I Want To Buy A Car And Rent It To My Tenants: Good Idea Or Bad Idea?

by Quatro Legal Corporate Team | April. 10, 2024 | Article, Corporate

Foreigners that own property in Costa Rica must face the reality that public transportation does not exist. Well, it does but not in a practical and comfortable manner. Therefore, if you are a foreigner and want to get around to do day to day errands or visit our amazing beaches and/or mountains, you will probably realize that a car is needed. This applies to property owners or long term tourists. But what to do with the car if it isn’t in constant use? We know leaving it to accumulate rust or dust is not good. For this reason, many property owners that have cars think renting it out to tenants – short or long term – might seem like a smart move, but before you hand over the keys to the car it’s important to consider the possible contingencies that come with this practice.

 

How do car rental companies do it?

Let’s just start by saying that car rental companies have to deal with a lot of red tape and gurantees in favor of the consumer. In Costa Rica car rental companies operating formally must comply with licenses and permits, including obtaining a tourism declaration before the Costa Rican Tourism Institute (ICT). This implies several legal, technical, and economic requirements must be met. These requirements vary depending on the specific location the car rental company will operate, local regulations applicable and they must comply with all Costa Rican tourism laws and requisites, including those established by the ICT.

Likewise, companies that look to enter the car rental busines shall demonstrate economic solvency and financial capacity to operate in a sustainable manner, have a solid business plan that includes realistic financial projections, marketing strategies to attract foreign customers, and pay fees and taxes to obtain the tourism declaration. They also need to keep it valid through the renewal periods, retain their staffs in compliance with social security obligations, keep huge liability insurance policies, a fleet of vehicles that complies with antiquity and security minimum requirements and protocols and regulations on how to deal with renting process, accidents, liability, car substitutions, customer attention, etc. So, not everyone can enter or sustain this type of business.

The reason why the Government has enacted all these requirements as a condition to operate a car rental business is to protect the users and guarantee the service is provided as per the market standards including a set of minimum guarantees which must exist. As you can see, when someone rents from a car rental, they are not just renting a car to get around, but a bunch of protection, structure and security behind it.

 

What about private car owners?

Returning to the point of the article pertaining renting a car to a tennant, it is clear that private car owners will not provide the requirements car rental companies must comply or offer the same guarantees. Under that premise, while offering a rental car option to your tenants can be a plus, especially for those tenants who need temporary transportation solutions and are wiling to pay for it, it is important to undertand the pitfalls or liabailities, prior to determining if the extra income is worth it since all protection for both owner and renter will not necesarily be there.

What are the contingencies related to renting a car to tenants?

  • Civil or criminal liability due to accidents: The biggest contingency that may arise are the liability risks of renting out your car. Remember you are entrusting it to a third party that maybe just passing by Costa Rica and has no attachments to the country outside of maybe loving the beaches. If the tenant provokes any accident or damages to the car, the owner will be liable which can lead to legal and financial consequences in the near future. It is important to retain a lawyer to draft a rental agreement outlining the responsibilities and the consequences for breaches and having deposit in case the worst happens.
  • Insurance Coverage: The rule should be that if you are renting your car to your tenants it must be insured with a well recognized insurance company and through a policy that provides sufficient coverage. No other suggestions or options are acceptable!! However, there are two things that must be taken into account:

a) Insurance coverages for cars involved in business activities such as rentals can be more expensive and complex than personal auto insurance.

b) Insurance policies maybe restricted and insurance companies may deny payments for rental activities ouside the scope of the law or the policy and/or regarding accidents caused by unathorized drivers.

  • Depreciation, damages and maintenance: No one takes care of things better that the owners. Therefore, when it comes to cars, it is common that tenants for the most part will see them at best as a tool and at worst as toy. This means that as an owner renting to a tenant you can expect car rentals to produce excessive wear and tear of the car and require regular maintenance and unexpected repairs. Do the math if it makes sense to actually do it.

Car renting services to tenants can be a lucrative venture if it is done right. By understanding the risks, adhering to legal requirements, and implementing good practices, you can turn your unused car into a valuable income-generating asset. However, be mindful of the expenses, including insurance, maintenance, cleaning, car delivery logistics, key exchange, staff (if necessary), depreciation, among others.

Before taking any rental venture, always ask your legal advisor to ensure compliance with applicable local laws and regulations governing car rentals in order to mitigate any potential risks and to avoid legal issues down the road. With these considerations in mind, you can confidently explore the option of renting your car to tenants in Costa Rica, maximizing the potential of your asset while providing a convenient transportation solution. Happy renting!

For more information please contact ANDRE CAPELLA at acr@quatro.legal
Will be glad to assit you!

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