. Here are some sample clauses on how to word this in your rental agreement.
Mandatory Evacuations: If your home is in an area that could experience a natural disaster, such as a hurricane, it is important that you specify the impact to the rental term and refund policy. It’s important to specify what happens when a mandatory evacuation is issued prior to a guest’s stay vs during a guest’s stay. Trip interruption insurance will typically reimburse a guest if a mandatory evacuation is issued, so it’s important to keep this in mind when establishing your refund policy.
Eviction: Some states have legislation that provides expedited eviction when a rental agreement is for a period of less than 30 days. Adding a clause related to this process and your rights as the owner is very helpful in supporting the eviction process, should you need to leverage it. Ensure to specify when eviction can be leveraged, such as when a guest’s tenancy has expired, a guest violates the terms of the agreement, or a guest fails to pay rent as required by the agreement, or a guest commits fraud/misrepresentation.
Indemnification & Hold Harmless; Right of Entry: A rental agreement should include a clause related to indemnification & hold harmless, for liability purposes. Additionally, you should clarify when, why and on what terms the owner or property manager can access the property. Here are some good sample clauses.
Other Terms & Conditions: Add a blank space for other terms & conditions that might arise, which may be unique to a guest or specific reservation. For example, if a guest requests to host an event or film a production - you should include requirements for additional insurance needs. These terms may not be relevant for your average guest, so having a free-form area is a great way to ensure you have room to capture them in your template
Addenda: If you have additional documents you want guests to sign, such as a rules/policies document or liability waiver, make sure that the title of the document is added to the addenda section, so that it’s enforceable with the terms of the rental agreement.
Identification: Requesting photos of legal identification from your guests is highly recommended. Not only does it allow you to ensure they are who they claim to be, it can be an additional aid if you need to take legal action against a negligent guest.
Signatures: The most important part of the rental agreement is the signature. Capturing the full name, date, signature, and party description (Tenant/Owner/Host) is what makes the document legally binding. Signing a rental agreement or lease electronically is legal in the United States.
Taxes
Disclaimer: I am not an accountant and this is not financial advice. Consult with a licensed CPA if you need assistance with your financial or tax situation.
When you accept payments for direct bookings, you become responsible for tax collection & remittance for those bookings. Thankfully, it’s super easy to register for a tax ID and start paying taxes. It’s industry standard for billing softwares to include tax calculation, but how do you know how much to charge? There are typically a few layers to this.
The most common types of taxes that apply to STR’s are State/County/City/Town Sales & Use Tax and Occupancy Tax. To confirm your exact tax rates, you can use a tool like Alavara, which offers a free tax rate look up for your rental address. You can also take a look at the tax break down in VRBO under Calendar > Settings > Taxes > View VRBO Taxes.
To register for a tax ID, visit your state’s Department of Revenue website. You can typically find the instructions for registering for a tax ID here, and sometimes you can complete the entire process online. You may also need to register with your County, City or Town to remit taxes, if applicable.
In addition to registering for a tax ID & determining your tax rate, you also need to determine your tax payment schedule. The payment schedule is locality-dependent, but typically you have to remit taxes monthly, quarterly, semi-annually, or annually. This happens in arrears. Generally speaking, you don’t owe taxes on a reservation until the reservation takes place.
In part 2 of this series, we’ll dive into guest communications (including e-signature software), booking & reservation management with calendar syncing, and invoicing/payments. This will provide you all of the basic elements required to start accepting direct bookings. In subsequent posts, I’ll dive deeper into creating a direct booking website, marketing your property, and collecting reviews. Make sure to subscribe below, to be alerted about new content.
