Understanding basic financials and vacation rental expenses is fundamental your business’s growth and success. The basics start with your revenue, costs and profit.
As a reminder, revenue is the value of your bookings and the room nights you have sold, as well as any other fees and extra add-ons. Profit is what remains after subtracting all your costs from your revenue.
To understand how profitable your business is, or how profitable it is likely to be, you need to have good handle on your costs. This article should help you prepare a comprehensive list of the type of vacation rental expenses you are likely to incur. Helping you avoid any surprises later down the road.
You should adjust the rental price of your accommodation accordingly to make sure that all your operating costs are covered. Alternatively, you can secure a business loan or extra capital to fill the gap until your rental revenues reach their full potential.
Operating costs (also known as overhead) are the vacation rental expenses you incur on a regular basis while running your business. These include everything from utilities, insurance & laundry fees to your staff salaries and marketing fees.
Also including less obvious expenses such as replenishing amenities, coffee and other such supplies, or ad-hoc repair and maintenance costs. If you are starting out, your biggest expenses are likely staffing or contractor costs, and your mortgage or loan payments.
Look at everything with a fine tooth comb. Walk through your entire work day and the end-to-end guest journey and take note of all the possible steps or events that inevitably lead to an expense. This is a good starting point to help you identify all your costs.
Five Major Cost Categories to Consider in Vacation Rental Expenses
- Mortgage costs, card fees, insurance (will keep repair costs down!)
- Payroll costs for staff
- Cleaning & maintenance costs (contractors, products and amenities replenishment)
- Marketing costs (including OTA commissions)
- General Services (utilities, phone, Internet & wifi, TV subscriptions)
Fixed Costs vs Direct Variable Costs
Fixed costs (also known as overheads) are the things you need to pay whether or not you receive any bookings. For example, your mortgage payments are due monthly, even if your rooms are empty. The same goes for some utilities, phone, internet or Cable subscription, and your payroll costs, etc. These costs are fixed. Meaning they must be paid no matter what, regardless of the number of guests who stay with you.
Direct Variable costs (also known as “Cost of sale”) are expenses that vary, increase or decrease in line with bookings your occupancy levels. If your property is empty, you’re not likely going to buy more toilet paper or coffee. You also won’t need to clean the property or organise laundry for linens quite as often. But with a high occupancy rate and short stays, changeovers will be more frequent and your costs will rise … but of course, so will your revenues!
If is worth remembering that growing revenues is always the best way to increase profit – so long as your cost base does not increase faster your revenues.
Understanding how your variable costs increase/decrease in line with booking volumes and/or occupancy levels will help you forecast these more accurate demand levels change from season to season, or unexpectedly – for example because of a bad weather storm.
The key to success with vacation rental expenses is to ensure that even in a low demand period, your daily rates and revenues always cover 100% of your variable costs, and as much as your fixed costs as possible. If your business is seasonal, do not try to recover all your fixed costs at all times.
You may price yourself out of the market and get no bookings at all – this will only make things worse! Instead, increase your prices as much as possible in periods of high demand. This will generate a high profit which can use to cover fixed costs in the low season.
Understanding your fixed and variable costs, and the seasonality of your business, will help you make the correct pricing decision. Then, once your daily rates are set for both the high and the low demand periods, you’ll find it much easier to forecast revenue goals and target occupancy levels that are achievable.
Contingency Planning for Unwelcome Surprises, Emergencies and Unexpected Costs
No one likes surprises, but they happen. And with them come increased unwelcome costs!
For a vacation rental property, such surprises may include a big jump in your utility bill from a guest who went a little hard on the thermostat, or an unexpected price increase from one of your suppliers.
There will be emergencies like a broken window, a burst pipe or having to take down a large tree. Which is why you should always allow for some level of contingency as a safety net.
The old adage is true, cash is king! Understanding seasonal demand patterns, as well as variations in weekday v. week-end demand, will help you nail down your vacation rental expenses with greater accuracy.
This is a key factor in helping you forecast your cash flow. Cash flow is critical. It is what keeps the lights on, allows you to cope with unexpected emergencies, and ensures that you’ll never run the risk of losing a service or being late on your mortgage repayments.
So when cash it tight, you must monitor rigorously when revenue is coming into your bank account and when bill payments are leaving your bank account.
Other than sound management and forecasting, three other course of actions may help safeguard your business against cash shortages.
Review your Rental Agreement and terms and conditions carefully.
For example, make it clear to guests that you reserve the right to increase your rental fee if guests exceed reasonable levels of electricity or water consumption. Use a damage deposit to cover such excesses or the cost of repairs.
Consider removing certain items, goods or services from your standard rental price and charge for these as an optional extra. Finally, prevent last minute revenue cancellation by implementing a late cancellation penalty.
Apply for a revolving cash facility or a business loan.
If you have analysed your costs and demand or occupancy levels carefully, as described earlier on, you can use this data to secure additional cash from your bank or other lending institutions for vacation rental expenses.
A revolving cash facility behaves just like a bank overdraft. It allows you to draw cash from the bank when your booking levels are low. And pay it back in the high season when your booking levels are high.
Alternatively, you may prefer to apply for a long-term loan. In this instance, you get the cash up front. It buys you the time you need to get your business going. But be careful, in both instances this type of loan or facility comes with interest charges. Do not forget to take these into account in your cost analysis!
Government grants or loans.
Last but not least, talk to your local authority to find out if help is available from government sources. Most governments offer small business loans, or financial help for start-ups or special grants. Examples include the The Federation of Small Businesses, or local banks and credit unions.