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What Expenses to Plan for When Operating a Short-Term Rental

Updated: Aug 11, 2022



Owning and operating a short-term rental can be a very lucrative endeavor given you are in the right market with the right property. There are several factors to take into consideration when choosing to purchase an STR (short-term rental), and in this post we will discuss one of those factors, EXPENSES.


In order to properly forecast your profit and earnings potential you must first consider all of the ways in which money will be deducted from your bottom line. These deductive items are called expenses, and can add up to effect a large portion of your profit. Expenses can fall into several different categories such as one-time, fixed, and variable which we will explain later on. As with most things, there are much more nuances associated with income and expenses and accounting for them, however this isn't a 400 level accounting class and we will only be discussing the basics. So let's get into it.


One-Time Expenses


When you initially purchase your property you are required to file with the city/county to acquire a permit and business/sales tax license which will incur one-time expenses. These types of expenses occur less frequently than the other two mentioned earlier, however they are usually bigger ticket items and can be a little bit sneaky so worth taking a deeper look at. The main difference with these expenses vs. fixed or variable expenses is they can be depreciated over time. Some other one-time expenses that are worth noting are:

  • Furniture (couches, beds, table/chairs, etc.)

  • A/C, heater units

  • Water heaters

  • Appliances (stove, refrigerator, microwave, etc.)

  • Upgrades (floors, paint, etc.)

Fixed Expenses


Fixed expenses are defined as those expenses which do not change from period to period. These types of expenses are easier to track and account for because they occur every month/quarter/year. A typical example of a fixed expense is a mortgage payment. It is fixed for 'X' amount of time and will only change if you're locked into an adjustable rate. Fixed expenses can vary from property to property, such as HOA's or supplying your property with cable/internet (highly recommended). Here's a list of basic fixed expenses to consider when forecasting your earnings potential:

  • Mortgage

  • HOA

  • Cable/internet/streaming subscriptions

  • Property taxes

  • Insurance

Variable Expenses


Variable expenses are the opposite of fixed expenses and change in amount from month to month. These expenses can be a little more difficult to track as the amount can be a moving target and will depend largely on your occupancy. An example of a variable expense is cleaning associated expenses, which are directly related to your occupancy and turnover. Other variable expenses to consider are:

  • Consumables (cleaning supplies, toilet paper, soaps/shampoos, etc.)

  • Utilities (electric, water, gas, sewer, trash, etc.)

  • Repairs and maintenance

  • Property management

  • Capital expenditures

  • Guest gifts (food/drink items, souvenirs, etc.)

  • Host site fees

All of these variable expenses will change in amount from month to month, however several can be assigned a fixed percentage such as property management, repairs/maintenance, host site fees, and capital expenditures. I actually assign a percentage to all of them except for utilities, which is paid out at exact costs incurred. The exact percentage assigned to each will vary depending on your property location, type, and age. For example, if you own a condo and have an HOA that covers exterior repairs and maintenance then what you set aside each month for your repair/maintenance budget will be less than if you didn't have an HOA that covered these expenses.


Another example could be how much you set aside for capital expenditures each month. Capital expenditures are those items which are considered assets such as the physical assets of your property (roof, siding, etc.) or the furniture and high dollar value items inside the property. If your property is older you may want to factor in a higher percentage for replacement. The same goes for the age of your physical assets in the home. As a general rule, I set aside a fixed 5% of revenue each month to create a reserve account for capital expenditures. I set aside a similar percentage for repairs and maintenance, and around 2.5% for consumables. It is important to break each line item down and assign an accurate dollar value to each to determine just how much you will need to account for. At the end of the day, these items make up a large portion of your expenses and can significantly affect your bottom line.


Host site fees are those fees associated with using a particular platform to list your property. Sites such as Airbnb and VRBO charge a certain percentage of each booking. For instance, Airbnb charges 3% off the top of each reservation. Other sites can charge anywhere from 3-20%, so it's wise to do your research and consider which platform suits your needs and budget best.


Summary


Taking a hard, detailed look into your expenses is crucial in determining if a property will become profitable in the future. Maintaining and controlling your expenses throughout the life of your property is equally as important. Methods of controlling your costs, for example, could be implementing a routine maintenance schedule, which will prolong the life of your assets. A great way to determine the earning potential of a certain property is to create a calculator, which I've detailed in a separate post and can be found here.


Running a successful short-term rental can be boiled down to a couple of key techniques, familiarizing yourself with the financials and controlling your costs, and establishing good relations with your guests and building confidence in your brand name. If you can establish consistency in these techniques the rest will fall into place. As always, good luck in your endeavor and enjoy the journey!





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