Impact of Fixed vs. Variable Expenses on Vacation Rental Revenues

Here’s what you need to know to understand fixed and variable expenses in short-term rental revenue strategy:

• Fixed expenses are consistent costs like mortgage, insurance, and taxes, while variable expenses fluctuate with occupancy, such as cleaning fees and OTA charges
• Fixed expenses help set cost targets but variable expenses determine pricing decisions
• Dynamic pricing can be used to help maximize vacation rental revenues
• Amenities have an impact on both revenue and costs, so it’s important to identify what adds value for you and your guests

Should vacation rental operators set prices based on fixed expenses?

Fixed expenses will be there whether your guest books a room or not, and therefore it doesn’t have much bearing on what your price is going to be. In reality, the marketplace has no idea what your fixed expenses are, so they’re not going to take that into consideration when thinking about what they want to spend on renting a home. 

What should go into vacation rental pricing decisions? 

While understanding your fixed expenses helps you know what your cost targets need to be, it’s really the variable costs that end up being your floor. The reason for this is simply because anything you earn over your variable costs will contribute to covering your fixed costs.

An example most of us are familiar with is buying an airplane ticket in the future: airlines are constantly using booking data, market rates, and algorithms to maximize their revenue into the future. The same goes for property managers. When determining dynamic pricing for your rental property, it’s important to think about the market value (which is driven by supply and demand), rather than dwell on fixed expenses. However much you price to cover your fixed expenses needs to be relative to the market. Once you are maximizing revenues, the next step is to maximize profits by controlling expenses.

What is relationship between dynamic pricing of a property and variable costs and fixed costs?

A forecasting, budgeting and planning exercise is a great way for property managers to get more familiar with their financials and understand the relationships of their P&L with pricing and gross revenue. Starting with the top line, take your target monthly price on average throughout the year and the occupancy. From there, you have gross revenue and all the revenues connected to that. This includes fees like cleaning, maintenance, damage waivers, so usually managers will have an idea of a percentage earned on each of those.

Next, look at costs associated with revenue, examining the relationships between gross rental revenue and variable costs. Then you take in fixed costs, like payroll, marketing and advertising expenses, and software expenses. With all of this in front of you, you can start to see how all these different factors translate to your bottom line.

What should you do if a vacation rental isn’t meeting revenue or profit targets? 

The market is going to tell you what you’re able to price in an area, but there’s still room to move around within that range too. If you think your revenues should be higher, go out and obtain market data, see what other rentals are going for, look at the pictures for your listings versus the competition, consider if there are any needed upgrades, and explore areas where you could spend money that will help you increase revenue. Don’t be afraid of expenses because there are things you can do that will help, from new amenities to marketing them.

If your expenses are high, consider if all of the costs listed are truly fixed. Are there substitutions or eliminations you can make that won’t affect the value of the property? Often, property managers will have semi-fixed expenses like subscriptions or marketing fees that are not locked in and can be controlled more easily to increase incremental income. As a rule of thumb, a typical marketing and advertising budget is between 2.5 – 5%.

When should you invest in amenities or upgrades to a vacation rental property?

Amenities have an impact on both revenue and costs, so identify what adds value for you and your guests. For example, if you have a house in Maine in the winter, the heat cost for an incremental night can be a real concern. It might be worth investing in an energy efficient heating system to reduce the vacation rental’s energy bills. Similarly, in many places adding a hot tub can automatically increase the value of a property, but managers should do their own market research to determine if it would pay off. If you have already invested in amenities and aren’t seeing the return you expected, make sure you are promoting them effectively across all of your channels. 

What are the top things vacation rental managers need to understand about revenue?

• You cannot understand your own company’s revenue until you understand the market, including clients and competitors. 
• There’s a lot that goes into dynamic pricing. Find someone that specializes in pricing to help you optimize your revenues.
• Understand and be curious about your expenses – don’t be so overwhelmed that you’re not looking. 
• Get organized: work with financial experts who understand your market and can help you turn higher revenue into higher profits.

Understand all of your expenses and review them regularly with help from vacation rental accounting experts.

Property managers are really good about making sure their owners get the right money, but they don’t always understand their own finances, variable costs, fixed costs, etc. Looking at the expenses yourself can be overwhelming, so take it in small pieces or hire a team that can explain it to you.

Ximplifi provides outsourced accounting to lots of property managers, including owner statements. Ideally, property managers should be looking at a dashboard every day, or at least once a week, to understand the performance of their company.  As your dedicated accounting experts, we can provide monthly reporting and provide you with real time data to help your business grow with financial clarity.

Book a meeting today to learn more.