(Photo Details: Secluded Napa Valley vacation rental)
This is a story about how I learned that I’m not going to start a little rental business in retirement.
Back when I was still working, Doug and I bought a vacation home in the Napa Valley. We used it on the weekends to escape San Francisco’s dreary summers. In less than two hours we could be 30 degrees warmer. Seriously.
A few years later we ditched the fog of San Francisco for suburbia so I could be closer to work. The upside was a 12-minute commute and a town whose motto is “Climate best by government test.” But then we didn’t get up to Napa as often. Our new house put us another 45 minutes away, and we already enjoyed warm temperatures just by staying put.
Brilliant Idea #1
So after I retired I came up with Brilliant Idea Number One. We had experienced a big boom in real estate prices over the years. If we moved to Napa for two years, we could establish that house as our primary residence and avoid tax on the sale. This tax savings would be a big boost to our retirement nest egg.
We shuttled back and forth between houses, being careful to spend more time in Napa than at our suburban “vacation home.” Being a former tax accountant and zealous rule follower--I was going to do this by the book.
Unfortunately, at the end of our two-year residency, the stock market, the economy, and most importantly the housing market, had tanked. We could certainly sell the house at that point without paying tax on the gain because there was no gain anymore!
But as long as we sold it within the next three years the sale would still be tax-free. As you already know, the real estate market did not climb back in the three years following the Great Recession. So now, seven years later, we still own that house. The good news is the value has finally recovered. Oh, and it wasn’t damaged in that recent 6.1 earthquake—thanks for asking.
The bad news is, despite jumping through hoops all those years ago, we will now owe tax on any sale. We would have been better off selling the house years ago, paying the tax, and investing the proceeds in the stock market. That’s why tax accountants are always advising clients never to make decisions based purely on tax consequences.
Brilliant Idea #2
Which leads me to Brilliant Idea Number Two. Why not keep the house and continue to enjoy it when we can, use it as currency for home-exchanges, and make a little extra money out of it at the same time? Why not start a little vacation rental business and make enough money to cover the carrying costs? Heck, if we were successful, we could make enough to hire a gardener and housekeeper to take care of it for us. If we were really successful, we could make enough to fund a couple of exotic vacations each year. Visions of dollar signs danced in my head. This was going to be so much fun!
Concern #1: Insurance
This is about the point in this story when I started to worry about things. Like what if a tree falls on the house and injures or even kills one of our guests. What do you do when you start to worry about things like trees falling on people? You talk to your lawyer friend. He then gives you a laundry list of other things to worry about.
He told us to make sure our umbrella policy was big enough to cover such worries. What’s big enough? Well that’s the problem. Turns out if you get sued for a tree falling and killing the breadwinner of the family, they will sue for some multiple of his salary. So you want a policy big enough to cover that. But I don’t know how much that is--my renters are only theoretical at this point. His advice: up our umbrella coverage and don’t rent to people that make tons of money. Which seems kind of counter-intuitive if you want to make money renting your house to people.
It turned out that our homeowner’s insurance didn’t cover any of these potential horror stories anyway because it didn’t cover rentals. So we packed up our policies, switched carriers, upped the umbrella coverage, and even saved a little money in the transition.
Now I just had to worry about renting to people that could afford the rent, but not too easily.
Concern #2: Local rental laws
Napa County prohibits unlicensed vacation rentals for stays shorter than 30-days. Remember that part about being a rule follower? I would of course be following this rule. I shared this plan with another friend who is married to a lawyer--which is almost the same as talking to a lawyer, but maybe worse.
She recounted a recent story that I had missed about the woman in Palm Springs who rented her house through Airbnb to a couple of guys for 44 days. They stopped paying rent after 31 days and wouldn’t leave her house. Turns out if someone rents your house in California for over 30 days, they now have rights as tenants. You can’t just call up the sheriff to kick the squatters out of your house. Now you have to go through a formal eviction process, which may cost thousands of dollars and months of your time.
So now I had to worry about finding a renter that wanted precisely 30 days, no more no less. Oh, and remember, one that can’t be too rich.
This is about the point in the story where I started to lose sleep.
But I trudged on, posting beautiful photos with eloquent descriptions of the area and the amenities of our wine country bungalow on a vacation rental website. I told myself to stop worrying and just see what happens. Millions of people rent homes without trees falling or renters squatting. It’s worth a try, right? Think of the upside.
Concern #3: The lease
Within a couple of days I started to receive rental inquiries. The first two were for periods shorter than 30 days—see proclivity for rule following above. But then, I got an inquiry from a guy--let’s call him Winston--because that was his name. Winston wanted to rent the house for four months. In four months, I could cover the carrying costs of the house for the entire year and then some.
Now I had to scramble. Winston wanted the house in a couple of weeks—he and his wife were moving to Napa for his work. We arranged to talk on the phone in a couple days to go over details.
I hightailed it to the office of another friend, a real estate attorney--yes, I do know a lot of attorneys. I needed a lease. I needed to know what kind of information I should collect from Winston. I needed to know the rules about being a landlord, and I needed to know what else I should be worrying about that I might not be worrying about already.
This is the point in the story where I not only lost sleep, my face broke out, and my stomach hurt. I was stressed. This all started to feel very familiar. It felt like tax season back when I was still working.
When I retired, I gave up a steady paycheck to never have to feel this way again. I gave up future earnings to eliminate future stress. Now I was making that old bargain, taking on more stress to get more money. I told Doug if this phone call with Winston does not put me at ease, we’re pulling the plug on this whole rental thing.
I’m sure you can guess what I did when Winston called and his name turned out not to be Winston. And he turned out not to be a potential renter, but a sales rep trying to woo my listing away from my on-line vacation rental company to his rental company. There was no wife, no move to Napa for work, no four-month rental.
I hung up the phone and deleted my vacation listing. That was last week. This week my skin has cleared up, I’m sleeping soundly, and my stomach feels great. Just like when I traded in that steady paycheck for retirement all those years ago.
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