Data provided here comes from our team of experts who have been working on business plan for a short-term rental business. Furthermore, an industry specialist has reviewed and approved the final article.
Are short-term rental businesses profitable, and what is the typical monthly income for property owners in this industry?Let's check together.
Revenue metrics of a short-term rental business
How does a short-term rental business makes money?
A short-term rental makes money by renting out a property for a short period of time.
Aside from accommodations, what do short-term rentals offer?
Short-term rentals, such as vacation homes or Airbnb listings, offer a range of benefits beyond just accommodations.
They often provide a more personalized and home-like experience compared to traditional hotels. These rentals typically include amenities like fully equipped kitchens, allowing guests to prepare their own meals and save on dining expenses.
Additionally, many rentals feature common living spaces, providing a sense of comfort and relaxation, and often come with unique decor that can offer a more culturally immersive stay.
Short-term rentals can be found in various locations, allowing travelers to experience different neighborhoods and local communities in a way that hotels often cannot provide.
They also cater to various group sizes, making them ideal for families or larger travel groups who can share a common space while maintaining individual bedrooms for privacy.
Many hosts offer local insights and recommendations, enabling guests to discover hidden gems and experiences that might not be as readily available through mainstream tourist guides.
What about the prices?
A short-term rental business offers a variety of accommodations at different price ranges to cater to various customer preferences.
The prices of these rentals can vary based on factors such as location, property size, amenities, and seasonal demand. For instance, budget-friendly options like private rooms or shared spaces might range from $30 to $80 per night, providing essential amenities and a cost-effective stay.
Standard apartments or homes with a moderate level of comfort and convenience might fall within the range of $100 to $200 per night, offering more space and amenities.
Luxury properties, such as upscale apartments, villas, or unique themed lodgings, could command prices between $250 to $800 or more per night, providing top-tier amenities, exclusive features, and breathtaking locations.
| Rental Type | Price Range ($) | Description |
|---|---|---|
| Private Room / Shared Space | $30 - $80 | Basic amenities, budget-friendly |
| Standard Apartment / Home | $100 - $200 | Moderate comfort and convenience |
| Luxury Property | $250 - $800+ | Top-tier amenities, exclusive features |
Customer segmentation for a short-term rental business
A short-term rental business may have customers ranging from vacationers to business travelers to those looking for temporary housing.
Which segments?
We've prepared a lot of business plans for this type of project. Here are the common customer segments.
| Customer Segment | Description | Preferences | How to Find Them |
|---|---|---|---|
| Business Travelers | Travelers visiting for work-related purposes | Proximity to business districts, Wi-Fi, work-friendly amenities | Partner with corporate travel agencies, advertise on business travel platforms |
| Tourists | Leisure travelers exploring new destinations | Attractions, entertainment, comfortable furnishings | List on popular booking websites, promote through local tourism boards |
| Families | Groups traveling with children or extended family | Spacious accommodations, child-friendly amenities | Advertise on family travel websites, offer discounts for longer stays |
| Event Attendees | People attending conferences, festivals, or special events | Proximity to event venues, flexibility with check-in/out times | Collaborate with event organizers, use event-specific hashtags for promotion |
| Remote Workers | Individuals working remotely seeking a change of scenery | Reliable internet, comfortable workspace, quiet environment | Highlight remote work amenities on social media, target digital nomad groups |
How much they spend?
In analyzing the financial dynamics of a short-term rental business, it's observed that guests usually spend between $100 to $300 per night. These figures fluctuate based on factors such as the location, the quality of the property, seasonal demand, and additional amenities offered.
Research indicates that the average duration of stay at these short-term rentals ranges from 2 to 7 nights. This span varies widely due to travel purposes, with some guests preferring quick stays, while others seek extended vacations or business trip accommodations.
Considering these factors, the estimated lifetime value of an average customer for a short-term rental would be from $200 (2x100) to $2100 (7x300), calculated by multiplying the number of nights stayed by the per-night cost.
From this data, we can deduce that, on average, a guest would contribute around $1150 in revenue to a short-term rental business, accounting for various stay durations and spending capacities.
(Disclaimer: the numbers provided above are averages and are intended for conceptual understanding. They may not precisely reflect your individual business model or market circumstances.)
Which type(s) of customer(s) to target?
It's something to have in mind when you're writing the business plan for your short-term rental business.
The most profitable customers for a short-term rental business typically fall into the "Frequent Business Travelers" profile.
These customers are lucrative because they often require accommodations for multiple short stays throughout the year, which leads to consistent bookings and revenue.
To target and attract them, it's essential to offer convenient, well-located properties with amenities such as reliable Wi-Fi, comfortable workspaces, and self-check-in options. Additionally, forming partnerships with local businesses or corporations can help capture this market.
To retain them, excellent customer service is crucial, addressing their specific needs and preferences, offering loyalty programs or discounts for repeat bookings, and maintaining a high level of cleanliness and comfort to ensure they choose your properties for their future stays.
What is the average revenue of a short-term rental business?
The average monthly revenue for a short-term rental business usually ranges between $800 and $15,000. Let's delve deeper into the specifics.
You can also project your own revenue, using different assumptions, with our financial plan for short-term rentals.
Case 1: A simple rental in a suburban area
Average monthly revenue: $800
This type of rental is typically a small apartment or a modest house located in the suburbs. It attracts travelers looking for budget stays or those visiting family in nearby areas.
Since it's situated away from prime tourist attractions and city centers, the nightly rate is more affordable, and the property might not have high-end amenities.
Assuming an average nightly rate of $50 and an occupancy rate of 20 nights a month, the monthly revenue for such a rental would be $800.
Case 2: A trendy rental in the heart of the city
Average monthly revenue: $3,750
This rental is strategically located in the city center, making it ideal for tourists and business travelers alike. With modern amenities and a comfortable setup, it's in higher demand than the suburban rental.
Additional features might include a fully-equipped kitchen, a smart TV, high-speed internet, and perhaps even a balcony with a view. Given its prime location and amenities, it can command a higher nightly rate.
With an estimated nightly rate of $150 and an occupancy rate of 25 nights a month, this property could yield a monthly revenue of $3,750.
Case 3: A luxury rental with top-notch amenities
Average monthly revenue: $15,000
This is the crème de la crème of short-term rentals. Situated in an elite neighborhood or boasting a panoramic ocean view, this type of property offers an unmatched experience to its guests.
Guests at such properties expect state-of-the-art amenities - from a private pool, jacuzzi, gourmet kitchen, home theater, to concierge services.
Given the luxurious offerings, these rentals target a niche audience ready to pay a premium for exceptional comfort and experiences.
With a ballpark nightly rate of $500 and an occupancy rate of 30 nights a month, such a premium property can bring in a monthly revenue of $15,000.
The profitability metrics of a short-term rental business
What are the expenses of a short-term rental business?
Short-term rental business expenses consist of property maintenance, guest services, marketing, and utility bills, in addition to any mortgage or property ownership costs.
| Category | Examples of Expenses | Average Monthly Cost (Range in $) | Tips to Reduce Expenses |
|---|---|---|---|
| Property Acquisition | Property purchase or rent, down payment, closing costs | $1,500 - $5,000+ | Explore financing options, negotiate property prices |
| Property Maintenance | Repairs, maintenance, cleaning services | $200 - $1,000 | Regularly inspect and maintain the property, DIY when possible |
| Furniture and Appliances | Furniture, kitchen appliances, electronics | $500 - $2,000+ | Buy used or refurbished items, consider long-term leases |
| Utilities | Electricity, water, gas, internet, cable | $150 - $500 | Invest in energy-efficient appliances, negotiate utility rates |
| Insurance | Property insurance, liability insurance | $100 - $300 | Shop for competitive insurance rates, maintain a safe property |
| Marketing and Advertising | Online listings, advertising platforms | $200 - $1,000 | Optimize online listings, use social media for promotion |
| Property Management | Property manager fees, software | $200 - $1,000 | Consider self-management, use property management software |
| Cleaning and Maintenance | Cleaning supplies, maintenance staff | $300 - $1,000 | Hire cleaning staff part-time, purchase supplies in bulk |
| Taxes and Licensing | Occupancy tax, business licenses | $100 - $500 | Stay compliant with local regulations, claim tax deductions |
| Guest Amenities | Toiletries, linens, welcome gifts | $100 - $300 | Buy amenities in bulk, provide reusable items when possible |
When is a a short-term rental business profitable?
The breakevenpoint
A short-term rental business becomes profitable when its total revenue exceeds its total fixed and variable costs.
In simpler terms, it starts making a profit when the money it earns from renting out properties becomes greater than the expenses it incurs for property maintenance, utilities, renovation, marketing, and other operational costs.
This means that the rental business has reached a point where it not only covers all its expenses but also starts generating income; this is known as the breakeven point.
Consider an example of a short-term rental business where the monthly fixed costs, including possible mortgage payments, property taxes, and insurance, typically amount to approximately $10,000. Additionally, variable costs such as cleaning, repairs, and guest amenities may run around $5,000.
A rough estimate for the breakeven point of a short-term rental business would then be around $15,000 (since it's the total cost to cover), or between 10 and 30 bookings per month, assuming the average rate per night is $150 and the average stay is 2 nights.
It's important to understand that this indicator can vary widely depending on factors such as property location, size, rental rates, operational costs, the tourist season, and competition. A property in a high-demand area would obviously have a different breakeven point compared to a property in a location with less frequent bookings.
Curious about the profitability of your short-term rental venture? Try out our user-friendly financial plan tailored for rental businesses. Simply input your own assumptions, and it will help you calculate the amount you need to earn in order to run a profitable business.
Biggest threats to profitability
The biggest threats to profitability for a short-term rental business can include fluctuating demand, increased competition, and rising operating costs.
Fluctuating demand means that the number of guests booking stays can vary throughout the year, making it challenging to maintain a steady stream of income.
Increased competition from other rental properties or alternative accommodations can lead to pricing pressures, potentially reducing profit margins.
Additionally, rising operating costs, such as property maintenance, utilities, and marketing expenses, can eat into profits if not managed efficiently.
These threats are often included in the SWOT analysis for a short-term rental business.
What are the margins of a short-term rental business?
Gross margins and net margins are financial metrics used to assess the profitability of a short-term rental business, common in scenarios where individuals rent out property spaces for brief periods, similar to services offered by platforms like Airbnb.
The gross margin reflects the difference between the revenue generated from renting out the property and the direct costs tied to preparing and maintaining that property for guests.
Essentially, it's the profit remaining after removing expenses directly linked to facilitating the guests' stay, such as routine maintenance, cleaning services, and utility bills specifically associated with the rental periods.
Net margin, conversely, considers all expenses the business incurs, encompassing indirect costs such as platform service fees, administrative expenses, marketing, property mortgage or rent, and local taxes.
Net margin delivers a more comprehensive insight into the rental business's profitability by accounting for both direct and indirect expenditures.
Gross margins
Short-term rental businesses generally see average gross margins between 50% to 75%.
For instance, if your short-term rental income is $20,000 per quarter, your gross profit would be approximately 60% x $20,000 = $12,000, assuming a gross margin of 60%.
Here's an example for clarity:
Consider a property rented out for 15 nights in a month with each booking priced at $200 per night. The total revenue for the month would be 15 nights x $200 = $3,000.
Direct costs include cleaning, maintenance, and utilities specific to those 15 nights.
If these expenses total $1,000, the business's gross profit amounts to $3,000 - $1,000 = $2,000.
Thus, the gross margin for this scenario would be $2,000 / $3,000 = 66.67%.
Net margins
Typically, the average net margin for short-term rental ventures ranges from 20% to 40%.
Continuing with simplicity, if your rental business earns $20,000 per quarter, your net profit might hover around $6,000, or 30% of the total revenue.
Using the previous example:
If a property is booked for 15 nights at $200 per night, the revenue remains at $3,000. The direct costs were established at $1,000.
However, additional indirect costs surface, including platform fees, marketing, insurance, administrative expenses, and possibly a portion of the mortgage or property rent, amounting, say, to $700.
Subtracting all direct and indirect costs ($1,000 + $700) from the revenue, the net profit stands at $3,000 - $1,700 = $1,300.
The net margin here would then be $1,300 / $3,000, equating to approximately 43.33%.
As a proprietor, recognizing that the net margin (in contrast to the gross margin) offers you a clearer understanding of your short-term rental business's genuine earnings is crucial, as it encompasses the entirety of costs and expenses incurred.
At the end, how much can you make from a short-term rental business?
As with any business, understanding your net margin is crucial in the short-term rental business—it's what remains after all expenses have been paid. It's the true reflection of your profitability.
The amount you can make will vary greatly based on several factors, including the location of your properties, the guest experience you provide, and how well you manage costs and optimize your listings.
Unfocused property host
Makes $500 per month
Imagine you start with a single property or a small room, and don't put much effort into the presentation or promotion. Perhaps you've chosen a location that isn't in high demand, or your property isn't maintained well, causing negative reviews. Your total revenue might only be around $2,500 a month.
If expenses aren't managed judiciously—consider cleaning, repairs, utilities, and possibly high mortgage payments or rent—your net margin might struggle to reach 20%.
This scenario leaves you with a meager $500 per month (20% of $2,500). It’s a situation that clearly calls for strategic changes in your business approach.
Average property host
Makes $3,000 per month
Now, consider a more dedicated approach. You have a property in a decent location, and you're active in ensuring it's clean, well-furnished, and reasonably promoted online. You respond to guest inquiries promptly and gather some positive reviews, building a good reputation. With dedicated effort, your total monthly revenue could be around $12,000.
Assuming you keep a keen eye on expenses and work to ensure a positive guest experience, you could achieve a net margin of around 25%.
This means your take-home earnings could be approximately $3,000 per month (25% of $12,000), demonstrating the benefits of a more engaged business strategy.
Outstanding property host
Makes $20,000 per month
Here's the game-changer: You operate multiple high-quality properties in prime locations. You're committed to providing an exceptional guest experience, with quick communication, top-notch amenities, and a personal touch that leads to stellar reviews and repeat customers. Your business could generate a total revenue of $50,000 or more per month.
Through smart expense management, investment in high-ROI improvements, and perhaps even hiring a property management service, you maintain a net margin of around 40%.
With this approach, your monthly earnings could skyrocket to approximately $20,000 (40% of $50,000). This level of success requires strategy, effort, and a continuous quest for excellence in the competitive field of short-term rentals.
Your potential as a host in the short-term rental business knows no bounds. It all starts with understanding your market, a solid business plan, and the commitment to creating memorable guest experiences!