Vacay-rental

Measuring the ROI of Your Vacation Rental

Many people consider vacation rentals good investments — a nice source of passive income. And they can be. But as with any financial decision, it’s best not to jump in without considering the nitty gritty details and determine just how much money your vacation rental will be making. In the business world, this is called ROI, or return on investment. Only when you know how much money and time you are putting in can you understand how profitable your investment is.

The basic formula is:

Net revenue (gross revenue – property expenses – marketing expense – time) + owner use = return on investment.

Let’s break it down.

Gross revenue

This is the easiest calculation as it’s simply the raw numbers of money coming in. Add up the total payouts you’ve received from guests, and voila. You can do this yearly or quarterly.

Property expenses

This is where it gets a bit more complicated. You’ll want to add up all of the money you’ve spent on the property, either as a one-time cost (like furniture and appliances), or recurring costs (like mortgage payments or maintenance). This will be different for everyone based on their situation, but here are a few common items:

  • Property tax
  • Mortgage payments
  • Utilities
  • House + Yard maintenance
  • Furniture + Appliances
  • Supplies
  • Cleaning
  • Rental manager, if you have one

Marketing expenses

While this falls in the same category as property expenses (at least when it comes to calculating ROI), it’s helpful to look at separately. All expenses related to marketing and booking your vacation rental should go here, like:

  • Advertising fees
  • Listing fees
  • Website and email hosting
  • Any other money spent on marketing or booking costs

Time

This is the part that people often overlook, but it’s essential to take into account when considering the return on your vacation rental investment. Time is money, after all, especially when you’re running your own business. How much time are you spending each week on running and marketing your vacation rental? How much is your time worth? Assign a dollar value to each hour you spend. Multiply that by how many hours you are working each week, month, or quarter.

Owner Use

One of the main reasons people rent out vacation properties is to subsidize their own vacations. If you want a vacation home but will only be there a few weeks or months out of the year, it makes sense to rent it out the rest of the time. So — don’t forget to take this into account when calculating your return on investment!

Estimate how many weeks each year you’ll be staying at your vacation property. Then, look up similar properties in the area to get an idea of the daily rate, and multiply that by your estimated vacation time. This is how much you’d be spending yearly on vacation rentals if you didn’t have your own place. Depending on the location and how much you plan to stay there, it could be quite a bit of money!

Calculating the ROI

Now that you have all of the raw numbers, it’s time to plug them into the formula. Remember, here’s the formula:

Net revenue (gross revenue – property expenses – marketing expense – time) + owner use = return on investment.

First, determine a time frame. Ideally, you want to do this quarterly or yearly. Make sure your numbers all match up to your time frame, i.e., gross revenue for the past quarter.

Next, take your gross revenue, subtract property and marketing expenses, subtract time, add owner use, and there you have it: your return on investment.

Conclusion

This is a simple formula for calculating ROI, but it can get as complicated as you want! There are many other variables that you can take into account, if you wish: seasonal bookings, repeat guests, customer lifetime value, pricing trends & daily average rates, are all areas that you can dig in to reveal more information about your business. But it’s best to start simple so that you don’t get overwhelmed, and determine a benchmark for revenue. From there, you can add in more variables and work on decreasing expenses and increasing revenue to work on increasing your overall ROI.