Real estate investors are often faced with a decision when they are looking to buy a property: should they rent it to long-term tenants or short-term "guests"? Since we’ve been hosting short-term rentals for 4 months now, I can give you our thoughts on the financial aspects to consider when running numbers for short-term rentals.
1. Up Front Expenses: Furniture is an obvious up-front expense, but there are others. You may want to update lighting and bathroom fixtures, for example. The up-front purchase of linens will be hundreds of dollars, including comforters, pillows, pillowcases, towels, etc. We also had to buy a wi-fi extending system for $300. Then, there are floor coverings and decorations too. Don’t underestimate these costs when running numbers.
2. Linens and Supplies: When analyzing a potential short-term rental property, you should assume 10% off the top for linens and supplies for your guests. This includes sheets, pillowcases, comforters, towels, wash cloths, coffee, coffee filters, sugar, paper towels, toilet paper, garbage bags, soaps, shampoos, etc. If (unlike us) you provide wine, a welcome basket, water bottles, snacks, etc., this number needs to be higher. Obviously, the supplies are consumable. Guests will use toilet paper and paper towels every time they stay. It may surprise you, like it did us, that linens are more consumable than you think. They will need to be replaced and you should allocate some expense to that.
3. Repairs: short-term guests are rougher on your property than long-term tenants are. I’m talking burned rugs, broken furniture, and more. Set aside another 10% when running numbers for replacing broken items and making repairs to the property.
4. Maintenance: we pay someone to maintain our yard. We also pay for pest control. These total about $200/month.
5. Cleaning Fee: we aren’t only hosts, we’re also short-term rental travelers. Nothing turns us off more as a traveler than thinking we’ll be paying one price only to be slapped by high fees at the end. Some of these fees go to the booking platform and some go to the government. One of them goes towards cleaning. Hosts don’t have control over what the platform takes or what the taxes are, but we are in some control over the cleaning fee. A rule of thumb for a cleaning fee is that it should be less than or equal to the cost of one night’s stay. We charge slightly more for the cleaning fee than we pay our cleaners because we pay separately for laundry. Also, I have a $5-$10 cushion for ruined towels and wash cloths. For ease, I don’t include this in my calculations, but you should if you’re cleaning the place yourself.
6. Utilities: we were surprised how much our utility bills went up when we started hosting. Guests will not conserve water or electricity the way an owner of a property would in the same space. Our utilities are 25% higher than we think they’d be if we were renting our own spaces.
7. Vacancy: the hardest thing to estimate is vacancy, how many nights your short-term rental will be empty every month (or year). We live in an area that has a high season from January – April, with the summer being slower. We asked other short-term rental owners what their vacancy is. So, we initially assumed a 50% vacancy when we ran our numbers. With one season under our belt, we know the vacancy for each unit a bit more accurately now.
Let’s run our numbers to give you an example. We live in the main house on our property with two cottages and a camper available for short-term rentals.
Revenue Camper $65/night * 12 nights (60% vacancy) = $780 Palm Cottage $80/night * 18 nights (40% vacancy) = $1,440 Acorn Cottage $60/night * 20 nights (33% vacancy) = $1,200 Monthly Revenue: $3,420 Annual Revenue: $41,040
Allowance for Linens (10%): $4,104
Allowance for Repairs (10%): $4,104
Net Revenue: ~$25,000
Our goal when we moved here was to use our rental units to pay our mortgage, which is right about $25,000. This means that for a couple of man hours per week we are covering our principal, interest, taxes, and insurance, thus effectively removing our largest monthly expenditure from our budget.