Like any business, setting rates for your vacation rental can be a stressful challenge.
Set your rate too high and rentals could be slow or non-existent, or your guest may have expectations that are higher than you can deliver.
Set your price too low and you may not be able to earn a profit, or you’ll only attract people who abuse your property as a cheap rental.
How do you find balance? Here’s a four-step process to help you decide on a range that matches your property. Remember: While you want to research the information to set the right rate for your property from the beginning, you can fine-tune later.
Step 1: Know Your Costs
External factors carry a lot of weight when it comes to setting rates for your vacation rental, but to start you need to focus on yourself: What is the minimum you can charge to break even?
Even once you’re up-and-running with regular rentals, it’s unlikely your property will be occupied every week of the year; HomeAway says that the average vacation home is rented for 17.4 weeks a year (about 30 percent).
Calculate all costs associated with your rental, then conservatively estimate how many weeks you feel you can rent out your space; this vacation rental calculator makes the calculation easy, using industry averages.
Unless you’re in a particularly hot area or anticipating some big-draw special events, chances are you’ll face a loss in your first year or two as you build your business and reputation. This is part of the value of the next step: Comparing your minimum against the local averages.
Step 2: Know Your Competition
Once you’ve calculated what you need to charge to at least break even, you need to figure out how much you can actually charge by looking at typical rates for your area. If the market can’t support your minimum rate, you may need to re-evaluate your plans.
Vacation rentals have a few distinct advantages: They generally provide more space, more comfort, and are more economical for longer stays. However, there are always other options.
Other Vacation Rentals
Focus on rentals that are comparable to your property. For example, it you have a two-bedroom beach-front condo, focus your research on other two-bedroom beach-front condos. Depending on the size of your market (i.e. how much competition you actually have) you may be able to narrow your research even further according to amenities and other prominent features.
Bed & Breakfasts
B&Bs are a niche market where guests are more catered to than vacation home renters. As one B&B owner noted, “Most guests who stay at a B&B are looking for something special and are usually willing to pay for it.”
While you should be aware of B&B rates in your area, their relevance also depends significantly on the market you’re chasing: Only eight percent of guests stay at a B&B for three days or longer, so if you’re targeting two or three day rentals, the comparison will matter quite a bit. If your focus is weekly rentals, B&Bs will be less of a factor.
Writer Anne Frugé suggests this calculation when considering local hotels. “If your vacation home sleeps a family of 6, how many hotel rooms would they need?” she wrote in this ezine article. “If it’s 2, multiply the hotel’s nightly rate by 2. If your nightly rate is higher, perhaps your amenities make it worth the difference.”
Depending on the market and your own preferences, you may focus on weekly rentals or offer a nightly rate. A standard calculation is to set your nightly rate to 1/5 or 1/6 of your weekly rate (or multiply your nightly rate by five or six to calculate your weekly rate).
You may also want to consider a monthly rental rate, which follows a slightly different formula. This article from HomeAway suggests setting long-term rents – especially during shoulder or off-season periods – at a lower rate. “If it’s an off-season month, where you would normally rent two or three of the four weeks, then charge two full weeks rent. If it’s a low season where you wouldn’t normally rent anyway, then price it at approximately two week’s rent.”
Step 3: Setting Your Highs and Lows
As you collect information about your competition, take note of the following details:
- What do they note as high and low periods?
- What are their rates during these different seasons?
- When do they typically offer package deals, and how do those deals impact their rates?
The ‘peaks and valleys’ in the local market may or may not significantly influence you – catering to a particular niche can drive your calendar – but you can certainly use it as a guide.
The schedule for the school year (which can differ from one region to the next) can indicate active and slow periods, as can your local events calendar and other regional influences (i.e. ski season, hunting, fishing, the beach).
Considering your particular target market, are there specific times of year that will be more important to them that may not impact your competitors as much?
Another element to consider: Whether you want to set a minimum stay. Some vacation rentals always have a minimum stay requirement, while others set it during peak period only.
In some areas, local regulations also set requirements around short-term rentals, so make sure you’re up-to-speed on any bylaws that may impact your planning.
Step 4: Look At Your Property Objectively (Or Ask A Friend To)
You’ve set a rate for high season and low, as well as related weekly and nightly rates. How do they compare to your competition?
If your rate is higher than that of your competitors, do the amenities you offer justify the difference? If it’s lower than your competitors, are you underestimating the value of your property, or can you take action to close the gap?
Particularly when measuring your property against comparable vacation rentals, you may feel that your property has much more to offer than the rest – or, alternatively, that your competition has more to offer. Before inflating or deflating your target rate, ask an objective third-party, like a friend or relative, for their honest opinion.
What lessons have you learned about setting rates? Do you have any tips for new vacation rental owners? Please add your advice in the comments section below!