When analyzing a property for short-term rental cash flow, investors follow the same formula they use to calculate cash flow for a yearly rental property. In simple terms, cash flow = total income - total expenses. However, unlike long-term rental properties, there are several added factors that affect short-term rental cash flow projections in 2024.
Before investing in a vacation rental property or converting a property into a short-term rental, be sure to consider the nuances of renting a property on a short-term basis and the effects they can have on annual cash flow. Let’s break it down.
Own a long-term rental property? Check out our yearly rental property calculator.
Factors that Affect Short-Term Rental Income
Whether you own a second home in a vacation destination or are strategizing to convert your own property into a fully furnished nightly rental, take time to consider these elements that can affect your gross income.
Dynamic Pricing: Much like hotel and airline rates, short-term rental owners set their nightly rates to fluctuate with demand. During the slow season, savvy owners lower their rates to increase their occupancy. During peak season, owners raise nightly rates to increase income.
No two months are created the same in the vacation rental world, and your peak season will depend on where your property is located. If you’re renting out a beach house in a place like Virginia Beach, you’ll find increased demand in the summer months. If you’re near a ski resort, perhaps winter will be the time of year with the greatest returns. Because rates change with the season and occupancy is not guaranteed, predicting monthly gross income for a short-term rental presents a unique set of challenges.
Wondering how to make the most of your Virginia Beach rental in the winter? Check out our complete guide to winter rentals!
Comparable Properties: Dynamic pricing can make determining the average nightly rates of comparable properties a challenge. Assessing properties similar to yours in the local area is a very important step to accurately anticipate how much revenue you can expect. Some tools, such as airDNA.co, can analyze pricing and vacancy rates for you - but they can be expensive.
CGP Real Estate Consulting provides flat-fee services like a full Vacation Rental Performance Analysis for short-term rental owners in Hampton Roads, as well as consulting on pricing strategies, individual listing optimization, and local market insight to maximize revenue and sustainability for your short-term rental property.
Discounted Rates: Take a look to see if comparable properties in your area tend to provide discounted rates for longer stays (think: 7 nights or more) or last-minute bookings. Discounts can incentivize guests to book your property and reduce the number of vacant nights on your calendar.
Special Fees: Renting out a vacation property often comes with conditional fees for guests that need a little extra accommodation. For example, you might charge a pet fee if renters bring their furry friends, tack on an extra charge for early check-in or late check-out, or charge for specific guest services requests.
Factors that Affect Short-Term Rental Expenses
Higher guest turnover means that short-term rental owners balance a variety of expenses that yearly rental property owners don’t have to consider. Here are a few to keep in mind:
Furnishings for New Nightly Rental Homes: If your property is joining the fully-furnished rental market for the first time, don’t forget to add to your calculations the cost of furnishing the home. This will not only include furniture, but also kitchenware, decor, and anything you want to provide for the ideal guest stay.
Utilities: A short-term rental owner typically foots the bill for all utilities year-round, a major expense for the rental property budget. In addition to water and electricity, don’t forget to include any costs for WiFi, cable or streaming channels, landscaping, and security if applicable. (Another perk of CGP’s Vacation Rental Performance Analysis - we can give you an accurate rate-per-square-foot estimate of utilities for monthly rentals in Hampton Roads.)
Marketing Expenses: Companies like Airbnb, VRBO, and booking.com all charge a fee based on the gross revenue of each booking. These fees can range from 3%-15% of the total revenue for each booking. If you market through a property manager, it can be even more expensive.
Variable Operational Expenses: Unlike a long-term rental, short-term rental properties will experience a high amount of turnover. This comes with added expenses like cleaning, linens, and increased wear-and-tear that will vary in cost based on the number of stays and overall tenant usage. Some owners will include a fee for things like cleaning or linens, while others provide them as part of the package.
Local Taxes and Regulations: Short-term rental regulation is a hot topic right now, not only in places like Virginia Beach and Norfolk, but nationwide. It’s important to consider the costs of licensing and additional taxes that short-term rental owners in your area must pay regularly. Additionally, some areas have local regulations limiting how many contracts a property can have each week, which could restrict how you rent your property. One regulation for Virginia Beach rental properties is that every vacation rental home must get a $200 zoning permit each year.
Already overwhelmed by the cash flow analysis process? Save time and headache by contacting CGP for a full vacation rental performance analysis and we’ll do the work for you.
THE BOTTOM LINE
For those looking to buy or convert a currently owned property into a short-term rental, it is important to consider all variables when projecting vacation rental cash flow. While tedious, taking the proper steps and considering the different factors that affect cash flow of a short-term rental can be the difference between a successful investment and your last investment.
Real estate consultants at CGP are uniquely qualified to consult and advise on short-term rental strategies to help you leverage your property to meet your investment goals. Reach out today!
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