Vacation Rental Expenses
Vacation rental expenses may be the topic most in the vacation rental industry don’t want to talk about. It’s the ugly side of the business for sure! Some owners are inundated with vacation rental expenses and the dream quickly turns out to be a nightmare.
Others figure out ways to manage them these expenses. They anticipate them from the initial purchase of the property and build them into their costs of doing business. At the end of the post you’ll have the opportunity to download our vacation rental spreadsheet expenses calculator to make this fast, fun and easy.
Preparing for Vacation Rental Expenses
The best method to avoid surprises and large unanticipated expenditures is to throughly analyze the vacation rental investment before an offer is made and a purchase contract is executed. To do this, treat the vacation rental investment as a business. Every business, the tall and the small, have expenditures and revenues. The line items for revenues in a typical vacation rental are your “rental income,” “cleaning fee’s” and others like “pet fee’s.”
The line items for expenditures is a bit longer and may depend on other variables, for example, does the vacation rental provide toilet paper, paper towels, shampoo, soap or welcome gifts? Is there regular inspections and how much are cleaners compensated? Ultimately, the vacation rental expenses will depend on many factors including the property type, location and how the vacation rental is managed, so it will vary.
We invested a large chunk of capital to build a “Vacation Rental SuperAnalzer” that takes into account all the cash inflows and cash outflows of purchasing, owning, maintaining and selling a vacation rental. The SuperAnalyzer is beyond the scope of estimating just vacation rental expenses, so don’t get lost in these numbers on the “Dashboaord” pictured below. The expenses are certainly a part of this calculator that looks at the lifetime of vacation rental investment and discussed in greater detail in Vacation Rental Confidential, the in depth book showcasing the Live Swell Proven Process.
How Estimate Vacation Rental Expenses
One of the great things about being a vacation rental owner or manager is the math is pretty simple, it certainly not calculus or rocket science. The problem, however, is most people “miss” expenses, just don’t think of them or underestimate them. Not including ALL vacation rental expenses in an analysis can turn out real ugly. Heres the math:
So, take all “rental revenues” + and other “revenues” and subtract the sum of all the “expenses.” Here is an example “profit and loss” statement:
Notice the specific line items for all the operating expenses of this business; accounting, advertising, depreciation, entertainment, software etc.
Vacation Rental Spreadsheet Expenses Calculator
If you have made it this far in this post you are like us, you are serious about managing your vacation rental expenses and making wise vacation rental investments. This mini vacation rental spreadsheet expenses calculator was developed from components of our more complex Vacation Rental SuperAnalyzer. This is what it looks like, you can use this as a model and customize one to your vacation rental, it will require you invest some time to put this together and wire it up. As an alternative, you may consider purchasing ours, already built and customizable to most vacation rental expenses. For a very small investment it won’t take you very long to get an accurate look at your vacation rental expenses, see our Vacation Rental Resources.
The OPEX Ratio and How it Applies to Vacation Rental Expenses
All successful and sustainable businesses have an operations and fulfillment process for their product or service. Most vacation rental owners and micro-entrepreneurs do not (1) have their business systems documented or (2) have access to a business model. Most tasks still get done; yet the tasks likely don’t get done the same way all the time. We believe that reproducible systems = predictable results.
An important metric to look at to compare operational expenses across industries is the “Operational Expense Ratio” or “OPEX Ratio.” This ratio gives us, in percentage terms, the percentage of gross revenue that accounts for the total expenses of any operation.
In hospitality and vacation rentals, that number, on average, is in the range of 60–80 percent (From: Leonard Baron, “Investing 101: Estimating Rental Property Expenses”). Sounds high? Yes, it is. However, the reality for each property does depend on many factors, like approach, process, managers and mostly leadership. For comparison, traditional long-term rentals have an OPEX ratio in the range of 35–50 percent, which means that more of each revenue dollar is retained by the business, and that’s a good thing.
Vacation Rental Expenses Measured is a Vacation Rental Managed Wisely
You win in vacation rentals and hotels when expenses are managed wisely and stronger-than-average income is produced. In business, it’s easier to save a dollar of revenue than produce a dollar of revenue. This means we have a choice if we’re mindful and prudent of our vacation rental expenses. We have an opportunity to identify areas for improvement and have more control over them.