If you want to embark on a healthy and successful vacation rental project, you’ll need to make a few calculations and studies beforehand to be sure of your rental investment. In this article, you’ll find out how to calculate the profitability of your vacation rental, what charges are attached to a rental business and what other things to consider.
Why start a seasonal rental business?
You may have a number of different reasons for launching a seasonal rental business. For example, you may want to buy a second home for your personal vacations and rent it out to travelers when you’re not staying there. Another reason could be an investment for the future. You could also launch your own business or supplement your income. There are many reasons to get into the short-term rental business, but they all have one thing in common: profitability.
After all, no one wants to embark on a loss-making project that won’t be profitable. This is where calculating a seasonal rental’s rate of return comes in.
How do you calculate the rate of return on a seasonal rental?
To get an idea of your gross rate of return for your vacation rental, you’ll need :
- The purchase price of your property, including notary and agency fees
- Your estimated annual income
Let’s take a concrete example. If, for example, let’s say you buy a property that can accommodate two travelers for 220,000 euros, all expenses include. You then intend to rent out your property for 120 nights, for example. Your plan to charge 100 euros per night.
So you calculate your rate of return as follows: income/purchase price x 100
In our example: (100×120)/220000 x100 = 5.4%.
This calculation will enable you to define your gross rate of return. To obtain your net rate of return, you need to deduct your fixed costs and expenses.
What are the different charges for seasonal rentals?
To obtain a net rate of return, you’ll need to deduct various expenses that run over the course of a year.
Renovation work
Perhaps your property is in need of some freshening-up or a more substantial refurbishment. Whether it’s a dab of paint, a change of the bedding, a complete refurbishment or even a complete redesign of the apartment, all this costs money and generates expenses of varying degrees. You’ll need to budget for these.
Management costs
Depending on your situation and your project, you may have to pay management fees. If you don’t manage the property yourself, this could be a concierge service or a rental agency.
If you manage your own property with a channel manager such as Smoobu, remember to include these fees in your expenses.
The bank loan
You may not have inherited a property or bought it outright with all your savings. As a result, you have taken out a bank loan. Your monthly installments are included in your expenses.
Maintenance costs
A cleaning company may be called in to freshen up and maintain your seasonal rental between bookings.
Co-ownership charges
If your rental is in a condominium, you’ll also have to pay condominium fees for upkeep and maintenance of common areas. From time to time, you may also have to carry out work on the facade, roofing, painting of shared areas, etc.
Fixed charges
Whether it’s your electricity, water or heating bills, or your comprehensive insurance, there are many costs to take into account.
Don’t forget that you’ll also have to pay property taxes, which are generally calculated according to the value of the property.
Taxation
There are different tax scenarios, depending on your project, the income you generate and the status of your company (if you have one). Don’t hesitate to consult the official websites for more specific information.
Marketing
If you advertise your vacation rental on Google, for example, or on social networks via sponsored publications, this all has a cost. So be sure to factor in your marketing and communications budget where appropriate.
One-off unexpected costs
A hot water tank or radiator that breaks down? A change of bedding? Bringing the electricity meter up to standard? You could be faced with a number of unforeseen events. It’s a good idea to set aside a budget for unexpected costs.
How can I get the most out of my vacation rental?
Geographic location
Geographic location will play an important role in your vacation rental business. Tourist areas are bound to have the wind in their sails, but competition can be just as fierce. For this reason, market research is highly recommended. An apartment or house by the ocean in a seaside resort, or in a good location in general, is sure to attract potential travelers!
In addition to tourist areas, cities are often the preferred destination for a stay with friends, a weekend away as a couple, or a few days away on business trips. Nature holidays are also increasingly attracting travelers in search of hiking, digital detox and reconnecting with the essentials.
The competition
Your competitors will also play a role in the profitability of your vacation rental. If there are a lot of them in the area, and supply outstrips demand, for example, then you may not get the number of bookings you expect. As a result, you may not have the expected occupancy rate, and therefore the associated income.
In terms of competition, it will be important to analyze it to see how your project stands in relation to them, and this will also help you define the price per night.
In any case, differentiating yourself from the competition is an asset you can bank on.
Your project / your concept
What you offer travelers will also contribute to the interest they show in your listings on booking portals before making a potential booking. Focusing on quality, cleanliness, premium services, attractive interior design and, why not, an unusual type of rental are all serious avenues to consider in order to boost the appeal of your offer and, a fortiori, your profitability.
Optimal customer experience
Offering your travelers the very best will indirectly increase your profitability. Indeed, a satisfied guest will give you an excellent rating on booking platforms. So, by capitalizing on a quality guest experience and the reviews that testify to it, you’ll inspire your future travelers to book with you and not elsewhere. Your occupancy rate will rise, and so will your revenues.
In conclusion
It’s important to note that this information and these calculations provide an estimate of the profitability of your vacation rental, but other factors such as actual occupancy, seasonality (high and low season), competition, and unforeseen costs can influence the actual results. We therefore recommend that you carry out a thorough market study and consult a real estate professional or accountant for advice specific to your situation.
