There is a question that arises again and again. You have invested in a vacation property. You are renting it out, or about to start renting it out.
How do you ensure you make the most doing so?
The answers are theoretically straightforward. The problem is that though in theory, theory and practice are the same, in practice they can often be different.
What is vacation rental income?
What do we mean when we say “rental income”? Here income will be defined as the product of two things:
- Rental Revenue
- Rental Costs
Increasing revenue if it increases your costs even more does you no good. Likewise, you can actually increase your income without increasing revenue at all simply by cutting your rental costs. We will tackle each of these areas in turn.
How to increase your topline rental revenue
Just like income, topline revenue is a product of two components:
- Occupancy rate
- Price per period rented
Increasing either component, so long as you do not decrease the other component by as much or more, will drive an overall increase in your revenue.
Here’s how to do each:
How to increase your Airbnb occupancy rate
Days your property is vacant are days you are not making any money. Do you have a long term renter who is guaranteeing you rent for 12-months or more? Great. How long did the home sit empty before you filled it with that renter? How quickly can you get a new renter in when that renter leaves?
Alternatively, if you are not looking for a long-term renter, but rather trying to capitalize on the increased demand for short-term rentals thanks to the growth of sites like Airbnb and VRBO, how do you make sure that you have as few vacant nights/weeks as possible?
Whether long-term or short-term, the answers are similar:
Increase the exposure of your home, and price it competitively.
In terms of increasing your home’s exposure to potential renters, there are many options out there.
Depending on the costs (some are free) there is really no reason to limit the places that potential renters can find your rental home. The more places it is presented, the more potential renters will see it, and the more frequently it will be rented, presuming it is attractive and competitive compared to the other similar properties on the relevant sites.
This brings up another point about exposure: It is not just about getting your home listed on the right platforms, you also have to make sure your home is one of the most appealing on that platform.
So how do you create the perfect listing?
From appealing photos to mobile accessibility, from the written description to preferred placement on the relevant sites, there are many levers you can and should pull to increase demand for your home.
But the most relevant lever? Price.
How to increase rental revenue per period rented
The second key component of driving rental revenue is the price per period rented.
Sure, increasing the price per night/week/month will increase what you make for that period, but increase it too much, and you risk renting fewer overall nights/weeks/months, thus lowering your total revenue.
How do you strike that perfect balance?
To begin, if there is short-term rental demand in the area where your property is, then this will certainly lead to higher prices per period rented.
Even then, what is the right price each week or night? How does it change, and how can and should you change it? If there is not consistent short-term rental demand, then long-term renting is likely your only option. Even then, you are left with the same questions:
How do I set my price?
The answer on both sides comes down to understanding your “competition.” How are others pricing? Price too far below the market and you leave money on the table, even as you fill the property. Price too high and you will leave your home empty more often.
One great place to perform competitive analysis is on the very sites and platforms where you are advertising your home. What are other homes being priced at? How frequently are they rented?
If all of this digging seems like a lot of work, there are fortunately many tools and companies out there who can help. To get a good sense of what your home can bring in overall, things like the Rented.com Rental Grader are invaluable.
For more tactical pricing help, companies like Everbooked exist for this very reason.
The point being, there are tools. Take advantage of them. Optimized pricing will help ensure you strike that perfect balance, keeping your home as full as possible, at the highest price possible.
Minimizing your rental costs
Increasing your revenue is but one lever you can pull in increasing your overall rental income. The other component, minimizing your costs, is just as important, and arguably more in your control.
For example, converting your long-term rental to a short term rental will almost certainly increase the revenue you can make from the property, but will the increased costs and headache be worth it? That is an open question.
So what costs are we trying to minimize? In short, all of them.
The largest cost will be the price paid for your home. If you are still in the research phase, this is the single most important factor you can control.
Use tools like the Rented.com Short-Term Rental Report to determine what the best markets for investment are. Once you have settled on a market, resources like Airdna and Everbooked can help analyze specific properties to make sure you are making the best investment possible.
Once purchased, this is a cost that it will be nearly impossible to influence other than perhaps through something like refinancing the loan if you borrowed money to purchase it, so make sure you get it right on the front end.
Once purchased, what costs should we look at?
This free rental income calculator does a good job of breaking expenses out line-by-line. What are your variable costs that can be reduced more easily? What are your fixed costs that will be harder, or impossible to address?
Variable costs of renting your home
What will you spend marketing your property? Each channel will have its own associated cost. Make sure that the increase in revenue from that channel more than offsets what you are spending on it.
Does the channel you are using charge booking fees like Airbnb, and more recently VRBO? If so, you need to factor this in as well.
Your property taxes are a fixed cost, but if there are occupancy taxes in your market, this will be variable. How much are they?
Then there are other costs that will be influenced by how frequently the property is filled: cleaning, maintenance, utilities, and if you are short-term renting you might have the cost of linens and towels, as well as “essentials” like soap, toilet paper, and paper towels.
Analyze every line item, and see where your costs can come down.
For cleaning, can you get a reduced rate if you guarantee a certain amount of business?
For marketing and booking fees, can you price it in such a way that the fees come on top of the rental revenue, instead of out of it?
Where can you source your linens and essentials that will keep the costs down?
These may seem like nitpicky questions, but they all will help increase your rental income by decreasing your costs.
Reducing fixed costs of renting your home
When you hear “fixed” you likely think these are costs that cannot really be influenced. In many ways this is correct, but in one crucial way it misses an opportunity: spreading them.
Yes, there will be certain costs that are “fixed” for a property, but could that cost be spread across more properties? If you have to hire an onsite manager, or a cleaner, or a landscaper for one home, would getting that same person to cover a second (or third, or fourth) home cost twice as much, or just a little more? The answer is usually “just a little more.”
And this is why professional property managers can often outcompete individual homeowners.
It is not just that they are better at marketing their homes, increasing the occupancy and rental rates, it is also that they can often do so at lower cost.
Those professional photos you paid $400 for? They have a photographer on staff, so their marginal cost is $0.
That weekly cleaning you have to do for your short-term rental that costs you $350 each time? They have cleaners on staff, or they book cleanings in such bulk, that their marginal cost is less than half that.
You are spending $1,000 a year on listing sites? They have hundreds of properties, and a negotiated rate. They pay a fraction of that, oh, and get premium placement to boot.
This brings us to one of the simplest ways to maximize your rental income: Work with a professional.
Sure there are plenty of charlatans out there. Managers who will take far more than their fair share and do a terrible job renting your home. But it doesn’t have to be that way.
At Rented.com we have more than 750 of the world’s best Airbnb managers competing for the privilege of managing your rental home. With the most homeowner-friendly contract in the business, you can ensure you are in good hands. With the competitive auction process in which the managers compete, you can ensure you are getting the most money possible.
All of this to say, yes, to maximize your rental income you could do everything above. But why would you when you can…