Occupancy Cost in the Short-Term Rental Market

Occupancy cost is an essential concept in the real estate industry. It refers to the expenses related to acquiring, maintaining, and financing a property or a rental property. In short-term rentals, occupancy costs include expenses associated with maintaining and operating a vacation rental property. They include mortgage or rent payments, property taxes, insurance, utilities, maintenance and repairs, cleaning, and management fees.

Occupancy cost directly impacts the profitability of the short-term rental property and the success of your business, so it's important to understand and manage it well. You'll also increase your chances of becoming a successful host if you streamline your daily operations using vacation rental software like Hospitable. With Hospitable, you can put your entire STR business on autopilot.

Components of Occupancy Cost

In the commercial real estate market, the total occupancy cost most often consists of the following fixed and variable costs:

• Base rent is paid by the tenant to the landlord for the property.
• Property taxes are imposed by local governments based on the assessed value of the property.
• Utility costs may differ based on the property type and may include electricity, water, gas, heating, cooling, and waste disposal costs.
• Insurance includes the costs of policies that protect the property and contents against damage or loss and liability insurance that covers accidents or injuries occurring on the property.
• Maintenance and repair costs are associated with keeping the property in good working order, including repairs, janitorial services, landscaping, and pest control.
• Common Area Maintenance (CAM) charges for maintaining shared areas in multi-tenant buildings, such as hallways, restrooms, and parking lots.

Each component affects the total occupancy cost. For example, property taxes can vary significantly depending on the location, and utilities costs depend on the property's usage and efficiency. Regular maintenance is necessary for keeping the rental property functional as it allows you to fix minor issues and prevent costly repairs.

Occupancy costs in the STR industry may differ from those in the commercial real estate sector. The occupancy cost formula for short-term rentals also includes such expenses as mortgage or lease payments (if you use the rental arbitrage model), utilities, property taxes, maintenance, and repairs. But keep in mind that maintenance costs will cover regular upkeep and vacation rental turnover cleaning that must be completed between guest stays. In addition to homeowner's insurance, you may need to buy insurance that offers additional coverage specific to STR properties.

Occupancy cost for STR properties can include expenses associated with listing it on booking websites, commissions or fees charged by the OTA platforms, and hiring a professional Airbnb photographer. If property owners hire property managers to take care of their vacation rentals, property management fees will also be part of the occupancy cost.

Keep in mind that in many locations, short-term rentals may require special licenses or permits, so you'll need to obtain a certificate of occupancy and pay a licensing fee. Local taxes may also be specific to running short-term rentals in your area. You need to consider all these costs when setting your rental price.

Importance of Understanding Occupancy Cost

Managing and understanding occupancy costs is vital for Airbnb investors, property owners, and STR hosts because these expenses significantly affect a rental's profitability. Optimizing these costs is key to running a profitable short-term rental business. You need to consider these expenses when setting your pricing strategy. Ensure your rates are competitive to attract travelers and cover operational costs, such as maintenance, cleaning, and utilities. To ensure the financial success of your rental, it's also essential to balance your nightly prices and occupancy rates.

You can increase your occupancy rates by using multiple channels to market your property and reach potential guests. You should consider listing your rental space on major OTAs, such as Airbnb, Vrbo, and Booking.com, and have a direct booking strategy. This way, you'll be able to expand your reach, build customer loyalty, and save on OTA fees, reducing your operational costs.

If you opt for Hospitable, you can take advantage of our Direct feature and easily build a direct booking website even without technical skills. We'll list your property on Google Vacation Rentals, and you'll be able to get direct bookings with zero investment in promotions and without paying hefty third-party fees.

Occupancy Cost Formula

Calculating occupancy costs is rather simple. You need to gather data for each component of occupancy costs related to your short-term rental property and sum up the individual components. That's why it's important to track all your actual occupancy expenses.

You should also consistently review your costs against your income and calculate the occupancy cost ratio. It is calculated by dividing your total occupancy cost by the total revenue generated from your rental. Since the occupancy cost ratio is a percentage, you must multiply the output by 100.

A lower occupancy cost ratio generally suggests better profitability. If the ratio is higher, it may signal issues, such as high maintenance expenses. Then, you should look for ways to reduce costs or adjust your pricing to increase your revenue. Download our comprehensive e-book on reducing operational costs while not losing on the comfort of your guests.