The most overlooked costs in a short-term rental property and how to plan for them

Management
Posted on
February 28, 2022

The old adage is true: Sometimes it takes money to make money.

With real estate values continuing to climb, the short-term rental industry is an industry with a particularly high cost of entry. Although the initial investment in property can be steep, the returns can be even higher.

Market research from leading short-term rental data provider AirDNA shows that the short-term rental industry isn’t slowing down – demand is booming, meaning property managers can fill their calendars and charge more per night.

AirDNA tracked more than 19 million nights booked in January, 41 percent higher than in January 2021 and 22 percent higher than in January 2020. Revenue is also growing, with AirDNA reporting a 30 percent increase in average daily rate compared to 2021.

Although the return-on-investment looks attractive on the surface, there are other costs that must be factored into a short-term rental budget. Before you head to Zillow to find your next rental property, be sure to factor costs including insurance, maintenance, taxes and furnishings into your calculations.

We’ve compiled a list of some of the most overlooked costs associated with running a short-term rental business so you can make sure all your bases are covered.

Platform service fees

Host fees can range from 3 percent on Airbnb to 15 percent on booking.com, but it’s not an apple-to-apple comparison (we’ll dig deeper into individual platforms at a later point in this roadmap). Unless you are able to list your property on your own platform — which is becoming easier for property owners with tools from services like Futurestay — service fees are expenses that cannot be avoided.

Property management

Property management fees can cut into your revenue but may be a worthwhile investment if you’re looking for more passive income.

Furnishing

More short-term rental guests are seeking a unique aesthetic when they search for a property, so it’s important to put thought and care into the furniture and decor. It is best to avoid cutting corners to save money when it comes to furniture — not only will guests appreciate the quality, but cheap pieces will need to be replaced far sooner. (If you are on a tighter budget, you can find bargains at estate sales or secondhand shops.)

Furnishing is one area where many new hosts go over budget, as they plan for the big ticket items like beds and dining room tables but forget to account for the details like shower curtains and lamps.

Guest supplies & toiletries

Short-term rental guests expect to find linens, pillows, towels, toilet paper and other essentials when they arrive. In fact, failing to provide these items is one of the fastest ways to earn a negative review on online booking platforms. If you plan on quick turnovers of your property, you will need a few sets of each so they can be quickly swapped before the new guests check-in.

Ask yourself what level of hospitality you want to provide your guests, and work items into your budget that will win them over. Popular perks that are often mentioned in reviews include coffee pods, bath robes, extra toiletries, a basket of local food and recreational equipment like bikes or kayaks.

A welcome note with a small gift, like a bottle of wine, is usually an appreciated gesture.

Utilities

You may be great at conserving energy, but that does not mean your guests will turn lights off when they leave the room or keep the A/C at an efficient setting. Be generous when budgeting for utilities and consider it a bonus when bills are lower than expected.

Insurance

Spend some time in short-term rental Facebook groups or Google “vacation rental horror stories,” and you’ll likely be ready to purchase the most comprehensive insurance policy you can find to protect yourself and your short-term rental.

Cleaning

Do you have the time, energy and attention-to-detail required to make your rental shine between guests? For most hosts, the answer is no — and that’s why an entire industry has emerged for short-term rental cleaning services.

Cleaning a short-term rental requires far more than mopping the floor and wiping down the counters. Cleaners are also asked to do laundry, make sure the home is staged properly and restock essentials like toilet paper.

Many guests are accustomed to paying for a cleaning fee when they book a short-term rental, but calculating your costs and setting a price will take some time. Average cleaning fees on Airbnb range from $65 for small spaces to upwards of $200 for large homes with more than six bedrooms.

Start by requesting quotes from cleaning services in your area and decide whether you will mark-up the cleaning fee to account for the time spent booking and managing the service.

Maintenance and repairs

Unfortunately, plumbing emergencies and broken furniture is the cost of doing business in real estate. Between emergency repairs and maintenance on appliances and plumbing or electrical systems, landscaping, pest control, painting touch-ups, and property repair, the costs can sneak up on new hosts.

Maintenance is hard to accurately estimate, but it is essential to be prepared for unexpected costs. There are a few loose formulas that some short-term rental managers use to estimate their costs. Some calculate by square footage, estimating $1 per square foot for yearly maintenance costs. Others base it on their monthly rental rate, estimating maintenance costs will average 1.5 times the monthly rate.

Although some online booking platforms offer damage protection, and additional insurance might cover other repairs or emergencies, it’s risky to rely on those pay-outs. It’s often difficult to prove that a particular guest put the scratches on your dining room table or broke the refrigerator, as normal wear-and-tear could also be the cause. (A broken window or a hole in the wall are more likely to be covered, but photo documentation between guests is important.)

Taxes

While occupancy taxes are meant to be paid by short-term rental guests, property owners are still responsible for their share of taxes. Hosts will owe income tax on any revenue from their short-term rental, but the way the tax is assessed depends on the number of nights the property is used and the level of service provided, among other factors.

If you rent out your property for no more than 14 nights per year and stay there yourself for at least 14 nights, the income does not need to be reported to the IRS — however, if you’re reading this roadmap, you are probably hoping for more than two weeks of rental income.

Short-term rental income is generally considered “passive rental income” and the amount you’ll pay is dependent on your tax bracket. However, if you are found to be providing “substantial services” to your guests, you may be subject to self-employment tax, which is an additional 15.3 percent in taxes that is best avoided. Substantial services would be similar to providing a “bed and breakfast” experience, where you are providing breakfast to your guests each morning or changing their linens daily. As typical rental operations like cleaning between guests or providing essential toiletries do not count as “substantial” in the eyes of the IRS, most short-term rental owners are not subject to self-employment tax.

A meeting with a tax professional can help new hosts avoid tax penalties or unwanted letters from the IRS.

Vacancies

Ambitious short-term rental hosts often create a budget based on a full booking calendar, but it is wise to account for vacancies. Even if your property is not being used, you’ll still be incurring some costs as the owner.

Mai Catania
Head of Customer Success

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