Boost Your Earnings with Expert Short-Term Rental Analysis
Investing in short-term rentals can be a rollercoaster, but with the proper short-term rental analysis, you’ll learn how to make decisions with your head, not just your heart. Let’s go through the essential factors, including some hidden expenses many overlook. Understanding these factors is crucial to ensuring your potential success and profitability in the short-term rental market.
Analyzing short-term rental deals is different from traditional real estate investments. It’s more than just crunching numbers on a spreadsheet. You must look at key metrics and go beyond the obvious. Today, I’m going to give you the insights and steps to make educated investment choices to achieve revenue optimization.
Table Of Contents:
- Factors To Include In Your Short-Term Rental Analysis
- The Often Missed Hidden Expenses in a Short-Term Rental Analysis
- Short-Term Rental Analysis
Factors To Include In Your Short-Term Rental Analysis
Many different financial metrics and aspects of a property play a huge part when buying investment properties. You can’t consider one or two of them; you have to look at the whole picture to gain a true understanding of whether an investment is good for you.
Cash Flow
Cash flow is critical for obvious reasons. Positive cash flow is when you make money after expenses are deducted. A common misconception is assuming every short-term rental generates immediate cash flow.
This may not always be the case. Starting a new business takes time to make money and short-term rentals are a business, so it’s ok if profits don’t appear overnight. It’s essential to think long-term and consider things like booking patterns for your rentals.
Cash-on-Cash Return
This measures the return you get based on the cash you’ve invested. What is your annual pre-tax cash flow divided by your total cash investment? I prefer cash-on-cash return over cap rate because it accounts for the time value of money; how long will it take you to get your money back.
In long-term rentals, people like to see around 5-12%, but with short-term rentals, you can strive for a lot higher. Don’t forget, everyone’s ideal return depends on their personal financial goals, tolerance levels, and how many properties they own.
Debt Service Coverage Ratio
DSCR indicates your ability to cover your debt obligations, including your mortgage payment, property taxes, and insurance, from your net operating income. A DSCR above 1 is typically required to qualify for a loan; lenders prefer a ratio of at least 1.2.
Cap Rate
Capitalization Rate, or cap rate, is a way to assess the potential profitability of a property regardless of financing. This is calculated by dividing your annual net operating income by your property value. Higher cap rates are attractive because they might show a higher potential return on your investment, however, with greater reward may come greater risk.
The real estate market and housing market fluctuates, which affects occupancy rates. So consider location desirability; a property with a slightly lower cap rate in a highly desirable area might be more profitable long-term. Also, take into consideration whether or not you will be doing any rental arbitrage.
Lifestyle Investment Factor
Do you plan to also live in this house occasionally? Buying a beach or ski house to use part-time, with plans to rent it when you’re away, changes the numbers game a bit. Are you ok with breaking even or just making a little because of the personal enjoyment you’ll get?
Owning vacation rentals can offset mortgage costs or generate some income while allowing you to enjoy your property. Think about what is most important to you.
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The Often Missed Hidden Expenses in a Short-Term Rental Analysis
These expenses can impact your profitability so be sure to consider each area:
Furnishing & Appliances
First impressions matter so invest wisely. Purchase quality, stylish, and durable furnishings. Factor in everything. Living room, dining, bedroom, decor, light fixtures, kitchen items and small appliances, outdoor furniture.
Think about your ideal guest experience, and what they might be looking for when searching for places to stay on Airbnb, VRBO, or any other platform. You can even use short-term rental data from these sites to learn what guests want.
Cleaning & Maintenance
It’s a common practice to pass cleaning costs on to guests. Be realistic when assessing your costs because guests expect pristine conditions. This includes laundry, replacing linens, restocking toiletries, deep cleaning, general repairs, landscaping, pool cleaning if applicable and pest control.
Factor these into your overall expenses to maintain those 5-star reviews. A clean house is important. A clean house can lead to positive guest experiences.
Utilities
Electricity, gas, water and internet…it all adds up. Understand guests often have different usage habits than you. Remember to figure in that people stay at vacation homes to relax and enjoy themselves and may not be as budget-conscious with using air conditioning, heating, or lights compared to a permanent residence.
So factor that into your short-term rental analysis to be prepared. Using dynamic pricing can help you adjust to the changing costs of utilities.
Consumables & Guest Supplies
The little things add up. You’re not just covering rent or a mortgage. This includes replacing items that are provided for guest use such as; toiletries, trash bags, paper towels, cleaning supplies, laundry detergent.
It is short-term rental etiquette to also provide coffee, tea, spices, cooking oils and sometimes a “Welcome Basket” so you’ll need to account for these costs, as well. Also, include marketing expenses to increase your visibility, attract more bookings and command better rates. Don’t be scared to make that cash flow higher than your competition. That is part of what guests are paying for when they stay at your place.
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Property Management & Technology
Factor in the cost of hiring a property manager to help you. Are you a hands-on type of person, or do you want help? A property manager handles bookings, communication, guest issues and ensures smooth operations.
They become your best friend, as they deal with guests and keep the property in tip-top shape while you’re away. Some, like myself, prefer to manage remotely with software and tech to simplify things. Either way, incorporate those expenses into your spreadsheet; consider listing on platforms like Airbnb or VRBO. Technology such as a smart lock for keyless entry and security cameras provide peace of mind for you as an owner.
Taxes and Insurance
Finally, don’t forget property taxes and insurance, which can vary greatly based on location and property type. The amount you need will depend on whether you are renting your primary home, or strictly vacation rentals. Short-term rental insurance is a specialized type of insurance so do your homework.
Short-Term Rental Analysis
Successfully buying rental properties comes from a thorough understanding of costs versus profits. Performing an effective short-term rental analysis means thoroughly examining the data: the average daily rates and occupancy rates for comparable properties and hidden expenses. I encourage you to look at those properties that are performing exceptionally well on sites like Airbnb and VRBO.
They can help to give you insights into higher than normal ADR’s. If you have a waterfront property that you rent out boats at, you might want to list your company on Boatsetter as an affiliate. Or perhaps you provide local recommendations on things to do and decide to partner up with Viator to become an affiliate and give your guests exclusive tours and excursions, that, in return, give you a small commission. All this extra work behind the scenes will give you ideas of hidden income to counteract some of those missed hidden expenses.
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