Vacation rental profitability refers to the relationship between the income earned from renting a property as temporary accommodation and the expenses associated with said property. To calculate profitability, it is necessary to consider both income and relevant expenses. Next, we will tell you everything about the profitability of properties for vacation rentals, how to calculate it and some tips to increase it:
Vacation rental vs. traditional rental
Vacation rentals and traditional rentals are the most common modalities that owners have to make their properties profitable, each with its advantages and disadvantages.
In the case of vacation rentals, the duration of the stay is generally for short periods such as a few days or weeks. It is common in tourist destinations and places of temporary interest. In addition, the property may be used by the owner for personal use at certain times of the year, provided it is available for rent during the rest of the time.
Vacation rentals often have higher nightly revenue potential because daily rates are often higher than traditional rentals and demand can be seasonal and subject to tourism factors or local events.
Vacation rental requires more work in terms of management, cleaning, customer service, and promotion to maintain high occupancy and satisfy guests.
By contrast, in traditional renting, leases are typically long-term, such as months or years, providing greater income stability.
Unlike vacation rentals, the owner does not need to constantly manage stays and guest turnover.
Rates on traditional rentals are generally lower per night compared to vacation rentals but offer consistent income for the duration of the contract.
Demand tends to be more stable throughout the year, providing predictability in revenue. In traditional rental, the property is generally reserved for the lessee and cannot be used by the owner during the lease period.
Therefore, vacation rentals can offer potentially higher income and flexibility for personal use, but require more active management and may be more susceptible to seasonality. On the other hand, traditional rental can provide a stable income and requires less dedication, but it is less flexible in terms of personal use and the rates are usually lower per unit of time. The choice between both options will depend on the financial objectives and the availability of time and resources for the management of the property.
| Vacation Rental | Traditional Rental | |
| Length of stays | Short periods (days or weeks) | Long-term (months or years) |
| Flexibility of use | Possibility of personal use at certain times | Personal use is not allowed during the contract |
| Income potential | Higher earning potential per night | Constant income during the contract |
| Rates | Higher daily rates | Lower daily rates |
| Management | Requires more active management (cleaning, customer service) | Requires less dedication and management |
| Seasonality | Subject to tourist factors and local events | More stable demand throughout the year |
| Predictability | Less predictability in revenue | Greater predictability in income |
Average profitability of a vacation rental
The average profitability of a vacation rental can vary considerably depending on several factors, such as:
- The location
- The type of property
- The season
- Tourist demand
- The quality of the accommodation
- Management efficiency
There is no single number that represents the average return in all cases, but I can give you some general estimates to give you an idea.
In general terms, it is considered that a satisfactory average return for a vacation rental ranges between 5% and 10% per year of the value of the property. This means that the income generated from the vacation rental must be at least 5% to 10% of the total value of the property to be considered profitable. However, it is important to note that these values can vary significantly depending on factors such as those mentioned above.
It is possible that some highly sought-after and well-managed properties may achieve higher returns, while others may have lower returns. In addition, profitability can also be affected by costs associated with vacation rentals, such as maintenance fees, management fees, taxes, utilities, marketing, and other operating expenses.
How to calculate the profitability of your vacation rental?
To calculate the profitability of your vacation rental, you will need to perform a detailed financial analysis that takes into account both the income generated by the rental and the expenses associated with the property. Here I provide you with the steps to calculate the profitability of your vacation rental:
1. Total income:
- Determine the daily rental price of your property. This is the amount you charge guests for each night they stay.
- Estimate the average occupancy of your property in a year. This can be based on historical demand or market data.
- Multiply the daily price by the average occupancy and then by the number of days in a year (typically 365 days) to get the total revenue.
Formula to calculate profitability:
Total Income = (Daily Rental Price x Annual Average Occupancy) x 365
2. Total expenses:
- Identify all expenses associated with the vacation rental. These may include:
- Fixed expenses: Mortgage (if applicable), property taxes, insurance, property management or administration fees, membership fees, etc.
- Variable expenses: Cleaning, maintenance, utilities, supplies, marketing, vacation rental platform fees, etc.
Calculation of profitability:
- Subtract the total expenses from the total income to get the net profit.
Net Profit = Total Income – Total Expenses
- Divide the net profit by the total revenue and multiply by 100 to get the percentage return.
Profitability = (Net Profit / Total Revenue) x 100
A positive result indicates that your vacation rental is making a profit, while a negative result indicates that you are making a loss. The higher the percentage of return, the more profitable your vacation rental will be.
It is important to keep in mind that income and expenses can fluctuate over time and that it is essential to continuously monitor and adjust your strategies as necessary to maximize the profitability of your vacation rental. Also, remember to consider other aspects, such as property value appreciation and the personal satisfaction of owning a property for your own use, when evaluating the profitability and value of your vacation rental.
How to increase the profitability of your vacation rental?
To increase the profitability of your vacation rental, it is important to implement strategies that improve income and reduce expenses associated with the property. Here are some effective ways to increase the profitability of your vacation rental:
Optimize the rental price of your home
Establishing a competitive and flexible price is essential. Research the local market and set a competitive price for your vacation rental. In addition to considering the possibility of offering more attractive prices for longer stays or in low season to attract more guests
Increase your occupancy ratio
Work on promoting your property to attract more guests and increase occupancy. Use online vacation rental platforms, social media, and your own website to reach a larger audience.
Take care of your reputation and the valuation of your rental
Taking care of our reputation is essential for the evaluation of your vacation rental to be positive. Good guest ratings and comments can increase demand for your property and attract more travellers. The aspects that our guests take into account the most and on which most of the time they base their comments and mark their travel experience is the following:
Impeccable cleanliness, clear and fluid communication, offering basic comforts, keeping the property in good condition, responding quickly to guest queries and requests and most importantly always listening to them and learning from criticism to take it as an opportunity to improve.
Decorate each room of the house with taste
Make renovations and improvements that can increase the attractiveness of your property and justify higher rates. Focus on key areas like the kitchen, bathrooms, and general amenities.
Promote your home in all possible ways
At Vacation Marbella, we focus on designing a tailor-made marketing strategy for each of our properties. Our website plays a fundamental role in our success since we manage to make 62% of our reservations directly, thus avoiding the increasingly high commissions of the main platforms. We promote all our properties in a personalized way and using various means, both online and offline.
We carry out advertising campaigns on social networks and Google AdWords, in addition to investing in organic positioning in the main search engines. We also implement email and WhatsApp marketing campaigns to keep in touch with our customers. In addition, we are present in strategic places in the city, with ads on billboards and in local classifieds.
Our goal is to reach a wide and diverse public, offering a unique and attractive experience for each guest. Through this combination of marketing strategies, we seek to maximize the visibility of our properties and ensure a constant flow of direct bookings, thus providing a quality service and saving commission costs.
Add value to each customer’s stay
Offer an exceptional experience. Provide an exceptional guest experience. Make sure the property is clean and well-maintained, provides additional amenities, and offers excellent customer service to receive positive feedback and attract more guests in the future.
In the competitive world of vacation rentals, having the support of luxury property management experts like Vacation Marbella is an invaluable advantage for owners. We know that each property is unique and the strategies that work to increase profitability may vary depending on the location and characteristics of each property. If you want to know more details about how to improve the profitability of your property, we invite you to discover all the advantages when renting your luxury property through our company.
