Running a vacation rental business is an amazing journey. But before you start this type of business, you need to set up a few important milestones that you must meet on your way to becoming a successful entrepreneur. To help, we’ve compiled a list of steps you need to take either before launch or during the early days of your business.
1. Write a business plan
A business plan will give you clarity about how viable your vacation rental business is. But more important is that it will provide an estimate of your start-up costs while indicating whether your revenue goals fit with your capital investment.
2. Open a business checking account
A business checking account will allow you to keep personal and business finances separate. As you’ll be able to maintain more accurate records of your rental income and business expenses, having a separate business bank account makes bookkeeping and filing taxes much easier.
3. Open a business savings account
In short, you can use a business savings account to put money away for business emergencies or different expenses that you’ll need to cover during a slow season or market downturn.
4. Get a business credit card
A business credit card is often easier to obtain than a business loan or line of credit, especially if you’ve just started your business. Additionally, using a separate credit card for your business can make it more convenient to track business expenses, which will simplify bookkeeping and tax filing processes.
5. Understand the differences between bookkeeping and accounting
Acknowledging the differences between accounting and bookkeeping will give you a better understanding of how your business finances work. In simple terms, bookkeeping involves the recording of financial transactions, whereas accounting is responsible for classifying, analyzing, and interpreting financial data.
6. Know the differences between cash and accrual basis accounting
When running a vacation rental business, you can either use the cash- or accrual-based accounting method to record financial transactions. The method of accounting you should choose depends on how many vacation rentals you have. If you rent out just a few properties, for instance, you may be better off using the cash-basis method, which will allow you to keep better track of the actual cash you have on hand.
7. Be aware of the accounting sub-processes you need to complete
Accounting sub-processes divide specific accounting processes into smaller tasks. For example, recordkeeping is a sub-process of bookkeeping. While recordkeeping involves the collection, creation, and management of accounting data, bookkeeping mostly focuses on preparing source documents for different operations and tracking financial transactions.
8. Report your rental income correctly
Besides allowing you to accurately determine the financial health of your business, reporting rental income correctly can help you avoid specific tax problems, including IRS notices, audits, and penalties.
9. Track your business expenses
Certain vacation rental business expenses, including startup costs, are tax deductible. To be able to deduct business expenses, you need to hold on to receipts, bills, invoices, canceled checks, financial statements, bank account and credit card statements, and other records that support items of income as well as deductions and credits you may be eligible for.
10. Determine your tax obligations
The taxes you’ll need to pay on the rental income you earn depends on the business structure you choose: sole proprietorship or LLC. For federal income tax purposes, an LLC is treated as a “pass-through” entity, meaning it doesn’t have to pay taxes on business income. On the other hand, a single-member LLC is taxed the same as a sole proprietorship. Check with your CPA to see which structure is best suited for your situation.
11. Know the tax forms you’ll need to file
*The tax forms you’ll need to fill out depend on whether your vacation rentals are treated as rental or personal properties. If your properties are considered personal residences, you’ll need to fill out a Schedule C to report income and expenses for your properties. If your vacation rentals are treated as rental properties, you’ll need to fill out a Schedule E. Additionally, you’ll need to use Form 1040 to file your individual income tax return.
12. Price your vacation rentals
When starting a vacation rental business, prices must be established to ensure as many bookings as possible. A great starting point would be to use a complete software solution that includes a reliable tool, which can automate and optimize the pricing for all of your vacation rentals, depending on market conditions and seasonality.
13. Find a complete and reliable lodging management solution
Before you place your vacation rentals in service, you’ll want to settle on a complete and reliable software solution that can help you efficiently manage a wide range of operations.
14. Consider vacation rental listing sites
Once you set up your business and you’re prepared to host guests, it’s time to choose several vacation rental listing sites to advertise your vacation rentals. Social media platforms, like Instagram and Facebook, and vacation rental listing sites, such as Airbnb and VRBO, offer some of the most accessible ways to list your properties.
15. Get adequate insurance coverage
If your vacation rentals are considered rental properties, it’s important to know that homeowner’s insurance doesn’t cover business-related claims. In this case, opting for adequate vacation rental insurance is the only way to protect your vacation rentals, their contents, and additional structures from unforeseen circumstances. Additionally, vacation rental property managers and owners, who neglect to provide a safe living environment, could be held responsible and ordered to pay damages to injured guests. To help you avoid paying compensation for injuries out of your own pocket, some vacation rental insurance policies include liability coverage. As a property management company it is your responsibility to gain adequate insurance to protect your company.
Starting and running a vacation rental business isn’t easy. Besides a comprehensive business plan, you also need the right tools to streamline your operations. To find out how the right lodging management solution can help you start and grow your vacation rental business, feel free to contact our professionals today!
*Always check with CPA to ensure what you need to do to stay in compliance.