When you invest in a vacation rental, you’re focused on the impressive profit you’re going to earn. You’re not thinking about the hidden expenses you could potentially accrue.
Don’t get us wrong. There is huge potential to make a vacation rental profitable (and we have thousands of owners who can attest to that). But there are costs associated with this business, and you don’t want to make a sizable investment in a vacation home if you’re not sure it’s going to pay off.
When you calculate your expenses, you have to factor in the cost of your loan and mortgage, insurance policies, utility bills, and the occasional tab for repairs and other routine home maintenance. On top of all of that, there are a few less-obvious things you shouldn’t forget to build into your budget.
We put together a comprehensive list of unexpected expenses you might run into, so you can make sure you’re generating enough income to make your investment work.
More likely than not, you’re going to have to pay taxes on your vacation rental income.
To avoid a surprise when April rolls around, talk with a tax consultant ahead of time to get an idea of how this is going to affect your year-end finances. Remember that you can deduct some of your vacation rental business expenses, so find out what you can write off and factor that into your budget.
You will separately have to pay lodging taxes for your vacation rental – this is a form of sales tax that most owners pass along to guests. If you want more information about lodging taxes, check out the following two posts from My Lodge Tax:
- The Income Tax Filing Season Is Upon Us – How to Handle Lodging Taxes Properly
- The Top 5 Lodging Tax Mistakes You Don’t Know You’re Making
City or state licensing requirements
If you’re making a significant amount of rental income with your home, it’s more than a side-project – it’s a business. And to run your business, you’ll likely need a license through your county, city, or state government. Contact them to find out what they require and how much this costs. But to give you an idea of how this might add up:
- The fee for the application and a license in Chicago is $500
- The fee for a license for a 3-bedroom home in Breckenridge is $150
- The fee for a vacation rental certificate in Palm Springs is $900
Costs to HOA for short-term rentals
It’s possible you’ll have to pay additional fees to use your property as a short-term rental if you are part of a homeowner’s association. When you contact your HOA to inquire about these costs, ask about additional rules or regulations you’ll need to follow.
Short-term rentals can be a source of contention for permanent residents in private communities. They worry about guests being noisy or disrupting their daily life.
By learning the rules and paying an additional fee for things like extra trash pickup days or security measures, you can avoid tension and retain a positive relationship with your neighbors and HOA.
Many owners have separate bank accounts for their rental income so they can keep their finances straight. It’s a great way to track your income and stay on budget, but it contributes an extra cost that’s easy to overlook.
The fees to manage a separate checking account for your rental income might run you around $150. But it can also cost as little as $0.
It all depends on the type of account you have and the bank you belong to, so if you choose to set up your bank accounts in this way, look for an account with favorable terms to save some money.
If you’re planning to take online bookings, you’ll need to factor in the 3% fee assessed for credit card transactions. It sounds small, but it can add up over time. That’s a $30 fee for every $1,000 earned.
Unfortunately, there’s nothing you can do to avoid these charges. That’s simply how much it costs to process these transactions, and every merchant has to pay them. However, you can (and should) plan for this fee by building it into your vacation rental budget as an additional expense.
Most full-service property management services will charge you between 30% and 50% per booking. On a $1,000 booking, these fees will run you between $300 and $500 – which is a decent chunk of your rental income!
Unlike some of the other costs we’ve laid out here, this is one that you can offset. One way to cut these costs is to do handle the management yourself. If you don’t have time for that, or feel that the liability is too much to bear, you might want to consider a more flexible option, like Evolve, which offers a much more affordable approach to vacation rental management.
Listing your property on booking sites
You have to spend money to make money with booking websites. Here’s what it costs to list your home on any of the top booking sites:
- Annual HomeAway subscriptions are $399*, or you can pay an 8-10% booking fee
- Annual VRBO subscriptions are $399*, or you can pay an 8-10% booking fee
- Airbnb charges a 3% booking fee
- FlipKey charges a 3% booking fee
- TripAdvisor charges a 3% booking fee
- Booking.com charges a 15% booking fee
*HomeAway fees are set to increase to $499 this year. Read more about that here.
If you can swing it financially, the best approach to vacation rental marketing is to list your home across all of these sites to reach the biggest audience. Some property managers will do this for you with the fees included in their services. If you’re considering a PM, ask what they offer and how much they charge before you sign anything.
One of the ways Evolve makes vacation rental easier, and more affordable, is by listing owners’ homes on the major booking sites for free. Our 10% fee also covers a custom listing, professional photography, a full-time customer service team to respond to guest inquiries, and access to our network of vetted and verified service providers.
Most owners pass routine cleaning fees along to the guests, so this shouldn’t be a regular cost. It is a good idea, however, to schedule annual deep cleans in spring and fall. A deep clean is when your housekeeping company takes care of tasks that aren’t needed as often – like steaming the carpets, cleaning the oven hood, scrubbing the grout, laundering the drapes, etc.
It’s an additional $200 to $400, but the expense keeps your home and furnishings in better shape for the long run.
To keep guests comfortable during their stays, you have to pay for heating and cooling costs.
While it’s hard to assess these costs without knowing your area’s climate or your home’s climate control system, the ballpark for a heating bill is between $100-$300 per month during the winter. In hot-weather climates, air conditioning bills average $80-90 per month throughout late spring, summer, and fall.
You can combat these costs with a programmable thermostat that regulates the temperature when you don’t have guests in residence. Or, you could leave a note in your welcome book asking guests to turn the temperature back up (if the AC is on) or down (if you’re running the heater) to settings that help you save energy when your home is vacant.
Vacation rental linens have to stand up to a lot of wear and tear. Your guests are using them on a regular basis and your cleaning company is laundering them between each stay.
Replacing stained towels and worn-out sheets can become a significant expense for owners. A nice set of 12 towels costs upwards of $169 and a nice set of sheets is around $70 per bed on The Distinguished Guest, a website that specializes in vacation rental amenities. While that seems pricey, founder Alanna Shroeder, insists the expense is worth it. Nice linens last longer, and a comfortable bed is precisely what guests want at the end of the day!
So skip the sticker shock and build these necessities into your budget from the get-go.
Spare toothbrushes, tubes of toothpaste, bars of soap, toilet paper, bottles of shampoo and conditioner might be an additional $5 per booking or as much as $25 per booking.
If you’re providing these basic toiletries to guests – and we highly recommend that you do – you’ll need to factor these small costs into your budget.
The high price of vacation rental success
Vacation rental success requires that you transform a vacation house into a true home away from home. It demands that you outfit the property with all the creature comforts that you would like to have in your own home. You have to go above and beyond to make sure guests have everything they might want and need during their stays.
It’s a lot to keep track of, we know.
That’s why thousands of homeowners have decided to work with Evolve to help manage their vacation rentals.
While we can’t help you redecorate your home in the latest style or do your taxes (although we have partners who can!), we can make the booking and management expenses predictable and manageable.
If you’re interested in learning more about Evolve’s services and how it can help you earn more rental income while doing less work, click here or give us a call at 877.881.7584.