How to lower property management costs on luxury STR vacation rental property

[AJ Wong]

When analyzing a luxury short term rental (STR) vacation home for investment in today's mortgage rate environment, the ROI & margins can be extremely tight.

Investors that are looking to offset their investment costs can typically expect to cover the majority of operational and carrying costs, but those seeking positive strong cash flow and ROI can find limited cost saving inputs.

One area of emphasis to improve cash flow is property management. Typically, short term vacation rental management in our area of coastal Oregon can typically range from 20-35% of the gross revenue!? This is prohibitive to profitability and can also include hidden factors that can make AirBnB listing less attractive. 

Many national STR PM companies working on a percentage of gross income (Daily rates + cleaning fees) charge an elevated cleaning fee. This can reduce occupancy and reduce the average nightly rate (as compared to a higher nightly rate and lower cleaning fee).

The financial solution can be self management or a full time manager. 

Particularly for luxury or higher revenue rentals (let's say above $75-100k in gross annual revenue) a 25-30% management fee equals a full time employee wage/salary. For those STR operators and investors that are not comfortable self managing (communication with tenants, scheduling cleaners and organizing supplies) one option is to hire a designated full/part time employee.

For $1-2k per month operators can generally hire a dedicated local 'Superhost' or experienced local manager/cleaner while enhancing the quality of services rendered. I have several clients that 'self-manage' or have a full time private manager that has enabled them to offer their manager/cleaner (occasionally the same person or couple) double the hourly cleaning rate (compared to national PM companies) while reducing the booking/cleaning fees for tenants. 

For example it is common for professionally managed luxury STR's to include $3-4-500 cleaning fees for property footprints that should only cost $150-250. House cleaners of national property management companies typically earn nearer to minimum wage and have low incentive to actually 'care' about the condition. So out of the inflated cleaning fees, both the worker and owner earn less AND could experience reduced NET occupancy due to the overall cost of stays being less competitive.

Lastly, in areas that are seasonal, operators can consider mid term rental (MTR) for the off season period at a significantly reduced average daily rate. Here in Oregon the beginning of the year (Jan/Feb/March) foot traffic typically slows down considerably. Often, properties priced at peak season rates can have very low occupancy during the winter. By leasing the property on an extended weekly or monthly basis, operators can increase annual gross revenue significantly. 

Any tips, tricks or strategies you're implementing on your luxury STR vacation rental that has boosted ROI?

[Collin Hays]

The original post assumes "all other things being equal" with property managers, and that isn't the case.

The cheapest shirts are at Dollar General, but that doesn't necessarily mean they are the best.

When it comes to property management, it's not what you are paying, but what you are getting.  If PM #1 is charging you 40%, but they are fetching $100K a year in rents, you are netting $60,000.

If PM #2 is "only" charging you 20 percent but they are fetching $70,000 in rents, you are netting $54,000.  So which PM is cheaper?

Yes, the Property Manager's commission is important. But more important, what do their clients have to say about them?  

The same is true for self-management. The self-manager isn't paying a property manager, but if the self-manager is leaving out the "managing" part, then almost certainly (s)he is giving up lost revenues that far exceed paying someone to actually manage the property.

Managing means you are responding promptly to all inquiries, monitoring rates and comps daily and making adjustments as necessary, ensuring that the property is safe and clean, that everything is operational, and quick responses and resolutions when something goes haywire.  

Most aren't up to the task.