Unique Revenue Types in the Vacation Rental Industry
By Richard B. Evans, President of Revenue Report Card LLC & Author of “the Definitive Study of Vacation Rentals”
As time marches on, vacation rental companies continue to establish their own unique set of metrics and financial profit margins. Over the years traditional hotels have enjoyed an average Gross Operating Profit (hereafter "GOP") margin of 32.0%, yet their vacation rental counterparts can realize upwards of 70.0%. Here's why.
I'll discuss them below. Typical charges used in the industry include, but are not limited to:
- Housekeeping Fees from guests
- Damage Insurance Fees from guests
- Credit Card Fees from guests
- Maintenance Fees & Profit from homeowners
- Management Fees charged homeowners
For this analysis I'll use a fictitious 100 home vacation rental company that realizes a 72% occupancy, a $250 Average Daily Rate and an annual Average Length of Stay of 3.2 nights per reservation.
Unlike hotels, vacation rental companies typically do not provide daily housekeeping service for guests but instead charge guests a one-time housekeeping fee for those services that occur after departure. In addition, and for arguments sake, I'll estimate that 25% of all guests request additional housekeeping service during their stay.
In south Florida, on a 3 bedroom 2 bathroom luxury home, a vacation rental company might charge guests $250 for housekeeping and, in turn, pay $85 to an independent to perform that service. Hence, for each reservation a $165 profit will be realized.
Annually, the above metrics create 8,213 reservations earning a housekeeping profit of $1,355,063. Add housekeeping services provided during guest stays, at a reduced rate (and related cost), and you'll add $102,656 for a total profit on housekeeping of $1,457,719 (see Illustration #1).
Damage Insurance Fees
Security deposits typically taken by vacation rental companies from incoming guests, are burdensome, time consuming and frankly an accounting nightmare. Companies are beginning to move away from this in lieu of requiring guests to pay one-time damage insurance fees. This insurance can protect companies against uncollectable damages from $3,000 to $5,000 (sometimes higher) per incident; depending on the coverage purchased.
What I see as more typical in south Florida is the vacation rental company charging guests $99 per reservation, instead of taking a security deposit, and in turn paying an insurance company (like CSA Travel Protection; Rhonda is National Account Executive; 858-810-2386 ) $19 per reservation. A profit per reservation therefore, of $80 provides an annual profit from damage insurance on the scenario presented above of $500,963 annually.
Based on what I sometimes see, some vacation rental companies will charge guests a damage fee and self-insure. Needless to say, in this case, this would result in the full amount collected of $813,087 (minus any damages incurred) increasing both GOP and the bottom line.
I provide Rhonda's phone number above because so many that I speak with have difficulty finding information on damage insurance; I have no affiliation.
Credit Card Fees
Credit Card fees provide a sizeable expense offset and sometimes a small profit. I see many vacation rental companies charging guests 3.0%. I'll assume here that vacation rental companies, with 100 homes or more, are able to secure credit card merchants who charge 2.7%. The overall reduction of credit card cost (assuming that 95% of all guests pay with credit cards) in this example would be $187,245 (see illustration #1); included in this cost savings is a profit of $18,725.
- Instead of charging homeowners for lightbulbs, batteries, remote controls, simple plumbing and paint touchups some vacation rental companies will charge homeowners a flat monthly fee of, let's say, $25 to cover these costs. In our example this would generate $30,000 annually with an estimated cost of $20,000 for a profit of $10,000.
- Larger vacation rental companies, with appropriately skilled maintenance staff, will mark up repairs & maintenance by 20% to 30% for jobs undertaken. Unlike traditional hotels, vacation rental company maintenance departments could be viewed as "profit centers". I show a net profit in Maintenance Jobs performed of $12,500 annually (although this could be quite a bit higher based on what is needed in homes).
Even when adding 20% to 30% to labor and material cost the homeowner will usually be provided with a substantial cost savings to that offered by independent 3
A number of vacation rental companies charge homeowners a management fee that is above and beyond the revenue split shared. Here I'll use a 3% management fee. On the above referenced this would generate annual management revenues of $197,100.
All items mentioned above substantially increase vacation rental company GOP to levels described. With discussed additional revenue types, profit centers and cost offsets the vacation rental company can look to GOP to be at or around 70% (see illustration #2- a pro forma created for a previous article).
Additional revenue types to those shown vary and are often predicated by what other vacation rental companies in different areas are charging guests. Revenue types can also include airport transportation, "resort fees", parking fees, refrigerator stocking fees, chef services, annual towel & Linen fees, deep cleaning fees and the like.
Although Illustration #2 was not created from metrics described in this article, it highlights the many revenue types used and provides a full look at the components used in arriving at a 70%+ Gross Operating Profit in vacation rentals.
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