Short-Term Rentals: How to Calculate Profitability and Account for Expenses
Short-term rentals are a popular real estate investment strategy, especially in resort towns. They can generate high returns but also require significant time and financial commitments. In this article, we will look at an example of calculating the profitability of an apartment used for short-term rental, analyze key expenses, and estimate how much time and money are needed to manage this type of business.
Example: Profitability Calculation for an Apartment in a Resort Town
Scenario:
- The apartment is located in a popular resort city.
- Purchase price of the apartment: $100,000.
- Average daily rental rate during high season: $120.
- Average daily rental rate during low season: $80.
- Occupancy during high season (5 months): 80% (24 days/month).
- Occupancy during low season (7 months): 30% (9 days/month).
Revenue Calculation:
High Season Revenue:
- Monthly revenue: $120 × 24 days = $2,880
- For 5 months: $2,880 × 5 = $14,400
Low Season Revenue:
- Monthly revenue: $80 × 9 days = $720
- For 7 months: $720 × 7 = $5,040
Total Annual Revenue: $14,400 + $5,040 = $19,440
Gross Yield (Before Expenses):
Main Owner Expenses
To calculate net profitability, it is important to consider the inevitable expenses incurred in the rental process:
- Platform Fees (Airbnb, Booking.com): Typically 15–20% of revenue Annual cost: $19,440 × 15% = $2,916
- Utilities: Electricity, water, internet: approx. $200/month Yearly total: $200 × 12 = $2,400
- Cleaning and Maintenance:
Cleaning cost per guest: $30
Average number of bookings:
- High season: 24 days ÷ 3 (avg. stay) × 5 months = 40 bookings
- Low season: 15 days ÷ 3 × 7 months = 35 bookings Total: 40 + 35 = 75 bookings Annual cleaning cost: 75 × $30 = $2,250
- High season: 24 days ÷ 3 (avg. stay) × 5 months = 40 bookings
- Low season: 15 days ÷ 3 × 7 months = 35 bookings Total: 40 + 35 = 75 bookings Annual cleaning cost: 75 × $30 = $2,250
- Taxes: Rental income tax (e.g., 5%): $19,440 × 5% = $972
- Repairs and Depreciation: Annual cost for minor repairs and furniture updates: $1,000
- Property Insurance: Annual insurance policy: $300
Total Annual Expenses:
- Platform fees: $2,916
- Utilities: $2,400
- Cleaning: $2,250
- Taxes: $972
- Repairs: $1,000
- Insurance: $300 Total: $9,838
Net Profitability
Net Income: Annual revenue: $19,440 − $9,838 = $9,602
Net Yield: $9,602 / $100,000 = 9.6% annually
Time Commitment
Managing a short-term rental requires significant time investment:
- Management: Communicating with guests, answering questions, handling bookings — approx. 10–15 hours/month
- Cleaning Coordination: Ensuring quality and managing schedules — 5–10 hours/month
- Handling Issues: Breakdowns, complaints, etc. — up to 5 hours/month Total: 20–30 hours/month per apartment
Conclusion
Short-term rentals can be a profitable business with yields of around 10% annually, but they require active involvement and consideration of many variables. Accounting for seasonality, expenses, and time commitments helps set realistic expectations.
If you're ready to make such investments, consider how valuable your time is. If you have no other commitments besides managing your apartment, this model can work well. But if your time is more valuable, it may be worth hiring a professional property management company — their services typically cost between 25% and 40% of rental income worldwide.
