The decision to invest in vacation rental properties shouldn’t be taken lightly. While a rewarding and profitable business, you may find that there is more involved than just putting out advertisements, making bookings and collecting money. There are maintenance costs, taxes, marketing fees, and of course, unforeseen expenses.
By building a comprehensive business plan, you will remove at least some of the mystery as to what will lie ahead with your new property management endeavor. The following guide will help you to organize your thoughts and lay out a clear plan as to how your rental business will be successful today and in the future.
A simple task that allows you to really lay out your business plan in just a few sentences. This is a basic summary of your business plan, so there is no need to stress out over the details. Keep it simple and answer the following questions:
Exactly who is your target demographic?
- Lone travelers
- Large groups or organizations
- Business travelers
What kind of property do you have?
- Small house
- Large house
- Private room
- Multiple properties
Where is your property located, and what types of travelers are most common in that area?
- Family vacation
- Business trips
- Romantic getaways
- Family occasions (reunions, weddings, etc…)
When do people visit your area?
- Certain seasons
- All the time
Why do you want to rent this property?
- Trying to earn a few bucks?
- Starting a long-term business?
- Is it an extra property you want to pay for itself?
- Do you have an extra room going to waste?
These are some basic questions that will help you formulate your corporate summary. Answering all or only some of these questions is certainly not necessary, but this is a great place to start if you need help organizing your thoughts.
Remember, this is just a summary of your business plan and details can be worked out later.
Company & industry analysis
Now it’s time to get to the details! When performing a company/industry analysis, your goal should be to find the characteristics that make your company and properties stand out in your market, and what price point you should be shooting for.
In short: What makes you better and more valuable than the competition?
Visit any listing site and you’ll likely find hundreds if not thousands of other properties in your destination. Standing out will be a key to your success.
This is going to take some thought and some research. You want to make sure that you’re offering a unique experience while still keeping your property desirable and affordable to the largest possible audience. Ask yourself these questions to get started and you should find a niche that fits your property perfectly:
What makes my property special?
- What attraction or activities are easily accessible from my property?
- Does my property offer onsite activities like fishing, swimming, game room, etc.?
- Is my property in the middle of all the action or is it in the middle of nowhere?
- Does my company offer a service that is unique in my market?
What are similar rentals charging nightly, weekly or longer?
- How does my property compare with other vacation rentals in the area? (size, price, etc.)
- Can I beat or match the competition while still maintaining a reasonable profit margin?
- Does the quality of my rental fit with what travelers to my area are looking for?
Where are the rentals coming from?
How does the competition advertise? Do they use...
- Social media
- Listing sites
- Word of mouth
- Online display or search advertising
Is there a marketing option that my competition is neglecting and can I capitalize on this oversight? For example, “No one in my market advertises to snowbirds and as a result they have 90 days of availability each winter that I know I can fill.”
What types of rentals are available? Can I offer something extra to attract more business?
There are going to be a variety of rentals available, and you have to figure out where your property fits. What type of property are you offering?
While you will have control over what type of service you offer, amenities or how lavishly decorated and well kept your property will be, you may not have full control over location, access to transportation or size of the property. It’s important to be realistic about what you can expect to charge for your rental.
You don’t want to charge luxury rates in an area that isn’t going to accommodate that price point - especially if you are starting without a history of serving guests at a high level or have no reviews.
The more you know about your competition the better the odds of you creating a business plan that puts your company on top. This is your business and you need to be an expert in it. By doing a little research you can ensure that your company is always offering the best service at a fair price.
In order to be the best host possible there is one thing that is more important than any other aspect of your business, and it’s simple: know your customer!
Who is renting from you and why? If you can answer these questions, you can easily build a profile of your average guest base and customize your business plan to suit their needs.
If you’ve been renting for a while, you probably have a good idea of what kind of people are attracted to your property. If you are new to the vacation rental business, use the internet to your advantage and find out who is visiting your area and why they’re coming.
Of course everyone has an ideal customer and you can certainly target your marketing, amenities and services offered to reach this demographic, but keep in mind it’s important to find a balance between your ideal customer and those that are actually looking for rentals in your area.
Build your business around your ideal customer. For instance, if you prefer to rent to couples without children, it would be beneficial to advertise your rental as a romantic getaway and offer services and amenities that highlight the needs of that demographic.
Whether you have five properties or 500 properties, you’ll need to establish a set of standards and rules that you and any potential staff will adhere to. It’s important to always know who is responsible for certain tasks and when they are expected to be performed. By having a plan of operations, you will ensure continuity in your business leading to greater efficiency and higher profits.
If you only have a handful of properties or even a single room that you are renting, it is possible to handle almost all of the operations of your business by yourself or by outsourcing some of the work like landscaping and housekeeping.
If you have multiple properties, this can become very difficult without assistance and you may need to hire part or full time staff. Areas you should consider:
- Managing Bookings & Calendars
- Landscaping/External Property Care
- Maintenance & Upkeep
- Housekeeping & Laundry
- Accounting & Tax Reporting/Filing
- Complaints / Local Management
- Owner Reporting (if applicable)
Even with multiple properties, you may be able to handle some of these aspects on your own, but others will require either outsourcing or hiring an employee to ensure they get dealt with professionally and in a timely manner.
Marketing and distribution
Based on all the research you’ve performed so far about what kind of guest you’re looking to attract, it’s time to make some decisions about marketing and distribution. In other words: how and where are you going to pitch your property? As in any business, you want to diversify your marketing and distribution channels to reach the largest possible audience.
Every property is unique and has features that should be highlighted. When developing ads, you want to focus on these unique aspects as much as possible.
Building a great advertisement is just the first step, you need to decide how you want to get your ad in front of your target audience. Some marketing ideas you may want to consider:
- Your own direct channel or website
- Google/Bing ads
- Social media
- Traditional media
- Word of mouth
Of course you are going to do everything you can to get your properties in front of potential guests, but unless you are planning to invest a substantial amount of money into your advertising campaign it’s going to be hard to compete with sites like Airbnb, Expedia, Homeaway and other online travel agencies (OTAs).
These companies have million dollar advertising campaigns and an enormous catalog of available properties in every size, shape and variety imaginable. So if you can’t beat them...join them!
It is essential to get listed on at least one OTA to start and add as many possible as you gain traction. This strategy is particularly important for new businesses as it is the best way to gain initial exposure and reviews, but adding additional listing sites will give you a competitive advantage over your competition as well.
Because not every short-term property manager lists on each channel, you have the opportunity to engage the largest audience imaginable and thus, book more nights than your competition. If you find your properties’ occupancy being maximized with only a few channels, then listing on more channels will enable you to add filters to your properties, meaning you will earn the most revenue-rich bookings available as well as retain your maximized occupancy rates.
Some things you will want to consider when choosing which OTAs are right for you:
- How much will it cost? Do the added bookings from that channel negate the channel’s fees?
- How will billing work? Is it monthly, commission-based or some combination of the two? Does the channel charge managers fees?
- Is there a contract?
- How and when do you get paid?
- Are there any rules that you must follow?
- What is the OTA’s target demographic and does it sync with your business plan?
OTAs are a valuable tool for any vacation rental business and while it can seem scary to keep up with multiple OTAs, booking tools like MyVR make listing and managing your properties across multiple distribution channels easy.
You aren’t doing all this work to lose money. You want to make sure that you know what your expenses are going to be in advance and determine what you need to charge to make a profit. Of course you want to maximize profit and keep expenses as low as possible, but it’s imperative that you are careful not to lose dollars to save pennies.
To determine how much you need to charge in order to reach your financial goals, you need to estimate your average monthly expenses and the monthly income you would like to generate.
While learning the nuances of your business, it is perfectly acceptable to turn zero profit or even be in the red for the first few months that you’re in business. There is a learning curve in the short-term rental industry; once you fully understand the landscape, you’ll see your revenue jump to the black.
Some costs to keep in mind:
- Payroll (if you’re going it alone you don’t have to worry about this)
- Average utility costs (water, electricity, garbage, cable/satellite, internet, etc.)
- Mortgage/loan payments
- Marketing costs
- Taxes (federal, state, local and any tourist or lodging taxes)
Once you have an idea of what your estimated monthly costs and have set a monthly income goal, it’s time to figure out exactly how much you need to charge nightly, weekly, monthly and beyond in order to reach your goal. The formula is simple but the variables can be extreme, so you want to be as conservative as possible.
For example, if you have one property that is costing you $1,500 per month to maintain and you are hoping to generate a net profit of $500 per month, you would need to charge an average of $110.00 per night, at 60% occupancy, to reach your goal.
Everyone knows it takes money to make money, but where exactly is that money coming from? Well, of course it depends on your unique situation, but in general there is going to be some investment involved with a vacation rental business.
Even just renting out a room in your house is more than likely going to involve some redecorating, fresh linens, bathroom supplies and more, and a larger scale business will obviously involve much greater financial contributions upfront.
It’s important to plan according to your needs and stick as close to your financial plan as possible.
If taking a traditional loan from a bank, be certain that you can afford the payments - even if your rental business doesn’t take off overnight. You don’t want to go bankrupt before even getting started, so consider the size, length and interest rate on any loans you take.
If you already have a proven business model, it may be wiser to invest money from your savings rather than borrowing from a bank.
Things to keep in mind when creating a financial plan:
- How much money is required to keep everything running smoothly for at least three months?
- What monthly payment can be afforded comfortably?
- Is there already a revenue stream or savings that can be used instead of taking a loan?
- Is there a back-up plan if revenue is below expectations?
Not everyone is interested in adding properties to their business, but there is always room for change and growth. You should at least have a general idea of where your revenue and your overall business is heading. Setting goals is an important factor in the success of any business and the property management sector is no different. If you are starting a new business, it’s a good idea to lay out your goals for at least the first year.
A good example would be to increase occupancy to at least 60% with an average net income of 20%. If you are expanding an existing business, a shorter term of six months may be more in line with your plans. For instance, if adding a service to your rental business, you may want to set a six month goal of selling that service to 40% of your guests.
Some things you may want to include in your plans:
- Increasing occupancy
- Raising net income
- Adding properties
- Offering more amenities and services
- Optimizing your daily workflow
- Decreasing average expenses
The specific goals you set will be customized to your business plan and ideas, but having a clear list of goals will help to drive your business to success. Once these goals are met, another set of goals can be laid out and the cycle continues.
This is a basic guide to drawing up a short-term rental business plan and each business will have its own special set of circumstances and considerations. Remember, this is your business, and you’re building a roadmap and guide for how you want it to run.