Calculating the &quot;Cleaning Fee&quot;

Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes

3y

Quote from @Jeremy Horton:

How do you personally calculate the cleaning fees?

I've been running into this lately in my STR analysis. I have talked to PMs in the area and am told the "cleaning fee is a pass through cost" - I understand that the guest "pays" the cleaning cost but this is still worked into the ADR from Air DNA - AirDNA's gross revenue is calculated as (Nightly Rate + Cleaning Fee)/# of Nights booked. So we can see the cleaning fee is added into the ADR and thus the gross revenue. So when you run analysis, the cleaning fee must come back out to calculate your total monthly expenses - if I'm understanding this right?

The other thing I've heard is that the cleaning fee can be incorporated into CapEx, Repairs/Maintenance, Booking Fees (I typically run these all at 3%). If you do incorporate the cleaning fee this way, it makes sense that you would need to increase those percentages to equate to what an additional cleaning cost would be.

The thing I'm running into is cleaning is a significant expense - I'd estimate at ~700 month for a reasonably sized place, on average, annually. This is 7-8k/year in cleaning. I can have pretty good numbers then add that in and boom - out the window that one goes.

I've attached a picture of a basic STR spreadsheet, that may describe what I'm talking about better than I can describe it in words lol.

Please let me know your thoughts and how you personally like to do it! I am always open to learning and listening

Yes, smart of you to figure this out and do research. You are looking at about $50 a room and 80 times a year. So a 2 bed $8,000 minimum cleaning fees.

1 Reply

Chase Hoover

Real Estate Broker · Staunton, VA · Member since 2019 · 194 posts · 216 votes

3y

Are you overthinking this a bit? Figure out what your cost is to clean each turnover: the amount your cleaner charges plus turnover supplies (toilet paper, paper towels, toiletries, etc), and laundry service (if you use one). Then, add the proper % to cover your taxes (since this is considered gross revenue). I usually pad in a few extra $ for the ongoing costs of replacing linens, dishes, etc every now and then. Charge this to the guest, and you're good. Pull the trigger man!

1 Reply

Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes

3y

How are you getting 4900 monthly income with an ADR of $205 with 12 days a month? Seems like you are projecting on 80 percent occupancy. If this is the case, then it seems to be a break even deal for you factoring in cleaning fee.

Nathan GesnerBusiness Member

Moderator

Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes

3y

Quote from @Jeremy Horton:

For the purpose of analysis, I would remove it from the equation. If you charge $100 for cleaning and spend $100 for cleaning, it's a wash and shouldn't affect the financial performance of the property, therefore it's just noise.

In reality, your cleaning fee should generate income, but it won't be a significant amount. You may charge $8,000 a year and collect $10,000 for a net income of $2,000. That's not enough for me to make a purchase decision.

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Jeremy Horton

OP

Rental Property Investor · Somewhere over the Rainbow · Member since 2021 · 1k+ posts · 1k+ votes

3y

@Chase Hoover

Hey Chase, the thing is I'm looking at gross revenue numbers then calculating backwards to find what price I should purchase at to get the return I want. Only way to do that is to calculate monthly expenses. Cleaning would run about 8k year or ~700/mo. This is a pretty big expense.

So to find your net revenue, or what you're actually making, you need to calculate all expenses, especially cleaning. This is the reason why lots of people think they're making a ton of money, then when you look at their balance sheet, they pulled in 4k/annual net on a 80k investment. They say wow I make 40k this year, 3k month expenses, 700 month in cleaning...and they netted a measly 300/mo.

I'm definitely going to pull the trigger when the numbers work out. If they don't, that $ could be better somewhere else.

Thoughts on that?

Jeremy Horton

OP

Rental Property Investor · Somewhere over the Rainbow · Member since 2021 · 1k+ posts · 1k+ votes

3y

Quote from @John Carbone:

How are you getting 4900 monthly income with an ADR of $205 with 12 days a month? Seems like you are projecting on 80 percent occupancy. If this is the case, then it seems to be a break even deal for you factoring in cleaning fee.

It's a duplex - so each side 205 @ 12 days a month. Times 2 for 2 units. The total monthly income is the summation of both units (205*12)+(205*12)

Jeremy Horton

OP

Rental Property Investor · Somewhere over the Rainbow · Member since 2021 · 1k+ posts · 1k+ votes

3y

Quote from @Nathan Gesner:

Quote from @Jeremy Horton:

For the purpose of analysis, I would remove it from the equation. If you charge $100 for cleaning and spend $100 for cleaning, it's a wash and shouldn't affect the financial performance of the property, therefore it's just noise.

In reality, your cleaning fee should generate income, but it won't be a significant amount. You may charge $8,000 a year and collect $10,000 for a net income of $2,000. That's not enough for me to make a purchase decision.

Agreed - mostly - the thing is I'll generally screen properties based on their purchase price and gross revenue - basically like the 10% rule where 50k/500k = ~10% return. Super basic but just a screening metric.

Thing is - ADR is skewed because it has the cleaning fee added in but you still have to pay the cleaner. So if you use the ADR from pricelabs/AirDNA you have to subtract back out the cleaning cost.

It seems there are 2 ways to do this - use the ADR (from AirDNA/pricelabs) and subtract back out the cleaning cost OR use the nightly rate (without the cleaning charge added in - this would reduce your gross income) and consider the cleaning charge awash since it is a passthrough charge.

The issue I'm having is projecting revenue. If I use numbers that include the cleaning cost - it has to come back out somewhere, right?!

Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes

3y

Quote from @Jeremy Horton:

Quote from @Nathan Gesner:

Quote from @Jeremy Horton:

For the purpose of analysis, I would remove it from the equation. If you charge $100 for cleaning and spend $100 for cleaning, it's a wash and shouldn't affect the financial performance of the property, therefore it's just noise.

In reality, your cleaning fee should generate income, but it won't be a significant amount. You may charge $8,000 a year and collect $10,000 for a net income of $2,000. That's not enough for me to make a purchase decision.

Agreed - mostly - the thing is I'll generally screen properties based on their purchase price and gross revenue - basically like the 10% rule where 50k/500k = ~10% return. Super basic but just a screening metric.

Thing is - ADR is skewed because it has the cleaning fee added in but you still have to pay the cleaner. So if you use the ADR from pricelabs/AirDNA you have to subtract back out the cleaning cost.

It seems there are 2 ways to do this - use the ADR (from AirDNA/pricelabs) and subtract back out the cleaning cost OR use the nightly rate (without the cleaning charge added in - this would reduce your gross income) and consider the cleaning charge awash since it is a passthrough charge.

The issue I'm having is projecting revenue. If I use numbers that include the cleaning cost - it has to come back out somewhere, right?!

So your cleaning fee could actually be higher with a duplex. You won’t always have turnovers on the same day. A cleaner to go out each time will be a fixed cost, if they go out to do 2 at same day, it’s likely less of an expense (depending on your cleaner).

You shouldn’t be running numbers on 40 percent occupancy though, if you can break even on 50 percent occupancy or less then it’s generally a good deal though. Are you pulling $205 a night for each unit so $410 a night? If so makes sense, if it’s $205 for both, then it’s not a good deal and I’d pass.

My number 1 metric is, will it break even renting 12 days a month (just 3 day weekends), and if it does, I’ll pull the trigger.

Chase Hoover

Real Estate Broker · Staunton, VA · Member since 2019 · 194 posts · 216 votes

3y

Quote from @Jeremy Horton:

@Chase Hoover

Hey Chase, the thing is I'm looking at gross revenue numbers then calculating backwards to find what price I should purchase at to get the return I want. Only way to do that is to calculate monthly expenses. Cleaning would run about 8k year or ~700/mo. This is a pretty big expense.

So to find your net revenue, or what you're actually making, you need to calculate all expenses, especially cleaning. This is the reason why lots of people think they're making a ton of money, then when you look at their balance sheet, they pulled in 4k/annual net on a 80k investment. They say wow I make 40k this year, 3k month expenses, 700 month in cleaning...and they netted a measly 300/mo.

I'm definitely going to pull the trigger when the numbers work out. If they don't, that $ could be better somewhere else.

Thoughts on that?

Hey brother, totally understood - I've been in the STR game for 7 years and own 50+ units. You're right, but I still think you're overthinking it (respectfully). Instead of taking full stock in the projected ADR/gross revenue shown in airdna/pricelabs and trying to work this number backwards, run a comp analysis of other STRs in your area and build out your proforma breaking out your own projected rent, cleaning fees, other fees, and expenses.

Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes

3y

Quote from @Chase Hoover:

Quote from @Jeremy Horton:

@Chase Hoover

Hey Chase, the thing is I'm looking at gross revenue numbers then calculating backwards to find what price I should purchase at to get the return I want. Only way to do that is to calculate monthly expenses. Cleaning would run about 8k year or ~700/mo. This is a pretty big expense.

So to find your net revenue, or what you're actually making, you need to calculate all expenses, especially cleaning. This is the reason why lots of people think they're making a ton of money, then when you look at their balance sheet, they pulled in 4k/annual net on a 80k investment. They say wow I make 40k this year, 3k month expenses, 700 month in cleaning...and they netted a measly 300/mo.

I'm definitely going to pull the trigger when the numbers work out. If they don't, that $ could be better somewhere else.

Thoughts on that?

Hey brother, totally understood - I've been in the STR game for 7 years and own 50+ units. You're right, but I still think you're overthinking it (respectfully). Instead of taking full stock in the projected ADR/gross revenue shown in airdna/pricelabs and trying to work this number backwards, run a comp analysis of other STRs in your area and build out your proforma breaking out your own projected rent, cleaning fees, other fees, and expenses.

What chase is saying is correct, but it’s easier said than done for people starting out in a new area. Experienced investors know this information, and to have a full understanding of the market takes a lot of time and effort. With the high property values and high rates, margins are compressed now. I do think the days of using airdna and making an offer with a weekend of analysis are over (atleast for now.) if I was buying in Shenandoah I’d be using chase, he knows his stuff.