How to Properly Forecast Expenses For Your Short-Term Rental Property?

If you’re thinking about starting a short-term rental property and are evaluating different options on the market, doing a financial forecast and analysis on it is pretty key. Not only it would help you predict how well your potential property would perform, but it would also give you a framework to compare the performance of different potential properties against each other.

Case in point, a single-family house with 4 bedrooms would have a different expense profile than a duplex with the same number of bedrooms. Understanding what may impact your costs is the key to making a good financial decision.

So let’s delve in and look at various costs you’ll encounter:

Traditional Property Ownership Costs:

Principal and Interest — assuming that you’re financing the property, this would be your debt service.

Property Taxes — property taxes can vary wildly from region to region. Especially if it’s your first property, you really want to check ahead of time as to what the taxes would be. In certain markets, we pay $10,000+ year in property taxes on a single property, so it can be substantial.

Short-Term Rental Ownership Costs:

STR Insurance — while getting traditional property insurance is easy, getting coverage for a short-term rental property is a tad more involved. Two of the most known options in the market are Proper Insurance and CBIZ. Alternatively, feel free to reach out to us and we can introduce you to a few insurance brokers who are familiar with the space and may be able to find you another option. In any case, you should budget on average $3,000 to $4,000 per year for comprehensive property and short-term rental insurance that adequately protects you.

Internet — whether you have a single-family house, a condo or a multi-family, you can typically just sign up for a single internet service account and then use signal extenders to ensure there is solid coverage throughout. This can range between $70 to $140 or more per month, depending on the speed that you opt for.

Electricity, Gas, Water & Sewer — unlike with a long-term rental where landlords rarely cover the cost of electricity, here you are responsible for all of the utilities. The actual amount will vary, of course, but if you need a ballpark estimate, put down $150 per month per each utility.

Airbnb Host Fee — if you’re listing your property on Airbnb, they will automatically deduct a 3% transaction fee of your gross revenues. Other platforms, such as VRBO/HomeAway and Booking.com, have even higher fees — although there are ways to offset them.

Supplies Cost — this category will include everything from cleaning supplies to any disposables (e.g. shampoo, toilet paper, paper towels, etc.) to any snacks or complementary items you may choose to provide (e.g. coffee, tea, snacks). It’ll also cover the occasional replacement of other items, such as towels, linens and — every once in a while — a piece of furniture that needs to be replaced. This can vary a lot depending on your audience, your style and the size of your property. However, you can generally allocate $75 per month per every room in your house.

Monthly Cleaning Fee — as an investor, you are going to be hiring a housekeeper to handle all of the turnovers for your property. On average, we pay between $18 to $22 per hour, although it does depend on each individual market. You can typically expect to spend about $200–250 per month per room that you have available. So if you have a 3–4 bedroom property, lean towards the higher range and plan for $750–1,000 per month. If you have 6 or more bedrooms, you can lean towards the lower range.

Software & Web Services — to effectively run and streamline your short-term rental operations, you’ll typically have to lean on at least a guest communication software, like Smartbnb, and on price optimization software, like PriceLabs or BeyondPricing. They aren’t too expensive typically, so you can just allocate $100–150 per month towards their cost.

Landscape Maintenance — depending on your location, you may have snow shoveling to deal with in the winter and landscaping during the warmer seasons. You can budget $100–150 per month towards this and expect it to average out during the year.

Repairs & Improvements — this category will vary widely depending on the property itself and the amount of deferred maintenance you have. With the assumption that when you bought the property, you took care of all of the pressing issues, you can typically set aside about $150 per month towards regular maintenance.

Monthly Reserve For Capital Expenses — similar to the above, but with the focus of saving up towards larger expenses, we typically recommend that you set aside about 2% of your revenues towards future larger expenses. Be it a large appliance, sewer line issue or a roof repair or replacement, this will build up a fund that you can use towards those expenses.

Airbnb / Property Management Fee — some investors manage their properties themselves and others choose to outsource that task. For the latter, the Airbnb/Property management fees will vary but typically range between 15–25% of gross revenues.

Occupancy Taxes — many of the markets require the hosts to collect and remit occupancy taxes. Fortunately, in most areas, Airbnb can automatically do that for you. Since the taxes are paid by the guests and added on top of their fees, we consider this a pass-through expense and do not assign a value to it.

Summary

When you’re evaluating properties, we recommend that you set up a spreadsheet and assign default values to each of these categories.

Then, for each specific property, you can tweak the actual numbers depending on how many bedrooms and units there. For example, a property with more kitchens and bathrooms may require more work for the housekeeper, so you may want to increase the cleaning cost by 10–20% to account for that.

Moreover, it’s good practice to run scenarios with different mortgage options to answer the question — should I put down 20%? 25%? Or more?

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If you need any help with running an analysis on one or multiple properties, we’d be glad to help! Feel free to reach out at any time at [email protected].