Property Management Growth with DoorGrow DGS 115: How to Be Successful In the Short Term Rental Market with Rob Stephens
What do most skiers and snowboarders dream about? Owning mountain property. But most of them don't have the necessary wealth or money to purchase a second home, especially in expensive real estate markets.
Today, I am talking to Rob Stephens of Avalara MyLodgeTax. As a Denver resident and lifelong skier, Rob was fortunate enough to buy a three-bedroom condo in Vail about 20 years ago. But even then, it took Rob, his wife, and wife's brother-in-law to make the dream a reality.
You'll Learn...[02:57] Short-term Rental Market Options:
- Hire local property manager/real estate agent.
- Post property online via VRBO, Airbnb, Expedia, etc.
- Rent-by-Owner: Book guests, collect money, and provide on-site services.
[03:48] Complex Tasks: Apply technology and manage challenges for property owners, managers, and operators. Know what taxes to charge, collect, file, and pay to agencies.
[05:50] Lack of Awareness: Property owners trying to manage their short-term rentals have never dealt with these types of transactional taxes.
[06:20] It's not rocket science, but multiple layers of government are involved. State and local tax rates and requirements are specific to rental property location and address.
[07:10] Avalara MyLodgeTax: Online hosted, Cloud service similar to TurboTax but for short-term rentals with vacation, occupancy, resort, and other taxes.
[09:27] Penalties to Avoid: Long-term, multifamily operators getting into short-term rental space need to understand rules and risks involved.
[11:40] One less thing to worry about. Partnerships with property management companies is when Avalara handles everything occupancy tax related.
[13:02] Common Questions and Concerns: Shortcuts and consolidation for creating awareness and understanding the mechanics of administrative work.
TweetablesIncreasing scrutiny and regulation on the short-term rental space, makes for more paperwork and forms to be filed.
Lack of Awareness: Property owners managing their short-term rentals have never dealt with some types of transactional taxes.
Short-term rentals involve multiple layers of government. State and local tax rates and requirements are specific to rental property address.
Resources TranscriptJason: Welcome, DoorGrow Hackers, to the DoorGrow Show. If you are a property management entrepreneur that wants to add doors, make a difference, increase revenue, help others, impact lives, and you are interested in growing your business and life, and you are open to doing things a bit differently, then you are a DoorGrow Hacker.
DoorGrow Hackers love the opportunities, daily variety, unique challenges, and freedom that property management brings. Many in real estate think you're crazy for doing it, you think they're crazy for not, because you realize that property management is the ultimate high-trust gateway to real estate deals, relationships, and residual income.
At DoorGrow, we are on a mission to transform property management businesses and their owners. We want to transform the industry, eliminate the BS, build awareness, change perception, expand the market, and help the best property management entrepreneurs win. I'm your host, property management growth expert, Jason Hull, the founder and CEO of DoorGrow. Now, let's get into the show.
My guest today is Rob Stephens and his company is Avalara MyLodgeTax. Rob, before we get into talking about your business, I'd love to hear your background of how you're connected maybe to the real estate or property management industry. Maybe you could share with us just a little bit about your entrepreneurial journey just to qualify yourself to our listeners.
Rob: Sure, happy to. Thanks for having me. I love the intro, good stuff. My story, I live in Denver, Colorado, lifelong skier like a lot of us, lifelong skiers here in Colorado. One of our aspirations is to have a mountain property. As a relatively young professional, this is about 20 years ago, was fortunate enough to be able to purchase a three-bedroom condo in Vail, Colorado with my wife's brother-in-law. The three of us went in together.
At that point in time in my life, we wanted a second home in Vail, great skiing, be up in the mountains more, but part of that is when you make that financial investment—Vail is a very expensive real estate market—when we purchased it, we really needed income on that property to make the economics work. We certainly didn't have the wealth or money sitting around just to have a second home for our own personal use when we wanted it. We really needed to generate income.
This was in the short-term rental market. Back in the day, this is the late 90s, you really hire a local property manager or real estate agent that would get you bookings. At the time, somebody told us about a little website called Vrbo, it was pretty new back then. We tossed it on what's now Vrbo. It was frankly really amazing to see the bookings and we were immediately connected to travelers really across the globe. Through this one subscription would cost us about $120 a year, we're able to keep our property pretty booked and you're talking $30,000, $40,000 a year in rent.
Doing that, and I'm sure your audience will appreciate this, we were pretty clueless doing the rent-by-owner thing, there are all these other tasks to go along with it. You have to interact with guests, book guests, collect money, maybe have a rental agreement, you have to have on the site service, cleaning services.
My background is I'm a CPA, accounting and finance background, worked for some of the big accounting firms. But even as a CPA at the time, we just stumbled across the requirement to collect, remit sales, and occupancy taxes.
It was really through that experience, one being successfully doing this on the internet, managed my own property, and then coming across the complexity of managing these taxes even from my own little rental in Vail, we realized this is a powerful model. We think this online short-term rental, these sites have a lot of opportunities, but this tax is going to be a stumbling point.
A few years down the road, we started a company to really solve that problem for people. Our model was to apply technology and manage all these complexities for our customers, which would be registering with the different agencies, knowing what taxes to charge, and then once you know what taxes to charge and collect taxes, then automating the monthly, quarterly filing and payment of those taxes to the different agencies. Just to be clear, this is like a hotel occupancy tax, the same taxes that hotels pay to apply to short-term rentals.
That was our inspiration. We got started and we're able to form some partnerships originally with Vrbo and some of the other larger operators at the time, but the industry has certainly grown. Now you've got Airbnb, which I think really a ubiquitous household name, but the short-term rental industry, it's just everywhere now. We've been fortunate to be a little part of that on the back-end with our tax service, but about 4½ years ago, we sold our company to Avalara.
Now we're part of the Avalara family, but our whole mandate in life, Jason, is to really support, whether that's an owner, property manager, or a large operator like Expedia or Airbnb, help all these taxes, apply technology to make all these taxes simple and keep that back-office function as simple as possible.
Jason: Got it. In doing all of this, what are some of the complexities, some of the challenges that people are dealing with that have rental properties? Why is this a service that they might need?
Rob: I think there's a lot of confusion in this arena. I think in the smaller segments of the market, if you think about property owners trying to manage this themselves, they've just never dealt with these types of transactional taxes before. If you mentioned tax to a property owner, they're thinking income tax. There's just a great lack of awareness and the complexity comes in. This isn't necessarily rocket science, but wherever you're renting, like for my property in Vail, I have to deal with the state of Colorado, the Colorado Department of Revenue for sales tax and then the town of Vail has their own local room tax or lodging tax, so that's very common.
There are multiple layers of government involved, these are state and local taxes, and it's all specific to the rental property address. If you're a manager and you have a portfolio, depending on how dispersed you are, each city, town, or county, and certainly, state, has their own tax rates and requirements. There are different forms and it can vary by city. That's the complexity. It's highly localized and each location has their own set of requirements.
Jason: Now, your service can cover any city anywhere in the US?
Rob: Yeah. We cover every location in the US. We don't do anything international yet, but that means we tell people the exact tax rate for all the properties they're managing or even if it's just one property, we register them. It's very common in this environment, you have to get a business license, short-term rental permit, or rental permits. There's increasing scrutiny and regulation on the short-term rental space so there are more paperwork and form.
We manage and do all that on behalf of our customers. Then on the back-end, these taxes need to be collected on all short-term transactions. Your software platform automates the monthly filing and paying of the taxes. I sometimes compare it to TurboTax. It's kind of an online hosted in the cloud service where you can log in, put in your data, and the technology does the heavy lifting and calculation of filing. We're similar, just a different type of taxes with these hotel taxes.
Jason: Got it. What are some of the filings that have to occur that the typical homeowner would probably not be thinking about?
Rob: Again, the typical homeowner (like I said) thinks of these taxes in the context of income taxes. I'll go back to my Vail property as an example. Every quarter, I have to file a Colorado sales tax return with the state. I have to file—this is where it gets confusing—a Vail special marketing district return which is also paid to the state even though it's a Vail tax. Then there's a Vail sales tax that's paid directly to the town of Vail.
For my little example in Vail, I've got three different filings to two different agencies every quarter. That's pretty common. If you're in Florida, it's going to be a state sales tax filing and a county tourist tax filing. If you're in Texas, it's going to be a state hotel tax filing and then a city or county hotel tax filing based on your location. It's multiple filings, it's always a sales tax or lodging tax, a very specific tax to providing accommodations.
Jason: If somebody's listening that has a property like this and they're like I haven't really been paying too much attention, I probably don't need to, what penalties could be coming down the line that they're just not aware of?
Rob: One of the things we're seeing is in the multifamily space. We're seeing a lot of operators that typically are in the residential long-term rental market, that are being pulled in at the short-term rental market because I think it's become so popular, it's become easy on these big platforms like Vrbo and Airbnb. The rent, the nightly or weekly rent can be very compelling, depending on your location of property relative to what you can do on a long-term lease. That's a huge trend we're seeing in the space is typical long-term or multifamily operators getting in the short-term space.
One of the issues for those folks is that now they're doing short-term rentals, the short-term nature of their rental is what triggers the requirement to deal with all these taxes. To your point, there's a risk there. Certainly, the very larger multifamily operators are very sensitive to it. They want to have all that covered before they engage in short-term rentals. For smaller operators, I think sometimes they'll get it going and then figure out as they're doing it, seeing if a short-term model is going to work for them.
Again, there's increasing scrutiny on short-term rental operators, but the risk is that if you're audited or found not to be paying the tax, you can be assessed, not only back tax, which you would have typically just collected from your guest or renter—they're very accustomed to paying it—but then you've got penalties and interest on top of that. It's certainly something that can add up. We do see those cases and we do help people that are in that situation where they've got a back tax liability to figure that out. The penalties can be pretty significant. Tax, probably like everything in life, is better to do it proactively versus reactively.
We certainly encourage our customers and people we interact with to try to get out in front of it, make sure you understand the rules, are registered, and collecting the taxes, so you don't have that liability jump up and bite you as you're trying to manage your business.
Jason: For property managers that are listening to the show, they have investors as clients. Some of them may have short-term rentals. Do you typically work with property management companies and how might that work for those that listen?
Rob: We work with hundreds and hundreds of property managers across the US in the short-term rental space. We actually do work, like I said, in the multifamily space. We're seeing a lot of those operators and we work with companies that often have largely been in the long-term rental space, they're getting in the short-term rental space. Our largest segment is still the rent-by-owner or the Airbnb host crowd but we certainly work with a lot of managers and we're a solution for them. Everything tax, occupancy-tax related, our model is to really handle that from soup-to-nuts, A-Z, like I said, registration rates.
I think our property manager partners really value us as a way to take everything occupancy-tax related which includes licensing and registration, to hand that over to a trusted partner (which is us), and just make sure everything's done correctly, accurately, on time. It's just one less thing they have to deal with.
Jason: Perfect. What are the typical questions that a property manager or a homeowner listening to this would be curious about knowing about your service?
Rob: Good question. There are two different buckets. In the homeowner space, there's often generally just a lack of awareness of what they even need to do. It's more of a conversation about, "Oh yeah, if you are renting in Vail, here's what you need to do." When owners understand that—and they often are very surprised about these requirements—they're often eager to outsource. Our service is $20 a month for that single user. Not to be cavalier, but we'd say it's a very affordable way, just to make sure you know the taxes are all getting paid on the right form, to the right agency, on the right date.
For the rent-by-owner crowd or host, they're just generally not aware. For the manager, generally there is awareness. The first question a manager would ask us if they're new to the space would be "Hey, do I have to file this for each of the properties I'm managing in our portfolio? How does that work?" Generally, for managers, we can aggregate their portfolio onto one set of filings. We can really do it much more efficiently.
There are some locations that require property level filings, but usually for managers, we can do things very efficiently, we can combine all their listings under one, what we call an umbrella account for the management company. Instead of filing 30, 50, or 100 returns for each property, we can file a couple for the management company that covers the 30, 50, or 100 properties they're managing in their portfolio.
Managers often have a lot of questions around the mechanics of those type of administrative mechanics about how it works, how can we do it, and do they have to do it by property, by owner, or can we do things more efficiently? The good news is in the manager segment, there are shortcuts and consolidations we can do to make things easier.
Jason: Right. Because usually, most of the properties are in similar geographic areas, you can bulk those together.
Rob: Exactly. Most of our managers are obviously concentrated in one area. Sometimes they span across two, three, four cities, or a couple of counties, so there are maybe a handful of different jurisdictions or filings that need to be managed. We do work with some of the national operators like Evolve or TurnKey Vacation Rentals, we work with the Saunders and the Lyrics. A lot of their [...] comes out of that multifamily space.
Certainly, the national operators have a much more complex set of tax requirements, so I think we can be a good partner. But you're right, most of these companies are localized within a certain area and they're dealing with a couple of tax agencies, not hundreds.
Jason: Basically, you have streamlined tax compliance for property managers. You're going to be able to group some of these filings together so that they're not having to do as many, and then you're focused on things at even the local level, state level, and just making sure that they're compliant all throughout all these different tax situations.
Anything else that those listening should know and how can they get in touch if they're interested in trying out your service?
Rob: The one thing I had passed along, we sometimes see reticence on the multifamily or long-term operators. They certainly know what's going on in the short-term rental space and they certainly know maybe there are a few homes or some of their portfolios that would really work there, but they're often intimidated by these taxes. I'm talking about even multi-billion-dollar multifamily operators that we work with, they're very concerned about managing these taxes correctly for the liability.
I think that's fair but I would encourage people if you want to get into it, experiment with it, or you think there's better revenue yield in the short-term space for some of your properties, I would encourage people to jump in. These large websites are very effective at generating your rent. Certainly, relative to the tax piece, we're applying technology to really just take that burden away from people and know that they can operate in this market, be fully taxed, and license-compliant. That's my advice.
In terms of reaching us, we're a hosted service. We're on the cloud. We like to do things through technology. The best way to reach us and get information is through our website, which is mylodgetax.com. Once you're on the website, there's information about tax, our services. If you want to send us an email or give us a call, we do have phone numbers published there. We're happy to pick up the phone and walk through people's specific situation like what are the requirements for their city, how doesn't work, what would it cost to use our service. We feel those types of inquiries and happy to talk about it all day long.
Jason: Perfect. All right. They can check out mylodgetax.com. I appreciate you coming on the show, Rob, and I wish you guys success.
Rob: All right. Thanks so much, Jason.
Jason: You bet. Bye-bye. All right, check out mylodgetax.com if you're concerned about the taxes, especially for your short-term rental properties, take a look at that.
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Websites are not that expensive. Making the changes are not that expensive. That's a leak that's easily shored up. Check out the DoorGrow Score Quiz and you can then easily schedule a call with our team. Nobody builds more effective property management websites than DoorGrow. Other people are trying to manipulate and focus on search engine optimization and rankings. You don't even have to have the top spot or even show up on the first page of Google in order to have a business that's crushing it with growth. We can show you how, so reach out to the DoorGrow.
That's it for today. Until next time, everybody, to our mutual growth. Bye, everyone.