February 19, 2016

Fixed-Rent Arrangements: How a Contract Is Helping Vacation Rental Owners and Managers Make More

Here at Rented.com, we believe our homeowners should have choices when it comes to picking the perfect professional vacation rental manager. Want to go the traditional route for property management? We can help. Rather receive guaranteed yearly income? Rented.com is also here to help.

In the Winter 2016 VRMA Review, a story on Rented.com’s innovative fixed rent contract made the front cover. Here’s what the VRMA had to say:

If you’ve ever rented an apartment, a condo, a home, or an office for the long-term, you’re familiar with fixed-rent contracts. You and the landlord agree to a monthly rental cost, you agree to pay the rent according to a fixed schedule, and that’s the end of it, except for, perhaps, a security and/or cleaning deposit and discussion of any ancillary costs such as maintenance and cleaning. The rent doesn’t change because all of a sudden it’s “high season” in the neighborhood or because a must-go-to amusement park opens next door. If conditions change, that will come up the next time the contract is negotiated.

The vacation rental business hasn’t worked like this, generally speaking. It’s a commission-oriented business, meaning profit is earned one rental at a time. But that’s changing, as some vacation rental managers recognize that for their properties and market(s), fixed rent contracts offer several benefits over the traditional, you’re-paid-when-we-rent-it arrangement managers typically make with owners.

At a fascinating session titled, “Fixed-Rent Contracts: An Innovative Approach to Recruiting and Retaining Homeowners,” held during VRMA’s 2015 Annual Conference in New Orleans, three vacation rental industry innovators outlined how fixed-rent contracts work in their businesses and why they’ve become big believers in the fixed-rent approach. Speakers included Cliff Johnson, Co-Founder and Chief Development Officer for Vacasa, Portland, Oregon; Michelle Acquavella, Founder and Owner of Sea to Sky Rentals in Seattle, Washington; and Andrew McConnell, CEO of Rented.com, Atlanta, Georgia.

Andrew summed up a fixed-rent contract this way: “Basically, you’re buying the bond rather than investing in stocks. It’s stability versus volatility.”

Full Control, Guaranteed Income

The benefits of fixed-rent contracts for vacation rental management companies according to the three speakers, include full control of the rental property, the ability to rent the property as the managers sees fit, and the opportunity to keep 100 percent of any extra rental income after the monthly rental has been paid to the property owner. Moreover, fixed-rent contracts are a cheaper way for managers to gain control of properties without actually buying them.

Owners Benefit Too

“A lot of owners want a guaranteed return,” commented Cliff. “That’s the big benefit for them with fixed-rents, and for many owners, it’s a very big benefit. Fixed-rent contracts are a great way, actually, to broaden the pool of owners. More and more owners like these kinds of guaranteed-income contracts.”

Approximately 90 percent of the homes in Vacasa’s program that are contracted on a fixed-rent basis (about 22% of Vacasa’s total program) renew as fixed-rent.

When fixed-rent contracts are part of a management company’s tool kit, they provide the company with new opportunities to grow within an established market, the speakers agreed. Not only that, but with their flexibility, and with the flexibility that having multiple kinds of contracts to offer provides, they can help a manager more easily enter a new market.

“Also, it’s been our experience,” said Cliff, “that fixed-rent properties generate higher profits.”

How to Structure a Fixed-Rent Contract

The key to making a fixed rent contract work for both the owner and the manager is in structuring the contract fairly and profitably. The first step is for the manager to project, as accurately as possible, the total rental income the property in question will generate across a full year. Next, said Michelle, assess the profit you hope the property will produce against the profit margin typically build into your budget. Next, deduct expenses—any costs for utilities, on-site management, repairs, etc. Divide what’s left over by 12, and that’s the fixed-rent the manager should offer to the owner.

Andrew used this hypothetical example on an apartment he wanted to earn an annual $3,000 profit from:

  • Nightly rental fee for guests: $250
  • Average nights booked: $200
  • Cleaning expense: $0 (in this example, cleaning is covered by the owner’s contract with the apartment building)
  • Annual marketing expense: $1,000
  • Maintenance/upkeep, annual: $1,500
  • Operational risk (“This puts a dollar amount on the answer to the question, ‘How comfortable am I with this property’ Older properties might be more risky.”): $1,000
  • Booking risk (“How volatile is the market for this property?”): $1,000
  • Annual gross projected revenue: $50,000
  • Pre-tax bid to earn desired profit margin: $40,476.19
  • Monthly lease (divide pre-tax bid by 12): $3,373.01

Vacasa has many luxury mountain properties in its program, and Cliff used the formula above to detail his calculations on a sample property he wanted to earn an annual $20,000 profit from:

  • Average nightly rate: $600
  • Average nights booked: $175
  • Cleaning expenses: $1,000
  • Marketing expenses: $2,500
  • Maintenance/upkeep: $1,500
  • Operational risk: $500 (it’s a newer home)
  • Booking risk: $1,000
  • Gross projected income: $105,000
  • Pre-tax bid to each desired profit margin: $74,762
  • Monthly lease: $6,230

For Vacasa, 90 percent of its homes on fixed-rent contracts generate profits, Cliff said.

As attractive as fixed-rent contracts can be, Andrew advised managers to “have both fixed-rent and commission contacts available, so owners don’t feel forced into a program.” And all three speakers cautioned that any manager considering fixed-rent contracts need to make sure any fixed-rent contracts offered explicitly states that the renter—that’s the manager—is going to sublease the property for short-term rentals. “Also, many sure the fixed-rent contract becomes void if local regulations change to prohibit short-term rentals,” advised Michelle. “You don’t want to get stuck with a contract you can’t use in your program.”

If you’re a homeowner looking for fixed or guaranteed rent for your vacation home, we can help. Call us at (844) 736-8334, or chat with us below!

What are your thoughts on fixed-rent contracts? Let us know in the comments!

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