Master Airbnb & Vacation Rentals with Vacation Home Help – Transcripts. #37 Learn how to calculate Airbnb ROI (Return on Investment) for your Vacation Rental in 10 minutes.

Transcript

Announcer:

Welcome to the Vacation Home Help Podcast, the only podcast dedicated to helping vacation rental owners self-manage their properties. Your hosts delivers short and sweet episodes with actionable advice, tips, and strategies to level up your hosting skills, whether you are a complete beginner or been in the vacation home rental business for a while, you are in the right place to get the tools you need to succeed. Here are your hosts, John Candelario and Tim Casey.

John Candelario:

Good morning, everyone. Today, we’re going to talk about how to calculate ROI, return on investment for your vacation rental. Tim has an easy and simple way of explaining how he calculates his ROI. So hopefully you’ll find it’s helpful. And Tim I’ll let you take off.

Tim Casey:

Yeah. So, John, I’m sure everyone’s got their own way of doing this. I just try to keep it really, really simple and break it down in such a way that it makes sense to me, and I can really see what I’m making every night the vacation rental is rented. So I start with just taking a hard look at my monthly expenses and John, I include everything. I include mortgage, if there’s an HOA, I include HOA, electric, water, pool service, maintenance, you know the drill. It’s really all the expenses that are either reoccurring or once a month or once a year kind of fees.

So as an example, for my annual license, I take that cost of $250 and I divided by 12 and I break that into a monthly fee. So I make sure all of my monthly expenses are captured. So as an example, let’s say that all of my monthly expenses, including mortgage come up to $5,000. Okay. That’s my first data point. My next data point is my occupancy that I am anticipating. So if I’m shooting for a 70% occupancy, well, most months let’s just use 30 days, 70% of 30 days is 21 days. So I’ve got a $5,000 a month expense and 21 rental days. So that comes down to $238 per rental day of expense. John, does that make sense so far?

John Candelario:

That makes perfect sense. That makes perfect sense.

Tim Casey:

So once I know what my daily rental expense is, in this case it’s $238, now I go over to the revenue side. So let’s just say, as an example, I’m charging $500 a night to rent my vacation rental. Well, if you’re using a property manager, you take $100 away from that. So that $500 becomes $400 because you’re probably paying about 20% for a property manager. And then you’ve got the platform fees, Airbnb and VRBO charge a fee to be on their platform. And just, let’s just say that’s 10%. So there goes another $50. And then you’ve got your tax. In Florida, it’s 13 and a half percent in the areas around Disney.

So now all of a sudden that $500 of revenue becomes $282.75 of nightly revenue. So I take my $282.75 cents of revenue and I subtract out the daily cost of rental of $238 and that leaves me with about $44 of net income. Now here’s John, where I think the conversation has to go. This is why we encourage all of you to really try self-managing because that $100 that you’re paying to a property manager for every rental night that could go in your pocket. And instead of $44 of income, you could be making $144 a night of income. It’s a difference between $11,000 a year and $37,000 a year. John, let me stop there and let you throw in your thoughts here.

John Candelario:

Sure. So Tim, as you do your ROI walk and we walk through which items are part of that return on investment, you could see when you add the property manager commissions and the OTA take of it margins, like your ROI really gets squeezed because they’re taking what’s significant in fees and you still have plenty of expenses to cover before you actually net anything. Right. So that key takeaway that you just mentioned, trying to do this on your own, it’s absolutely critical to think that through if you’re an owner on the fence, if you’re thinking about going with a manager, going at it on your own with the supportive podcast like ours, you have to go under the assumption that those fees are just going to increase, go forward in the future. They’re not going to get any smaller, right? So there is that downward pressure on ROI because of the OTAs and commissions.

Now cash is king. Right Tim? So cash flows is different way of thinking about it than ROI, but ROI, are you incorporating like financing into the purchase price of the home? Or are you just looking at like the value of the home, the purchase price as like the baseline? How are you doing that?

Tim Casey:

Yeah. The way I do this, John is I just use my monthly mortgage payment and people have a different way of thinking about this. Some people don’t include the principle in that expense. I do because I like to take a conservative approach. So I include the principle, the interest and the escrow when I’m calculating my monthly expenses. Again, I take a very conservative approach and I like to have eyes all open. And John, you said it well, if you think about your margins being squeezed to just $44 per rental night, if you’re using a property manager, the property manager is making more than the owner is, and that was the epiphany I had several years ago and why I decided self-managing was the way to go. Even though it was a steep learning curve, it was well worth it when it comes to bottom line.

John Candelario:

Right. And when I speak to new hosts that are going to this for the very, very first time, I’m shocked at how much back of the envelope math their real estate brokers do to convince them to buy in because their back of the envelope math is so simplified and it ignores tons of things you just mentioned, like even the hidden costs of running it. And they try to, when they sell you property, take a really optimistic view obviously, to try to get you to do the deal. But I want to warn everyone listening against taking that back of the envelope math as like, that’s what it is, because that’s not a great way to look at return on investment.

Tim Casey:

I think that’s right.

John Candelario:

You need to build a model. Right Tim?

Tim Casey:

Yeah, I think that’s, it’s right. And I think everyone’s got to be very, very careful. And this was a learning step for me as well. Every time I ran to a Target or a Walmart or to buy supplies for the home, that expense, that receipt has to be part of my monthly expenses. And you’ve got to be disciplined to really track everything so that you know what your real return is. Once you know what your actual annual income is well, now you can easily calculate ROI or cash on cash return, but it’s really getting down to what is your real net operating income. And then the eyes really become opened up when you realize the property managers are making more than you are. And I don’t think that’s the way it was intended to be. I don’t think any of us got into vacation rentals to make less than our property managers. So just a word of the wise, have all your expenses laid out, really have your projections for occupancy, know what your revenues are and what’s coming out of those revenues. And now you’re all set to calculate.

John Candelario:

Right on Tim. And I don’t want to sound like an algebra teacher or anything, but we can’t forget the time value of money. Like a dollar today is not worth the same as a dollar a year ago. So when you’re building in your model, just try to make sure that you take the time value money, right? Because costs have significantly risen. And we don’t want to forget that the market does move and that should be built into your projections. That should be built into how you’re planning for the future. So just don’t neglect that fact, but we’re going to have in the show notes how to calculate ROI Tim’s way, and we hope you use it because it’s a really conservative approach. And that’s how you can actually look at the numbers and see truth in it. There’s a lot of ROI calculators online, but you need to make sure that the assumptions are sound and that you’re not taking a too optimistic view of the rental business, because it’s important to go into any business armed with the facts.

So you don’t make a bad decision and you don’t operate under false premises. So I will have in the show notes, Tim’s ROI calculation. So we hope you take a look at it and you incorporate it into your business. And this won’t be the last time we have this discussion. But Tim, thanks for walking everyone through how you do return on investment, because I know I take a different view of it. Like I look at it more how I would look at it in the finance and banking, but I could be just over complicating how I do it. I like your way a lot better. So hopefully the listeners do too.

Announcer:

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