Your biggest financial risk in owning a STR

[Collin Hays]

I am often asked this question:  "What is my biggest financial risk in buying/owning a short-term rental property?"

Lots of things come immediately to mind:  Septic problems, a new roof, HVAC failure, lower-than-projected rents.  And while each of these is a potentially large expense, they pale in comparison to your biggest financial risk: A judgement against you for gross negligence.  

Ensuring that you have, and continuously maintain, a safe property for guests, is barely even an afterthought for most STR investors. Let's just get the property furnished, a hot tub installed, and start making some money!

But ignoring the safety of your guests could cost you everything that you own.  Here is why:  While you will adequately insure your property against various guest perils, your insurance does not cover gross negligence.  And depending on the state, gross negligence damages can include punitive damages for up to four times actual damages.  In other words, if there was a broken leg on your property that resulted in $250,000 in medical, lost wages, and pain & suffering, if there was gross negligence on your part, the total judgement could be $1.25 million, and worse, your insurance company could deny it.

So what constitutes gross negligence?  The legal definition of gross negligence is: "An act marked by total disregard for the rights and/or safety of others, and with complete indifference to the consequences of the act."

In other words, gross negligence refers to an act taken without exercising even the most basic amount of care owed to others. Such an act involves a deliberate disregard for the safety or well-being of another person. Gross negligence does not refer to acts undertaken with intent to harm another, but acts for which the perpetrator knew, or should have known, would result in injury or damages to another person. Such acts may be seen by the courts as bordering on intentional conduct, depending on the level of recklessness involved.

What might be some examples of gross negligence on your property?  Here are a few:

- Loose stair railings that you decided to fix next year instead of now because money is tight.

- The wasp nest that you noticed underneath the front porch and decided to disregard.

- A hot tub that isn't wired correctly because you hired the housekeeper's husband to do it for you for 50 bucks.

- The shiny new barbeque grill that you had the housekeepers place on the wood deck next to the railings.

- That quirky, and warm, light switch that you didn't notice because you haven't been to the property in a year.

- The shower that you noticed is awfully hot but failed to check into it more before you left.

And so on.  Serious injury or death has occurred from each of these items, and they could have been prevented by keeping watch and staying on top of things. Do not believe the lie that you can adequately manage your vacation rental with your iPhone and some far east "customer service agents" to take the occasional phone call. There is a certain amount of "on premises" management that you need to commit to; if you do not, you risk everything you own.