Why are we so focused on occupancy??

24 Replies

 In working with investors in a tourism-based market, vacation rentals are a constant discussion. Not only because other people are interested but because I am shifting my personal portfolio to focusing on them as well. The most common question I always get is, “Tim, you know the market, how much could I get per night and more importantly how often will I stay booked??”. Typically I go through the whole spiel about the various factors that can affect your ADR (average daily rate) and occupancy. Now I’d like to propose a question, why do we focus so much on occupancy when the base rate is what we should be focused on?

Let say for instance someone wanted to stay completely booked. Now I know it is rare to be 100% booked as there is always that stray Wednesday in there that no one wants but we want to look conceptually here. If high occupancy is the focus, they could set an absurdly low rate of $10/night and allow single night stays and they would stay booked 100% of the time in any market. That’s great and all but $300/month is nothing to write home about. Normally when I give this ridiculous example, I am asked, “Well how high can I raise the rate and still stay fully booked?”. Once again the thought is right but the question is wrong.

If you have a property that for $100/night is a complete steal and would keep you 100% booked, you are looking at an income of $3,000/month. Yes, yes, I know, there are factors like taxes and things that cut into it but for this discussion, we are talking gross numbers to keep things simple. Anyway, back to where we were. In order to make that same $3k at $125 you only have to be booked 24 nights. That’s a difference of 20% occupancy!! At $150, it becomes only 20 nights and brings you down to needing a 67% occupancy. These prices while they are increased are not outside of the range you could expect out of a house that is a steal at $100.

Now here comes the fun part! If you book your house 80% at $125 to reach the $3k, you are still left with 6 days empty. If those remaining days had their prices dropped down to $100, you could bring in an additional $600. That’s a 20% increase in your profits!

The next question becomes, “How high should my prices be and when should I start to drop them?”. The answer to this question is knowing when are the most people booking. When I first started working on bettering my pricing on my vacation rentals, I ran across sites like BeyondPricing & Wheelhouse. I personally use Beyond Pricing as it had certain integrations that I needed at that time. In Beyond Pricing have what they call a health score that helps you to gauge the performance of your unit. This is based on your occupancy rate for the next 30 days being close to 50% and your next 90 days being around 32%. The reason these rates are chosen is based on the percentage of people that book a unit within those time period. They found that roughly 50% of bookings happen within the last 30 days before their arrival!!! If you are fully booked for the next 30 days, you are missing out on half your potential clientele! Now obviously this will vary market to market, so I needed to know what were the booking patterns for Galveston. So using a tool called AirDNA which scraps data from AirBnB, here is a chart of booking % based on days away from stay:

Now let dive into this! Obvious by the time of check-in all bookings are booked or else they wouldn’t be there. But 6 days out, only 68% of bookings have been placed! That’s 32% of people who book within a week of their arrival!! If we look at within 30 days, that number jumps to 69% of renters haven't booked yet! If you are fully booked for the next month, you are missing out on 2/3rds of your potential renters!

While I understand that these percentages are an average across the island and there are other factors that can affect these, it is good to have an idea of the market you are in. Now I’d love to say that I try to follow these numbers and stay at 31% occupancy for my next 30 days, but I personally still strive to keep my average at about 50%. Even with all the data, there is a balance of comfort and risk that has to be taken into account.

Next, we need to figure out how to adjust our pricing for those last days. When you use tools like Beyond Pricing and Wheelhouse, the best thing is they adjust your prices for you. They will adjust based on seasonality, day of the week, events, and days left until a date. This is amazing for helping to not forget to adjust for major events! If I had kept my normal rates instead of adjusting for Biker Rally, I would have missed out on $200 extra a night on each of my 2 bedroom cottages! Now to further help and fill in these last-minute gaps, I suggest implementing last minute discounts. With Beyond Pricing, these percentages off can be set for the last 28, 21,14, 7, & 3 days. This allows for those people looking for a last-minute deal to fill in the gaps on your calendar. Personally, mine are set at 10% for 14 days, 25% for 7 days, and 33% for 3 days. This is an area I am still experimenting with but can be a valuable tool.

I say all this to make this point. We all want high occupancy because an empty rental isn’t making anyone money. However, occupancy shouldn’t be the end goal of success. Instead, it is a tool by which we measure the effectiveness of our pricing. It is a measurement by which we make adjustments on a regular basis. Once we’ve accepted this, we can move are the focus to making improvements to our properties to help us to raise our base price. This is what will truly make us successful and competitive in a vacation rental marketplace.

What are your thoughts?

Timothy Church, Real Estate Agent in TX (#668626)
409-877-4159

Nice analysis @Timothy Church and have often asked myself the whole chicken/egg question on ADR vs Occupancy.  As you mentioned it's really based on your market and guest demographic I think. My ADR is what I used to validate the 'quality' of my guest demographic, meaning I simply do not want anybody that is only willing to spend $100/night to stay at my home as I know it's not going to be treated well.  That also goes for last minute bookings.  I want my bookings to be at least 30-60 days out as those are people who are planners and 'usually' more responsible while on my property. 

So that being said since only ADR and Occupancy collectively made your total revenue and since I put more weight on ADR I, therefore, must be selective and/or accurate about the occupancy rates in the markets I'm targeting.  Once again though, this totally depends on your business model and/or market in my opinion. 

Great points and thanks for the post! 

@Timothy Church

I'll be honest, I did not read your whole post because I believe you probably answered your own question. We focus on occupancy because it is a good measure of how effectively and efficiently you are managing your asset. People who know what they are doing in this business know that 100% occupancy is a good indication that your rents are too low. You are able to determine that because you focus on occupancy. It also highlights all of the other points you made in your essay. Again, you gain that insight by focusing on your occupancy rate. Your point is that your whole goal shouldn't be 100% occupancy, not that we shouldn't focus on occupancy.

@Timothy Church , Great post you nailed it!

I look at my pricing multiple times per week. I use the new tools on HA/VRBO that show me for my area occupancy, average rates of booked vs un-booked, it shows how many inquiries are coming in for a given day so that you can see demand rates ramping up. You can use these tools to increase or decrease your rate based on the competition and market demand. Using these tools on HA/VRBO I also adjust my prices on Airbnb without having to pay for AirDNA data.

Most of my rentals come via HA/VRBO so the free tools they provide are priceless. If the bulk of your rentals come in via Airbnb then it might be worthwhile to pay for the data you need.

Before these tools were rolled out I had a spreadsheet with links to some of my competition and I would see how full their calendars were and what rates they were charging. I don't need to do this manual process anymore.

Also a few cheap rental days in the off season helps your ranking and hopefully reviews which both boost your search position. These people might come back as repeat guests in the peak season if they liked your house.

Originally posted by @Jon Crosby :

Nice analysis @Timothy Church and have often asked myself the whole chicken/egg question on ADR vs Occupancy.  As you mentioned it's really based on your market and guest demographic I think. My ADR is what I used to validate the 'quality' of my guest demographic, meaning I simply do not want anybody that is only willing to spend $100/night to stay at my home as I know it's not going to be treated well.  That also goes for last minute bookings.  I want my bookings to be at least 30-60 days out as those are people who are planners and 'usually' more responsible while on my property. 

So that being said since only ADR and Occupancy collectively made your total revenue and since I put more weight on ADR I, therefore, must be selective and/or accurate about the occupancy rates in the markets I'm targeting.  Once again though, this totally depends on your business model and/or market in my opinion. 

Great points and thanks for the post! 

 I definitely agree! When you are priced to low you can get the kind of guests that don't treat properties well. I have found that those guests can exist in any price range though. I've had a beach home going for $300/night get treated poorly yet have had guests in my cottages in the offseason at around $100 that left it spotless. Even had one that asked if she could do some gardening because she didn't have anything planned that day!

As for the planners vs the last minute guests, I honestly think that is more contingent on the market. In Galveston, we are a short throw from Houston. We get people who decide since the weather looks nice they will hop down to Galveston for a few days. Typically my bookers who book further out are those coming from a longer distance.

But the point we definitely agree on is it is a market-to-market type of situation. I'm just lucky enough to live in a tourism-based market.

Thanks for your input!

Timothy Church, Real Estate Agent in TX (#668626)
409-877-4159

Sometimes you give someone a better price if they book for a long time. In 2016 a guy and his girlfriend wanted to rent a STR of mine, he said he'd be working here indefinitely. I let him have a 2 BR house for $200/week. He ended up staying 81 weeks, and only left because his girlfriend was pregnant and he didn't want his kid to have a Kansas birth certificate. He wanted his kid to have a Utah certificate, where the guy is from.

During those 81 weeks, I spent $0.00 restocking it and my wife spent 0.00 minutes cleaning it.  The guy also referred some other people to me, they spent $400 to $600 per week on their houses.  The restocking and cleaning fees are another thing to consider.

btw, the guy is coming back after his wife delivers.

Originally posted by @Edward B. :

@Timothy Church, 

I'll be honest, I did not read your whole post because I believe you probably answered your own question. We focus on occupancy because it is a good measure of how effectively and efficiently you are managing your asset. People who know what they are doing in this business know that 100% occupancy is a good indication that your rents are too low. You are able to determine that because you focus on occupancy. It also highlights all of the other points you made in your essay. Again, you gain that insight by focusing on your occupancy rate. Your point is that your whole goal shouldn't be 100% occupancy, not that we shouldn't focus on occupancy.

 That was the basic point of the post exactly! High occupancy shouldn't be your main focus but occupancy should be used as a tool to measure performance and adjust rates. Mine was just a much more wordy explanation!

Timothy Church, Real Estate Agent in TX (#668626)
409-877-4159

It's about finding a balance.  At the most basic level, you want the maximum occupancy (100% for the sake of this discussion) at the highest rate per night.  I have two properties that are 100% booked for March at market rates.  Your $10/night example is unnecessarily ludicrous.  If one is observant of one's market, one will quickly figure out what the market can/will support in terms of a normal nightly rate.

Now, your point re: scaling to time is certainly valid - maximizing income will come with doing the research and learning what prices work in which timeframe, and adjusting accordingly.  Right now that's too much hassle for me, I'm satisfied with what I'm obtaining, but it will become a focus (after I've done the 500 other things ahead of that on my priority list).  

The optimal way to maximize income is to be that granular about it, but that also requires time that some might not have, and resources that cost money.  If your goal is to reach X level of income per month, it can be done at a higher base price and lower occupancy.  But at the end of the day, 100% occupancy is necessary to MAXIMIZE income - which is, in fact, the argument you end up making in your post above.

So that's why occupancy is such a focus.

Originally posted by @John Underwood :

@Timothy Church, Great post you nailed it!

I look at my pricing multiple times per week. I use the new tools on HA/VRBO that show me for my area occupancy, average rates of booked vs un-booked, it shows how many inquiries are coming in for a given day so that you can see demand rates ramping up. You can use these tools to increase or decrease your rate based on the competition and market demand. Using these tools on HA/VRBO I also adjust my prices on Airbnb without having to pay for AirDNA data.

Most of my rentals come via HA/VRBO so the free tools they provide are priceless. If the bulk of your rentals come in via Airbnb then it might be worthwhile to pay for the data you need.

Before these tools were rolled out I had a spreadsheet with links to some of my competition and I would see how full their calendars were and what rates they were charging. I don't need to do this manual process anymore.

Also a few cheap rental days in the off season helps your ranking and hopefully reviews which both boost your search position. These people might come back as repeat guests in the peak season if they liked your house.

 I'm actually very impressed with the new tool VRBO has been rolling out. They really help you to get a feel for the marketplace! Here in Galveston, my units tend to be split about 70% AirBnB & 30% VRBO so it is good to see data on both. 

For most investors, I don't recommend purchasing a subscription to AirDNA as you can simply use the free tools that are now available like you are. The primary reason I keep mine is since I work as a Realtor on the island, I reference the data with multiple clients. Free tools are great for your direct competition but it becomes more work to have all the data for the whole spectrum. Thank goodness we don't have to keep those spreadsheets anymore!

Timothy Church, Real Estate Agent in TX (#668626)
409-877-4159
Originally posted by @Paul Sandhu :

Sometimes you give someone a better price if they book for a long time. In 2016 a guy and his girlfriend wanted to rent a STR of mine, he said he'd be working here indefinitely. I let him have a 2 BR house for $200/week. He ended up staying 81 weeks, and only left because his girlfriend was pregnant and he didn't want his kid to have a Kansas birth certificate. He wanted his kid to have a Utah certificate, where the guy is from.

During those 81 weeks, I spent $0.00 restocking it and my wife spent 0.00 minutes cleaning it.  The guy also referred some other people to me, they spent $400 to $600 per week on their houses.  The restocking and cleaning fees are another thing to consider.

btw, the guy is coming back after his wife delivers.

 Got to love the long-term guests! They give you rates that while below short-term potential vastly exceed a normal long-term rental! Plus, in Texas at least, once you exceed 30 days consecutively they are considered permanent residents and are exempt from hotel tax. Between state and local tax, that's a savings of 15%. I do have weekly and monthly discount to encourage those as well. 

Great to hear! I would love someone to stay a year and a half at my units!

Timothy Church, Real Estate Agent in TX (#668626)
409-877-4159
Originally posted by @Julie McCoy :

It's about finding a balance.  At the most basic level, you want the maximum occupancy (100% for the sake of this discussion) at the highest rate per night.  I have two properties that are 100% booked for March at market rates.  Your $10/night example is unnecessarily ludicrous.  If one is observant of one's market, one will quickly figure out what the market can/will support in terms of a normal nightly rate.

Now, your point re: scaling to time is certainly valid - maximizing income will come with doing the research and learning what prices work in which timeframe, and adjusting accordingly.  Right now that's too much hassle for me, I'm satisfied with what I'm obtaining, but it will become a focus (after I've done the 500 other things ahead of that on my priority list).  

The optimal way to maximize income is to be that granular about it, but that also requires time that some might not have, and resources that cost money.  If your goal is to reach X level of income per month, it can be done at a higher base price and lower occupancy.  But at the end of the day, 100% occupancy is necessary to MAXIMIZE income - which is, in fact, the argument you end up making in your post above.

So that's why occupancy is such a focus.

 Yea the $10/night is typically said as a joke to clients who insist they have to have 100% occupancy so it is meant to be ludicrous!

I completely agree that learning the optimum price at each point throughout a season if far too time consuming and a major hassle! My point is if we know we can use price adjustments to fill up the gaps in a calendar, why not focus on maximizing the rate and therefore your income. Overall you do want to end up with the highest occupancy possible but focusing on regularly adjusting prices to maximize that return makes a big difference.

That's one of the reasons I advocate dynamic pricing tools. They allow me to go in on a weekly basis and adjust my price using occupancy as a measurement. It keeps my focus on keeping a balance of available vs booked days to maximize my income without me needing to go into deep analytics about the optimum price for any given time. There are far too many factors and like you said you have far too many other things to do, to be able to do this all the time.

I guess the better way to title it would be "Why are we focused on high occupancy instead of using occupancy as a gauge for price adjustments?" but that is a bit much for a title and it doesn't invite people to read it as much!

Thanks for your comments!

Timothy Church, Real Estate Agent in TX (#668626)
409-877-4159

@Timothy Church Don't get me wrong, I monitor my pricing and adjust over time etc. (and HA's new tool is pretty great), I just haven't been able to break it down as scientifically as you have yet!  Managing pricing is obviously key.  

AirBNB recently introduced "rule sets" that you can apply to specific dates that I've found helpful, as well - e.g. I have a 2-night minimum but when I get isolated days, I'll apply a rule that allows for one-night stays.  

I may start playing around with my minimum stays, too, and scale them down over time, but I don't offer discounts for longer stays so it may not matter that much. 

Anyway, all of this is in the pipeline for me, but I've also been busy just launching new properties so that's occupying most of my time right now!  :D 

I'm very new to this but I also really like the VRBO MarketMaker tool. I'm in a high-demand high-rate vacation area. I have been using the tool to gauge demand and competition, then set my prices manually -- not necessarily what the tool suggests.

For example I had a 3-day Monday to Thursday gap in my calendar and used MarketMaker to gauge competition, and lowered my rate to just under the competition, and picked up a booking for that hard to fill gap.

On the other hand, I looked at a week in July (peak season for me) where my daily rate is currently set to $700 for weekdays and $800 for weekends. The marketmaker tool said my competing properties (both booked and unbooked) are around $400. I refrained from lowering the rates, and still picked up a 7-day booking in that period. 

I guess it's a tool but not a solution.

Great post. I now too focus on ADR versus 100% occupancy with my STR as well. I’ve found that when I lower the price trying to get those odd nights in between bookings I tend to get guest that are not high quality guest. I hate to make such associations and assumptions, but in my honest experience the guests that typically book my “bargain” nights tend to leave the home in poor condition or damage an item that they neglect to mention to me. A classic issue is missing silverware, cups or towels. I can’t tell you how often those items go missing, but only when I lower my ADR dramatically to get that 100% occupancy for the month.

Is it recommended to put a home designated for only STR inside an LLC? I know for traditional long-term rentals it’s highly recommend, do the same recommendations and liability concerns apply for STR as well?

@Darnell J. For liability, it depends on how you are getting your bookings. Thankfully with typical booking portals, they understand that liability is an issue and have policies in place to protect you. If you are booking primarily outside these, it could definitely be worth it as the only protect you have at that point is your general liability insurance on the property. Obviously keeping your guests in a safe environment is critical in order to avoid these issues but accidents do happen. I prefer to hedge my bets and take all bookings through AirBnB and VRBO.

Timothy Church, Real Estate Agent in TX (#668626)
409-877-4159

@Timothy Church Thanks Tim, I only accept bookings through AirBnB and VRBO as well. I do love that AirBnB has now matched VRBO $1,000,000 primary liability coverage in their Host Protection Insurance program. I was considering adding Booking.com and TripAdvisor, but haven't looked into them much because of my success with AirBnB and VRBO. If anyone has any experience with hosting STR via TripAdvisor or Booking please do share, I'd love to hear about your experiences with other hosting platforms besides AirBnB and HA/VRBO.

I am not familiar with vacation rentals but from a multi-family rental standpoint, occupancy is only one data point in the income calculation and nothing more. What occupancy does tell you however, is how efficiently you are renting your asset. Price vs occupancy is just the same as supply and demand. If demand is high, you change pricing to meet and capitalize on the market. In my area I've always heard that for apartment buildings 85% Occupancy is the sweet spot that you are well priced.

@Darnell J. If you have a mortgage, my experience is the terms are better in your name. Hosts will than buy a separate umbrella policy, or add it to their current umbrella policy, or commercial insurance policy. 

@Julie McCoy I thought at one point you said you have your STRs in one llc as well as your co-hosting business in the same llc. Am I right? If so, does the co-mingling concern you from either a tax or liability standpoint? And do you have one insurance policy, either a commercial or umbrella, in place for that llc? 

I will be co-hosting/booking and thought of running it in the same llc we have for one LTR. I wasn’t sure if that was the best approach or just buy a commercial insurance policy for my co-hosting/booking company. As we read, Airbnb only allows cohosting for individuals and not businesses. 

@Timothy Church Good question. I focus on maximizing income within the fewest nights. It’s like the 70/30 rule, sort of. Weekends get the most nightly rate and we don’t discount them. They book 100%. So when 30% of the month(weekends)  brings in good money to net cash flow, we’re good. Less wear. We can decide to lower weeknights accordingly, if desired. 

@Nancy Bachety No, it's not me that has things set up that way.  I've certainly considered it and am planning to discuss it with my CPA, but my current understanding of the tax code is that I wouldn't get any benefit from it.  Re: insurance, I have commercial insurance policies on each of my rental properties, and will be getting a commercial umbrella policy to cover them all in the near future.

@Timothy Church and @Darnell J. I highly recommend you get insurance policies designed for STRs to cover your properties, and do not rely on the AirBNB/VRBO protection policies, which are NOT designed to replace insurance. Traditional homeowner's and landlord policies will not cover the business activity/liability of STR operation and you are thus exposed. There are multiple threads in this forum that discuss the topic at length.

Gross annual rental revenue and net rental are the only numbers I care about. I tell my property owners that I don't want to be the cheapest in town because you may not attract the clientele that will take care of your place. Higher rates may equal lower occupancy but at the end of the day, if higher rates at a lower occupancy equal lower rates at a higher occupancy, I'd pick the prior. Less wear and tear on your place and less work required to maintain the bookings, guest interactions, etc. There is also supply and demand at play here. During peak season, are there excess properties or is there more demand than there is supply? One of my property owners recently was worried that his friend's place was booking faster than his was. I told him that the less expensive supply will get booked first but then his will at a higher rate once the supply starts to deplete. I'd rather have my place book at $275 a night for 4th of July a few weeks later than my friend's who booked at $175 a few weeks prior.  

So, as mentioned above, it is definitely a balancing act but I like late bookings because the rate I can get is higher. The point above about the search rankings is something I will be considering though. 

My prices have stayed the same for the last 6 years.  In a nutshell it's $200/week for each bedroom in a house.  So a 2 BR is $400, a 3 BR is $600.  There are extra beds in all the houses that I do not charge for when business is normal or slow.  When there is some special event in town and demand is high, I charge if the extra beds are used.  Most of my renters are repeat, and they have come to expect the prices to be the same.  My main competition is a cheap motel.  Their prices have stayed the same for the last 6 years too.  

Great topic and conversation from everyone - thanks! It has taken me nearly 3 years to sort out what's most important to me. I have been tracking ADR (all in), ADN (avg daily net inclusive of cleaning fee as I bump my cleaning fee up to cover "consumables"), and ANR (less cleaning fee), Occupancy and all the other "stuff" the industry thinks I should be tracking. It is A TON of spreadsheet work for a handful of properties. Other than "it's interesting" it hasn't provided much value other than trends and validation of my approach. STR's are now the most significant source of my income so I am adjusting my focus and working backwards, e.g., "What are my monthly financial goals from this source and how do I maximize them?" In a seasonal market I am increasing rates on a nightly basis with moderate minimum stays (3 - 5 nights depending upon property type) in high season; weekly to monthly discounts for low season with longer minimum stays (capture traveling professionals since it's 115 degrees in AZ in mid-summer); and a variation of such for the transition month. I love spreadsheets so I'll continue to track my data points and not allow the "industry experts" to cloud my judgment and goals.

      Like @Wendy Schultz I focus on gross rental income as the primary objective.  Sometimes we leave a small amount of money on the table leaving a day here or there unbooked to make sure the homes are properly maintained (our average home has 8 bedrooms so it can be hard to do a full inspection, inventory, and perform maintenance on a same day turn).   I am always confused by people that try to maximize occupancy instead of income.  They are often not as correlated as one might think.  If you are at 100% occupancy you are probably leaving money on the table by not charging enough.

Thanks for the insight ! Great blog !

Join the Largest Real Estate Investing Community

Basic membership is free, forever.