Cash Flow is the most important yet simplest concept in short-term rental deal analysis. Income from a property minus expenses associated with its ownership, renting, management, and maintenance determines its cash flow. In other words, calculating the cash flow involves subtracting all the Short-Term rental property’s costs and expenses from its rental income value.
Nightly Rate
In real estate, the Nightly Rate or the Average Daily Rate (ADR) is the average Short-Term rental revenue earned per day by an occupied property. You should set your listing’s price generally based on its location, amenities, and overall demand in the area.
By surfing booking channels and finding similar properties nearby, you can estimate the ADR of your deal effectively. By the occupancy you wish to achieve, determine the average nightly rate of your property during a year based on either the annual average or minimum ADR of your competitors’ properties and use this value as an average nightly rate.
In establishing your pricing strategy, you must balance the occupancy rate and price. Once you have estimated an annual average, the nightly rate will fluctuate around it. Depending on the local market, you can slightly increase it in the high season and decrease it in the low season.
Occupancy Rate
The occupancy rate indicates how many rooms are occupied in your property at a given time. 100% occupancy is the ideal occupancy rate for a property. Short-term rentals, however, are unlikely to achieve 100% occupancy.
The ratio is calculated by dividing the number of occupied rooms by the number of available rooms.
Utility Bills
You typically pay for all the utilities in short-term rentals, unlike long-term rentals, where your tenant may be responsible for some or all of them. Looking at the records of similar properties in the neighborhood is the most reliable way to estimate utility bills and incorporate them into the cash flow calculation. In the absence of such records, some helpful websites provide information on the average consumption of different types of households based on their size and location.
Council Tax
In England, Scotland, and Wales, council tax is a form of local taxation on domestic properties. According to property value, each property is assigned one of eight bands in England and Scotland (A to H) and nine in Wales (A to I), with a fixed tax amount for each band. The higher the property’s value, the higher the tax – except for properties worth over £320,000. Tax exemptions and discounts are available for some properties and people.
Average Length of Stay
The average length of stay (ALOS) refers to the number of nights a guest stays in a vacation rental property. Most vacation rental channels estimate an ALOS of 5.6 nights. You can calculate the average length of stay by adding up the number of nights booked per month and dividing it by the number of different guests. Booking platforms like Airbnb can calculate this for you and display the average length of stay of all vacation rentals in your area.
In an ideal scenario, vacation rental properties are better off when guests stay for longer periods. As a result, fewer cleanings are required each week. For example, you need to pay cleaning personnel only once a week if a guest stays for five or six nights. Thus, more money is saved, and more revenue is generated when guests stay longer.
Cleaning and Laundry
When analyzing cash flow for a short-term rental property, the most costly items are cleaning and laundry. You can exclude cleaning and laundry from cash flow calculations if you do them yourself. Otherwise, you need to consider the expenses when employing a housekeeper or sourcing these out to a cleaning company.
Commissions
When hiring a property management company to manage your properties on your behalf, you should factor in their commission. According to their services, property management companies charge between 10 and 20 percent of the total turnover.
In addition, you need to consider OTAs’ (Online Travel Agencies) commissions. Several well-known OTAs around the world accept your property and charge quite different fees. However, an average of 15% of the total turnover should be devoted to OTA commissions.
You may need to factor in transaction fees since some Property Management Systems (PMS) and payment gateways charge a percentage.
Other Expenses
From a leaking pipe to a broken light bulb, there are usually additional expenses you should pay for. For these unexpected outgoing costs, it’s better to set aside an average of 5% of the total turnover per month.
Analyzing a short-term rental deal requires a thorough understanding of multiple factors, from cash flow and occupancy rates to utility costs and commissions. A successful investment hinges on accurate calculations and market research to ensure profitability.
By keeping track of all expenses and estimating revenue based on local market trends, investors can make informed decisions to maximize returns. Proper planning and management are essential for optimizing cash flow, maintaining high occupancy rates, and ultimately achieving long-term success in the short-term rental market.
