When it comes to running a successful business in the vacation rental industry, both revenue and profitability are factors that need to be taken into account.
Because revenue is the total amount of money generated while profit is the remaining income left after deducting expenses, you can actually have a net loss while still generating revenue. With this in mind, especially during such trying times, professional property managers should focus on boosting their vacation rental profitability in order to maintain a sustainable and long-lasting business.
Avantio and AJL Atelier have come together to deliver a 360 profitability solution and recently joined forces in a webinar that focused on five of the most important tips for improving the vacation rental profitability of short-term rental properties. The in-depth webinar included Simon Lehmann, CEO and Co-Founder of AJL Atelier, Kyle Davies, Senior Account Executive at Avantio, and Manuel Giner, CEO of Avantio.
In this article, we’ve used the valuable advice of these experts as inspiration for ideas and actionable steps that professional property managers can use to improve their businesses.
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The vulnerabilities of a professional property manager
As the COVID-19 pandemic has reminded us, the professional property manager, and hospitality industry more generally are extremely vulnerable to being impacted by unpredictable events.
AirDNA and STR published a report in 2020 that analyzed the impact of the pandemic on vacation rentals. What they found is that “global new bookings fell 47% from more than 2.3 million in January 2020 to just 1.2 million in April. Year over year, global new bookings were down 61%”.
Despite these worrying numbers, property managers who understood vacation rental profitability were much more likely to survive the strict travel restrictions over the past year, as they have been able to identify what wasn’t working and make necessary changes.
How To Transform Your Vacation Rental Profitability
To give you a better idea of how to transform your vacation rental profitability, we’ll be discussing the following five points:
- Calculate all of your fixed and variable costs
- Measure the true cost of customer acquisition
- Put profitability first
- Focus on reducing your operating costs
- Review your business model and owner contracts regularly
Let’s get started.
Tip 1: Calculate all of your fixed and variable costs
Understanding and calculating the fixed and variable costs in your business is one of the first and most important ways to increase your vacation rental profitability because it allows you to strategically price your units.
Fixed costs are expenses that are usually constant despite changes that might occur during a specified period, while variable costs refer to expenses that are associated with individual units and are triggered over time. Some examples of fixed costs in vacation rental businesses are:
- Mortgage payments
- Employee salaries
- Insurance
- Real estate taxes
- Internet and cable subscriptions
- Office rent
Common variable costs include:
- Third-party booking fees and commission
- Marketing expenses
- Utility fees
- Payments to owners
- Cleaning services
- Repair fees
So what do you do once you’ve established these costs? Here’s an example: Let’s say that your fixed costs for one unit add up to $1,200 a month while your variable costs are an average of $650 per month (keep in mind that variable costs change depending on the number of bookings you receive). For this rental to break even (let alone be profitable), you’d have to generate a minimum of $1,850 each month.
Now that you have this figure, you know that you need to be able to charge guests to be profitable. If the fee you’ll have to charge guests is unrealistic, or you find you’re banking on 100% occupancy year-round to break even, then you know you need to find ways to cut costs.
Whether you’re keeping on top of the books or you work with an accountant, it’s crucial to consider every expense. Something as insignificant as complimentary kits eventually adds up when bookings start to increase. Every little amenity must be factored into your overall costs.
According to Lehmann, it’s recommended to define both fixed and variable costs at least once a year on a business level as well as on a more precise booking level to be able to set your rates accordingly and ensure profitability.
Tip 2: Measure the true cost of customer acquisition
When it comes down to it, property managers have two main customers: homeowners and guests. When the focus on these customers is unbalanced, meaning either homeowners or guests are favored more than the other, the profitability of the business is affected.
Measuring the true cost of customer acquisition for both of these parties, referred to as the customer acquisition cost (CAC) and property acquisition cost (PAC), is essential because it lets you know whether you’re running a viable business with a suitable distribution strategy:
- CACs are those related to acquiring new renters, such as marketing costs, your sales team, and commission fees from OTAs. To calculate it, just add up the expenses required to receive bookings and divide it by the total number of customers acquired. Analyzing this cost is key because it can help you rearrange your costs—you might, for example, find that a certain OTA is no longer serving your business.
- PACs are the fees that come with taking on a new vacation rental property, such as generating new contracts and administration tasks.
To accurately measure the CAC and PAC of a property management company, you should also consider metrics like your churn and repeat rate. The churn rate, which refers to the percentage of homeowners not retained, can trigger costs if it’s positive because it forces property managers to generate new contracts.
The same goes for calculating your repeat rate, or the number of guests that re-book a property. To increase your repeat rate, it’s important to focus on both direct booking strategies and portal bookings from OTAs like Airbnb, Vrbo, and HomeAway.
Lehmann believes that you should have at least 50% direct and 50% indirect business. He says, “[Property managers] need to balance it and have eggs in different baskets. One thing you need to be extremely mindful of is having as many channels as you possibly can because, still today, we’re seeing property managers who solely depend on Airbnb for demand generation.
“For me, for property valuation, a business like that has no valuation because it’s solely dependent on one source channel and the pandemic has shown that if that tap is turned off, there’s no more demand and your business is done.”
Using vacation rental software like Avantio solves this problem. Not only does it allow you to integrate with all of the leading online travel agencies and boost your visibility, but you can also design your own professional website to increase customer loyalty and establish your brand.
Aside from what we’ve already mentioned, vacation rental software helps improve your profitability because you can:
- Easily incorporate discounts and promotional codes
- Upsell extra services
- Automatically (and strategically) adjust prices
Tip 3: Put vacation rental profitability first
Having profitability at the forefront of your vacation rental strategy means putting in additional time and effort to ensure longevity for the company. This idea was proved in a recent case study that AJL Atelier conducted to analyze the profitability of Feeling Italy, a vacation rental agency with over 60 properties.
Remove unprofitable rental properties from your portfolio
During the case study, AJL Atelier found that while the business was profitable at a portfolio level, 10 of the properties were actually making negative contributions. When including the non-profitable properties, the agency had a profit margin of 4%. Once these units were removed from the equation and a proper cost analysis was conducted, the profitability jumped to 11%, despite a drop in revenue.
That said, by detecting properties that are negatively impacting your business and minimizing the costs that come with these units, you can reduce your break-even point significantly and be more profitable.
As well as monitoring KPIs like revenue per property, your Average Daily Rate, and occupancy rates, you should also review the characteristics of areas in which your properties are located. Is there a high vacancy rate in the town? Have crime rates shot up recently?
Proactively asking the right questions and doing the necessary research will help you decide whether a property is worth managing or not, always with a focus on profitability.
Adopt a flexible commission approach
There are three main ways that property managers charge homeowners:
- Fixed-rate model: In this model, property managers receive the same flat fee every month regardless of the number of bookings.
- Guaranteed income: This method ensures passive income for homeowners all year round, meaning that property managers pay a fixed monthly rate and keep the profits. This also means that during times where there are no bookings, property managers still have to pay the same amount despite not generating any cash flow.
- Commission model: The percentage-based commission model is a more flexible method in which property managers are paid depending on what is earned in a given month.
Costs vary depending on whether you’re managing a beach rental, urban rental, or mountain rental. Since urban rentals are usually closer in distance and require less maintenance, they usually have lower property management fees.
Some property managers may also charge homeowners with additional management fees such as:
- Leasing fees
- Advertising
- Maintenance
- Eviction Fees
- Late payment fees
Although the fixed-rate or guaranteed income model may work in some cases, they tend to be a flawed solution for vacation rental management companies working in areas that are affected by seasonality, such as Florida. In this case, a flexible commission approach is more beneficial as it allows you to professionalize your business and adjust your strategy depending on the demand that exists during a given time.
Be ready for growth in the vacation rental market
By taking a look at vacation rental statistics and trends for the future, it’s clear that the lodging industry has an exciting road ahead. In fact, in a 2021 report by AirDNA, the company stated that “high levels of demand and a delayed expansion of the available supply of new STR units will mean at least two years of elevated occupancy levels for U.S. properties.”
As a property manager, this anticipated post-COVID rise in demand presents an opportunity to increase profitability and grow your business. To effectively take advantage, consider the following areas:
- Customer service: Now more than ever, guests have high expectations for communication and value property managers that make them feel welcome. That could mean complimentary wine and chocolates to greet them on arrival or simply ensuring the kitchen is equipped with all the essentials.
- Highlighting your unique selling points: After a year of sitting indoors, travelers want something different. Take the time to consider what makes your properties stand out and emphasize these characteristics wherever you can.
- Automation tools: Save time and effort with automation tools that allow you to answer frequently asked questions before they even arise. For instance, cut down on post-check-in texts about how to connect to Wi-Fi by ensuring that information is all covered clearly in an automated welcome email on the day of arrival.
Property managers who get ready to distinguish themselves from the rest of the pack when the expected tourism boom period begins will be in a great position to boost their vacation rental profitability.
Tip 4: Focus on reducing your operating costs
Another way to increase profitability is to thoroughly analyze your operating costs. Lehmann recommends “doing a proper cost control at least once a year if not twice” and maintaining a balance between internal costs (which tend to be fixed) and external costs (which tend to be variable). Doing so will ensure that you preserve a high level of quality without being bombarded with unmanageable costs.
Consider negotiating existing contracts (e.g. cleaning or laundry contracts), tracking costs that you might be absorbing from owners (such as inventory replacements), and looking over your insurance policy to know exactly what claims or damage you are protected from.
Jeremy Gall, Founder & CEO from Breezeway says that “property care and operations is one of the biggest areas for vacation rental managers to reduce costs and boost profitability.”
According to their 2021 Property Operations Survey, “scheduling property care tasks and coordinating work and issues with teams were two of the biggest challenges for vacation rental managers. Those who can trade manual workarounds for automated processes can eliminate over 30 hours in admin time each month and save over $50,000 in labor costs, housekeeping call-backs, and maintenance billables.”
There are many ways to incorporate touchless technology touchpoints and other digital advances into your business to save money in the long term. Consider some of these smart home technologies for vacation rental properties:
- Smart locks for keyless check-ins
- Digital property guides
- Smart home security systems
- Thermostats that can be managed remotely
These innovative additions are a win-win because not only do they help to reduce recurring costs, but they also enhance your customer experience and reputation!
Tip 5: Review your business model and owner contracts frequently
Be flexible with your communication and commission. The more flexible you are, the easier it will be to react to changes in the market. Put yourself in the shoes of owners and work together towards building a relationship based on trust. They have, after all, made a significant vacation rental investment and given you control of their valuable assets.
Marketing yourself to owners is equally as important. The same way you would learn how to market your villa rental or a client’s second home, you should also be able to market your property management business. Manuel Giner, CEO of Avantio, advises that “you have to include owners in your marketing plan because you have to do marketing for them.”
He suggests “giving value to the services you provide, even if they are free. There are lots of services [property managers] do for owners, like home inspections or opening the door for a handyman, that need to be shown to owners so that they know what you’re doing for them, even if it’s free.”
Key Takeaways
The next time you want to just focus on revenue or vacation rental income, remember the importance of profitability and its role in creating a sustainable vacation rental business.
By following these five tips and taking the time to calculate your true costs, reducing them when possible, and having a flexible approach to your rental management, you can transform your business and maximize your efforts all at once.
Distributing your listings is a strategy, not a task. Take our free 5-day email course for property managers who want new, creative strategies for distributing their vacation rentals.
