Owning or managing vacation rentals is a lucrative business- however there are many complexities involved in accounting for managing properties. Those complexities are unique depending on the quantity of your inventory, where you manage them, and how frequently you have guests. To help untangle the web that is vacation rental accounting, here are five basic tips that will ensure you have an efficient, uncomplicated accounting process.
1) Do Your Research
It is mandatory to know the local regulations, restrictions, and permits necessary for operating a management company in every city in which you have properties. A common regulation is trust accounting. This dictates when you can and cannot recognize your income. There are far too many aspects of trust accounting to get into in this post (but don't worry, we'll get to it), so suffice it to say we recommend calling the city's office. Asking directly what regulations are in place for that area will help you avoid any confusion or future financial headaches.
2) Managing Taxes
Death and taxes. Those are the only two certainties in life. Every country, state, and city have their own set of taxes and corresponding tax schedules...and the IRS doesn't play around. For example, counties in Utah charge travelers who stay at hotels anywhere from 9-11.85% as a 'transient room tax'. Vacation rentals and other 'alternative accommodations' are charged a 4.25% TRTin addition to that. If you do not collect that extra 4.25% per booking, it will adversely affect your margins. Taxes are also subject to change per jurisdiction. Make sure to closely monitor what the tax laws are for each city where you're managing a vacation rental.
3) Tight Contracts
Before managing a property for someone, you need to know how expenses and income will be shared. The success of that property hinges on this delineation. Depending on how income is split between you and the property owner, it may be necessary for you to adjust the pricing strategy to ensure high property management margins. It is so important to know your contract inside and out. Make sure you go through and understand the terms in each contract, being clear which costs are being shared, and which ones are not. By going through with a fine-toothed comb, no one ends up stuck with unexpected costs or low margins.
4) Keep Individual Property Ledgers
Keeping property ledgers makes it possible to know what revenue was earned and what expenses were incurred per property. That way you know what is owed to each owner, each month, depending on the terms of your contract. Each property has it's own income, expenses, owner, and owner contract. One property may have maintenance done on the refrigerator, one may have recently been repainted, another may have needed the couch reupholstered. When you have multiple properties, it quickly becomes confusing which lightbulb or maintenance order corresponds to what property, and therefore how much you need to pay your owner. It is crucial to keep track of all expenses and income on a property level.
5) Always Monitor Your Process
When starting out, your accounting process will hopefully be relatively simple, however, if you begin to manage multiple properties, manually accounting for them can become a nightmare. As you begin to take on more inventory, it is important to take note of how long accounting took previously, and then compare it to your current process as you scale. Managing one property manually is feasible, but the scope of your responsibilities will increase exponentially as you manage more. The amount of work you will have to do will add up! Instead of drowning in work, plan on incorporating some automation to help take care of the extra tasks. This controlled evolution and continual evaluation will help you keep everything organized, while also being agile enough to adopt the tools necessary for your business's success.
By incorporating these basic tips into accounting for your vacation rental, growing your business and increasing your margins will be simple.
Make sure to come back to the blog next week, where we tackle how to negotiate and manage owner contracts!
For any further questions about vacation rental accounting, or the products we offer to make accounting for your vacation rental easy, check out our website.