JF1826: Saving Tax Money On Short Term Rentals & Other Properties with Robert Stephens
Taxes are a major expense for real estate investors, and Robert is here to explain some of the taxes that we may not know about, and how to save money on those taxes. In the short term rental area, there are lodging taxes. Much of the conversation focuses on that today. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
“A lot of people think since they’re not running a hotel that the lodging tax doesn’t apply to them” – Robert Stephens
Robert Stephens Real Estate Background:
- Co-founder of Avalara MyLodgeTax (formerly HotSpot Tax), formed in 2002 out of his own necessity to understand and manage compliance with his rental property.
- Helps homeowners, hotel operators, and other businesses with short term lodging tax regulations
- Based in Englewood, CO
- Say hi to him at https://www.avalara.com
- Best Ever Book: The Big Short
Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.
TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions. For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.
Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.
Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff.
With us today, Rob Stephens. How are you doing, Rob?
Rob Stephens: Great, thanks for having me, Joe.
Joe Fairless: Well, I’m glad to hear it, and looking forward to our conversation. A little bit about Rob – he’s the co-founder of Avalara MyLodgeTax, which was formed in 2002 out of his own necessity to understand and manage compliance with his rental property. He helps homeowners, hotel operators and other businesses with short-term lodging tax regulations. Based in Englewood, Colorado. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Rob Stephens: Sure. You touched on it, but… 20 years ago I purchased a second home in Vail, I wanted to generate rental income on it, because I needed to do that to be able to afford the property, which is pretty common. I put it up on some of these short-term rental sites, which were very new at the time. It worked great, but through that experience I realized there’s a bunch of other things I need to do to be successful at this, one of them being [unintelligible [00:03:15].23] remitting lodging taxes, which I didn’t know really anything about at the time. So it was really through that experience we built what we think is a very simple solution for people that are engaged in short-term rentals, and that’s really our focus – leverage technology to provide cloud-based or internet-based very simple solutions for people to be charging the right taxes, collecting them from their guests, paying into the jurisdictions at the right time. We handle all of those tax tasks for people, so that’s really our purpose – helping people with that kind of back-office function of tax, that are involved in short-term rentals.
Joe Fairless: Okay, let’s talk about this. I’d love to learn more. What are lodging taxes, and aren’t they already accounted for on the site that you have your house on?
Rob Stephens: Great question. Two-part question. The first is what are lodging taxes… So really the same taxes that hotels pay. By and large, the hotel is going to be paying the same sales and lodging taxes that a short-term rental apartment, single-family home, condo, whatever the property type is… With a few exceptions. Generally, it’s the same types of taxes. It’s called different things – sometimes it’s sales tax, sometimes it’s hotel tax, room tax, lodging tax, accommodations tax. It’s a tax on short-term renting, and I think some people miss that at the beginning; they think “I’m not a hotel, this doesn’t apply to me.” If you actually read the law, it’s pretty broad. Any type of property where you’re providing overnight accommodation is gonna trip these taxes.
Secondly, yeah, there’s a lot of change going on in the short-term rental industry. One of those things is the big platforms, one of them being Airbnb, starting a couple of years ago, have decided to collect and remit some of the taxes on their own. So in certain markets they are collecting and remitting some of the taxes. Usually, they’re doing state taxes… And I don’t know how in the weeds we wanna get, Joe, but a lot of these taxes, for most locations in the U.S, there’s a state tax you have to pay, at the Department of Revenue, but then there’s very often a city or county tax you have to pay, too.
What’s happening now is Airbnb is paying most of the state taxes, but they’re not paying the city and county taxes. That then leaves the host the responsibility to collect and remit some of these taxes. And they’re really the only platform right now broadly paying taxes. So if people are on VRBO, or Booking.com, or TripAdvisor, they’re gonna need to collect and remit the taxes, because that platform isn’t handling it.
Joe Fairless: How much are we talking? Just specific, maybe use an example for a certain market.
Rob Stephens: Sure. I think these taxes are a lot. The average I would tell you is 10%-12%, and that’s of gross rent. So if you’re charging a guest $200 a night, or $2,000 for the week, it’s an extra 10%-12% on top of that. When you get in urban markets, the taxes typically are 15% or higher. Chicago actually has over a 23% tax on short-term rentals now… So if you get into big, urban cities… Kind of like rental cars, hotels – it’s easy for those big municipalities; it’s a good revenue source for those cities to tax those types of activities, because it’s not residents, it’s travelers and guests tom the community.
So these taxes tend to be very high, and if you’re missing it, you’re not doing it, it can add up to be a pretty significant amount over time if you’re not collecting it from your guests.
Joe Fairless: I would imagine the majority of people are not accounting for this, or even paying it. What would your guess be?
Rob Stephens: That’s a great question. We have that debate here internally, and I generally think you’re correct. Look, it’s gotten a lot better; I’d say in the last couple of years there’s a lot more awareness and focus on this issue… And look, short-term rentals have really become a mainstream part of the travel segment. I suspect a lot of your listeners are engaged in this, or they have long-term properties… They may be actually looking at getting into that market. And I do think, by and large, there’s some people doing it, but I think there’s a pretty high non-compliance rate. Now, whether that’s 80% non-compliance, or 50% – I don’t think anybody knows for certain, but we’re hoping to help with that. There’s a lot more room to go in terms of being compliant, and I believe it’s just a matter of time. If we’re gonna be a real, legitimate industry, protecting our property rights in these cities and these communities, one of the things we’re all gonna have to do is make sure we’re paying these taxes.
Joe Fairless: What are the consequences of not being compliant as a rental property owner?
Rob Stephens: Your obligation is to collect the tax… And typically, the way to think about this is the guest, the traveler – they pay the tax. If it’s a 10% tax, you charge that guest an extra 10%, they pay it. Your obligation as an operator is to collect it and then remit it to the different agencies.
I always tell our customers, “Look, this isn’t really an economic cost to you. This is kind of a passthrough; it’s your cost for doing business, you have to collect these taxes from your guests.” But if you’re not doing it, typically what they’ll do is audit, or inquire and go back typically at least 2-3 years – typically not more than 4-5 years, unless they believe there’s some sort of fraud or something like that involved – and they’ll look to pull your income tax returns or whatever records they can to validate how many rentals you had… And then if it’s a 12% tax and you’re doing $30,000/year in rent – which is pretty typical for a short-term rental – you’re looking at $3,000-$4,000/year in tax. So the liability can add up quickly, and then they’ll slap on penalties and interest on top of that, which can unfortunately be pretty significant. Those penalties can be easily 25%-50%.
We’ve seen it happen unfortunately to customers, or new customers coming in with the problem. It could be thousands of dollars of back-taxes, plus penalties and interest.
Joe Fairless: What’s the worst scenario that someone’s come to you with?
Rob Stephens: The worst scenario… These governmental agencies have a lot of power. In the tax world, in your market, or multifamily or long-term rental markets, every property has a property tax; and if you don’t pay your property tax bill, ultimately the tax agency can put a tax lien on your property. Same thing in the hotel tax, lodging tax world – if you’re not paying your taxes, they can make an assessment against your property for back-tax due, and if you don’t pay it, they’ll put a tax lien on the property, and then anytime the property is sold, that’s when they can step in there and recover their funds. Obviously, the worst case is they’re seizing the property.
I don’t know that we’ve ever seen a property seized, but we’ve certainly seen people with tax liens, and had to sell their property just to get out from under that liability.
Joe Fairless: Tell us more about what you all have come up with as a solution.
Rob Stephens: Historically, all these taxes – it’s a manual process. If somebody’s short-term renting, they have to go to the state site, figure out the state requirements, go to their city site, figure out what the requirements are for the city, maybe even go to the county… So there’s multiple agencies involved, multiple forms, you have to register with these different agencies, you have to pay tax, usually monthly and quarterly to these different agencies… So there’s a fair amount of moving parts and complexity.
What we were talking about earlier, Joe – the rank and file person involved in this space just has never dealt with these types of taxes before, so they’re not aware of it. So what we’ve really tried to do is really just with technology solve all of that. Sometimes I’ll use an analogy – think of it like TurboTax, but for hotel taxes. We have a software platform, the customer can sign up, they put in the property address that they’re renting, we immediately tell them what the correct, accurate tax rate is to charge from the guest, then they [unintelligible [00:10:51].12] Airbnb account, or VRBO account, they collect the tax from the guest, we handle all the moving parts of registering them, filling out the paperwork, get all that in place, whatever licenses are needed… And at that point they’re really all set up; it becomes a monthly cadence of just they report whatever the rent was for the month, so there’s automated processes around this; they report their monthly rent, and then based on that we calculate the taxes, file and remit them on their behalf.
So from our customer perspective, really all they have to do is come to the website, sign up, put in their profile, their address, some of their profile information, and we take it from there – rates, we register them and file and pay the tax… And we just make sure everything’s done on time, correctly.
The way we describe it is it’s really a way for a host or a homeowner or an investor just to put al this on autopilot and make sure these taxes are done… And at a price point of $20/month/property. We think it’s good value, and leveraging technology to solve what’s kind of a headache for most people.
Joe Fairless: Oh, absolutely… Big-time headache for most people. And if it’s not a headache for them, then they’re probably not doing it, so then it will be a major migraine in the future.
Rob Stephens: It’s funny you say that, because some of our best customers – the most eager to sign up – are often people that have been doing this on their own and understand the monthly filings that have to be done, and some of the paperwork, or have tried to do it on their own are were confused, or frustrated… Or simply don’t have time. At a $20/month price point they’re happy to say “You know what – put this on autopilot, take care of this for me.”
Joe Fairless: Yes. With certain markets, one of them being close-ish to you – Denver, Colorado – moving away from short-term rentals and then being more medium-term (over a month), because regulations are against the short-term, what are the tax implications and reporting implications for medium-term rentals versus short-term ?
Rob Stephens: Sometimes it’s really good on the tax side, for Colorado… So we’ve talked about taxes on short-term rentals; in most states, in most locations, that’s 30 days. Once you flip over and you use the term “medium-term”, so once you’re doing monthly rentals or longer, you’re gonna be out from under, having to collect and file all these taxes. That’s the good news, that bad burden is gone. Now, in some states like New York, New Jersey, Massachusetts, it’s 90 days. Big travel states, like Florida and Hawaii, it’s 180 days. So some states do have longer definitions of short-term. But to use your example, Denver would be a city where if you’re doing monthly rentals, then you wouldn’t have to deal with the hotel tax portion of it. So that’s good.
Now, I always tell people – unfortunately, short-term rentals are in high demand, and I’m sure you have a lot of your listeners that have realized that in certain markets they can generate very high rents on kind of a nightly, weekly basis, relative to a long-term rental contract. So yeah, it’s great – 30 days you avoid the complications and expenses, administering these taxes, but I think most people in this market realize that short-term is certainly the most lucrative… But again, there’s increasing regulation and limitations in certain cities on people’s ability to do that.
Joe Fairless: What else should we talk about that we haven’t talked about already, as it relates to your business and real estate investors in short-term rental tax?
Rob Stephens: I would say — I’m a short-term rental property owner myself, which is how I got into this… I suspect your listening audience probably has mainly long-term investors, but I’m sure a lot of those people are getting in the short-term rental space… What I would say is a couple things. I think the big platforms – Airbnb, VRBO – they’ve invested a lot of money over the last decade; it’s getting easier and easier to do. So if people are thinking about this, I would encourage them to take the leap.
The other part of it is you hear lots of noise about tax and regulation… There is some of that. Again, there’s services like ours that can cover the tax fees; I think that regulation sometimes is overstated. I mean, there are cities where there’s real challenges, but in most places across the U.S. you can still short-term rent without too many problems.
And the other thing is sometimes people have — look, we’re in a community. We have tens of thousands of short-term rental property owners; I go to conferences, there’s often angst about wear and tear, or partiers, or what that short-term rental crowd is gonna be like… And I can tell you, by and large these are responsible travelers, higher than average incomes. A lot of times it’s families going to events, or vacationers if you’re in a ski market, or a beach market, or a lake market… The issue of high turnover in your property, or damage — I’ve been doing this for 20 years and I probably have one instance where there was some sort of issue that I had with a guest.
So again, if people are thinking about it, I think a lot of people are very successful at it. It’s a hot space. The nightly rents can be very attractive. Again, I’m a short-term rental advocate; I would encourage people that are looking at it to not hesitate. Give it a try.
Joe Fairless: You’ve been doing short-term rentals for 20 years?
Rob Stephens: Yeah. That means a) I’m old, but yeah…
Joe Fairless: You’re experienced.
Rob Stephens: Yeah, we’ve bought this in 1999 and put our property in Vail on VRBO. So I’ve seen a lot of change; it’s a completely different industry, obviously, than it was 20 years ago.
Joe Fairless: Oh, my goodness. Yeah. Airbnb wasn’t around, right?
Rob Stephens: Yeah, Airbnb came around I think 2009 or 2010.
Joe Fairless: Yeah.
Rob Stephens: There was no online booking, nobody took credit card payments… You had to call somebody or email somebody. It was a much more difficult experience. Kind of one of my points – it’s becoming easier and easier, and travelers love it, and it’s getting easier for travelers, because the travelers want that instant book. They wanna have that same hotel-booking experience with a vacation rental, which is pulling more travelers into this segment. So it’s a lot of progress, a lot of exciting things happening.
Joe Fairless: Let’s talk about your short-term rental. How many do you have right now?
Rob Stephens: I have one short-term rental and one long-term rental.
Joe Fairless: One short-term and one long-term, okay. So with the short-term — have you have multiple short-terms at one point in time?
Rob Stephens: I have not. I’ve had multiple different short-term rentals, but not multiple at one time.
Joe Fairless: Okay, got it. So this one that you have now is not the one that you started with 20 years ago.
Rob Stephens: Correct.
Joe Fairless: Okay. Tell us about how your thought process for buying one, selling it, and then continuing to go until you’ve reached today the one that you have now.
Rob Stephens: Sure. I live in Denver. For a lot of us on the front range, that grew up in Colorado, lifelong skiers, owning mountain property or property in the ski resorts is a big goal. So for us, that first purchase was I would say as much or more a lifestyle decision than it was investment, and I think when you get in the short-term rental space, especially the vacation rental segment of that, that’s a lot of the mindset. People are like “I like to go to Myrtle Beach” or “I like to go to South Florida” or “I like to ski in Vail. I’m gonna purchase a property there, anchor there. I’m gonna go there… I’m gonna build equity over time there.”
There certainly was the investment thesis too that if you looked over time, real estate in a market like Vail was phenomenal, and it just gets more and more expensive. So my psychology – and this was 20 years ago – was at some point you’ve just gotta jump in, make that commitment. And when we did that at the time, we could afford just to own a second property on our own and pay that mortgage, so we needed the rental income to basically help cover the carrying costs. So that’s what we did, and it worked great.
We looked at using a property manager at the time. Property managers in Colorado at the time took about 50% of your gross rent for their management fee, so… We were looking for a better option, and that’s when we found the websites, VRBO, and for really nominal dollars put it on there, and it rented up very successfully.
So that was 1999. We ended up selling that one to our partner in 2007. Joe, you’ve been in real estate [unintelligible [00:18:48].05] 2007 was probably the peak of the real estate bubble, so we saw a huge appreciation. The property tripled in value in about 7-8 years. So when you reflect back on that, you say “Well, that was great… Probably a bubble.” So we turned it around and bought another one in Vail. This is the Best Ever Show – that second one was probably the worst ever investment. We bought it at the absolute peak of the market.
I remember doing the financing at the time, which — mortgages seemed to just give away; we had perfectly fine credit, and all that, but we were starting to struggle getting a mortgage, which was at the time a bizarre experience. Little did we know behind the scenes the mortgage markets were really melting down. Anyway, we closed that one, but bought it at the peak of the market…
Joe Fairless: What did you buy it for?
Rob Stephens: That was about $850,000.
Joe Fairless: Okay.
Rob Stephens: It dropped precipitously. I think the market just came back. It took about ten years to come back. It just came back recently. In fact, we’ve just sold it a year ago for a little bit less than $900,000.
Joe Fairless: Good for you.
Rob Stephens: But we’ve put about $100,000 of improvements into it, too.
Joe Fairless: Oh, there’s the catch!
Rob Stephens: And the first several years we had to support it operationally. Again, this is my worst deal ever, and anybody who does anything – not everything always works out great.
Joe Fairless: Yup.
Rob Stephens: But we sold that one and then bought a very tired, rundown property in the heart of Vail, which is a great location… And kind of immediately saw the opportunity. I had a contractor that had done some remodeling projects with us in Vail, and immediately — we gutted the place last summer, ripped out everything… So we’ve put in all new everything. It’s a small unit, 850 square feet, but a great location. It’s 75 yards from the Gondola… We’ve put it on the short-term rental market, and that type of central location – the rentals were just super-strong, and the property turned out great. The rentals are super-strong and we’re personally excited to be really close in where we can walk to restaurants, and the slopes, and bars, and that type of thing. But from a real estate perspective – we’ll see over time, but I’m excited about getting in… This property was very beaten up, and I think we got it at a great price, put in the work and dollars to improve it, and I think we’re well-situated now on that one.
Joe Fairless: Nice. Lessons learned, that’s for sure. When you think about your experience as a short-term landlord, and then also you have one long-term, what is your best real estate investing advice ever?
Rob Stephens: I was in this camp for years. I’ve always [unintelligible [00:21:12].02] myself. Joe, I’m sure you’re a real estate expert; I have a couple of properties and I’m in the short-term rental space, but we have this tax automation solution… But I still think of myself somewhat as a real estate novice, or did for years… And I’m always kind of looking at doing things, but not pulling the trigger. So my advice is to just take action, jump in, do something. That doesn’t mean you wanna do anything stupidly, obviously, but I was just talking to one of the young folks here; they’re looking at buying a house in Denver. Denver has become a very expensive market for real estate over the last several years, and I was talking about — the first time [unintelligible [00:21:45].13] 25 years ago, and I got married, and we upgraded, and that whole story… I said “Look, this was the mid-90’s. We thought it was all super-expensive and super-hot then.” I remember friends telling me “I wouldn’t get on this market”, and the first time we bought in central Denver, we sold 3,5 years later for 60% appreciation.
So I guess my point is you can also look to time the market, or wait for the next correction or crash, but just take action. If you have an interest, you have some capital, you think you have a sound investment plan… It’s obviously important to have a plan, and run the numbers and the math and make sure it makes sense, but… At some point you’ve just gotta jump in and take action.
Joe Fairless: And I think with that taking action, it’s also having a fallback plan, or at least a reserve or something, because if you do accidentally time it for a 2007 purchase, then you’ve gotta be able to float that property for a period of time, right?
Rob Stephens: That’s a very good comment. You can’t necessarily go all-in; you need to be capitalized such that if the rental market doesn’t materialize as expected, or rates drop, that you do have the capital or the staying power to ride it out. You don’t wanna be over-leveraged, or that mortgage payment too high, or extend too much for a property; that’s gonna put you in a really bad position. So absolutely, there needs to be a level of prudent planning and thoughtful analysis that goes into these.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Rob Stephens: Let’s do it.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Best ever book you’ve recently read?
Rob Stephens: The Big Short.
Joe Fairless: What’s a mistake you’ve made on a transaction that we haven’t talked about?
Rob Stephens: Not enough due diligence.
Joe Fairless: Best ever deal you’ve done?
Rob Stephens: That would probably be my first condo in Vail. It tripled in value over eight years.
Joe Fairless: And with not enough due diligence on the mistake – will you elaborate? An example of where you didn’t do enough due diligence?
Rob Stephens: Just not researching the market well enough, and maybe understanding the property well enough.
Joe Fairless: Best ever way you like to give back to the community?
Rob Stephens: This is gonna be self-serving, Joe. I’m an entrepreneur, I started a company, so I think employing people is very powerful. For the people that work here – I really take care of them, I give them an opportunity.
Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?
Rob Stephens: Anyone interested – go to our website, MyLodgeTax.com, and learn all about our tax automation solutions.
Joe Fairless: Well, thank you so much, Rob, for being on the show. It sounds like you’ve got a great out-of-the-box solution for short-term rental landlords to help them make sure they’re compliant with the taxes that they will need to pay; whether they know it or not, they need to pay them. And I did not know the taxes were so high. You said the average tax is 10%-12% of the gross rent, and in some markets 15% or higher if it’s an urban market. And Chicago… Oh, Chicago. It doesn’t surprise me that they’ve got [unintelligible [00:25:30].29] tax on this.
Rob Stephens: Yeah.
Joe Fairless: They’ve got some things to work out…
Rob Stephens: Indeed.
Joe Fairless: But thank you, Bob, for being on the show. I hope you have a best ever day. I really appreciate your time, and we will talk to you again soon.
Rob Stephens: Happy to do it. Thanks, Joe.