As a new host, there’s an absolute thrill to receiving your first payout. That’s what you’ve been working toward, right? However, with hosting guests come some literal costs. When diving into this business, you need to have an understanding of your occupancy costs. This guide explains what you need to know about occupancy costs, what they are, and how to prepare for them.
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What are occupancy costs?
In short, occupancy costs are the amount of money you spend to both maintain and operate your short-term rental. They are the day-to-day costs of just keeping it up and running, and affect your bottom line. Examples of occupancy costs include:
- Mortgage payments
- Rent payments (if you’re pursuing rental arbitrage)
- Short-term rental insurance
- Property taxes
- Utilities (heating, cooling, gas, water, electric, etc.)
- Pool cleanings
- Cleanings
- Regular maintenance and repairs
- Landscaping
- Pest control
- Property management fees
- Platform fees
- Licensing fees
How to find your occupancy costs
You can understand the definition of occupancy costs all you want, but you need to know how to calculate your individual costs for it to really mean anything. Let’s get into it:
- List all your expenses
- Add all of your expenses together. We’re talking everything.
- Use this formula to find your occupancy cost:
- Occupancy Cost Ratio = (Total Occupancy Costs ÷ Total Revenue) × 100
So, for example, if your total monthly revenue is $4,000 and your total occupancy costs are $2,200, your occupancy cost ratio is:
($2,200 ÷ $4,000) × 100 = 55%
A healthy occupancy cost percentage depends on your market and business model, but a lower ratio generally indicates higher profitability. If your ratio is too high, consider strategies to reduce costs or increase revenue.
Tips for reducing costs
Let’s talk about a few actionable tips and tricks for lowering those pesky occupancy costs:
- Go energy-efficient. Where you can, switch to energy-efficient appliances and use items like smart thermostats to better control these utilities.
- Don’t wait for something to go wrong. Be consistent in inspecting your property so you can catch little things before they become big-ticket fixes.
- Shop around for deals with different vendors. There’s no rule saying you have to take the first offer!
- List your home on multiple booking platforms to get more eyes on your property. Be sure you are also using a direct booking site to cut back on service fees.
Having a full picture and understanding of your occupancy costs is important for a sustainable short-term business. It lets you know how much money you’re spending every month and thereby determine how much you need to be charging in nightly fees. Understanding how much it costs to keep your property running is vital to keeping your finances in the black and growing.
Host Tools provides an automated, unified calendar for short-term rental hosts, allowing you to seamlessly list on all major channels. Start your free trial today!
