STRA Episode 8 : How Many Nights do I Have to Have Rented to Break Even?

The Short Term Rental Authority Podcast

Episode 8: How Many Nights do I Have to Have Rented to Break Even?

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[00:00:05] Hey guys. Welcome back to the podcast. The short term rental authority podcast. We are John and Wendy Williams here to make you the best operator ever.

[00:00:15] And today's topic is how many nights. per month, do you have to get it rented in order to break even right. And the answer to that is, and the answer is, it depends. John's answer to everything it depends. It truly does. But here's, here's what you need to figure out. You need to figure out what are your expenses?

[00:00:37] So what are your, what are your basic expenses? Meaning if no one stayed there. at all that place still costs you something, right? We call it fixed expenses, but yeah. It's your fixed expenses. Yeah. And the reason what he said, eh, is because, well, you're figure here, I'll tell you what they are. They're your, what the place would rent for per month as a long term rental.

[00:01:00] It's your gas, electric. Your utilities, water, all utilities, right. Which are technically variable, meaning they aren't exactly the same every month. Right. They're just not, but we include them as fixed expenses because we have to pay 'em regardless. You still have to pay something for electric. You don't turn it off when it's vacant net, right?

[00:01:21] Yeah. Internet's more of a, I know what that is every month. Cuz it's the. Unless you have a plan that goes over data or whatever, but the, the idea is I, I need to know what all of those expenses are and it doesn't, here's what it doesn't include. It doesn't include cleaning. It doesn't include these other things that you are actually charging a fee for when someone is staying there.

[00:01:43] Right. So it's just your fixed expenses. It's your rent? It's your. Utilities utilities. It's your insurance insurance. It's your, any software subscriptions you have that you pay either way. It's those things, and you add all that up and now you have a monthly [00:02:00] number, cuz truly that's what break even is it's right.

[00:02:03] How much am I paying every month? How much am I paying every month? And how much do I have to make to break even mm-hmm to bring that back to zero. Right? Right. So. the question really becomes is, well, how much do you charge per night? Mm. So if you're, if your fixed expenses were, you know, $2,000, just to make it a round number and make the math easy, if you charge $2,000 a night, the answer is one, right?

[00:02:32] if you charge a thousand dollars a night, the answer is two. If you charge $500 a night, the answer is I need four, cuz I'm trying to get to 2000. so it's very dependent on what is your nightly rate and the challenge becomes that your nightly rate? Well, at least it shouldn't be it should not be the same across the board.

[00:02:56] Right. And it's very seasonal. So when I say it depends, not only does it depend on what are you charging per night? It also depends on when, in other. here in, for example, in our market, our seasonality is January's our worst month, June, July. Our tend to be our best months. So the number of nights we need to break, even in August, because we're charging more per night is actually less than it is in January, right?

[00:03:26] Because we have a certain number that we have to get to, to break even that month. And if we're able to charge. That average daily rate char, if we charge more on that average daily rate, then we don't need to get it booked as much. Correct. And, and so average daily rate with that term it's or ADR, what that is, is what on average.

[00:03:52] do you charge per night because every night's different weekends are different, even if it's just, Hey, it's this price during the week and this price on the [00:04:00] weekend, or it's this price in January and it's this price in July, right. It changes. Right. So your ADR actually changes per month. So how do you, how do you get to a place where, okay, I know I'm going to be able to make it.

[00:04:14] And what we suggest is start looking at things over a 12 month period. Yeah. So start looking at average. Instead of trying to, trying to say this month, it's this and this month, it's this eventually you will figure that out as you have data, but you almost have to be operating for a year to, to know what your numbers are.

[00:04:32] Yeah. I think that's a, a really interesting mindset shift that, that a lot of people need to make that are thinking about going into the short term rental spaces. yes, you do want to, to make money we're in business to make money, but it's important to, to think about it in think bigger, think, think, think of it in a year's worth in, in terms of a year instead of a, a daily rate.

[00:05:05] Yeah. And so what you're looking for now is now what you can start doing is aver. out over the whole year. Right. And that's why you, why that's why you need to make that mindset shift. I think. Yes. Yeah, because it's, it's hard to say. That's why I said it depends. Cuz I had said, well, is it January? Or is it July?

[00:05:24] Right? Right. So you need to have that mindset of, oh well. Okay. And I I'm let's look at bigger time periods. Let's let's make it let's let's go bigger here. Right. So the question was what's my average daily rate and the, and the real question is, well, what's your average yearly rate. Yes. Right. Is the real thing.

[00:05:45] That's the real S what's your average daily rate over a year's period. Yes. And now you can start getting into, okay. On average, I need 13 days of the month rented to break even. Right. Right. But that probably means that in [00:06:00] January you need 20. And in July, maybe you need seven, right. But it averages out to 13.

[00:06:06] Yes. So you're, so you're looking at, as long as you're looking at it over a long period of time, you can get more accurate with what mm-hmm that actual break even number is. Yeah. So I think that's a really great nugget. What you just said was mm-hmm the, it just shifting your mindset a little bit to. Not focus on so much about the, the, the average daily rate.

[00:06:28] Think of it as a average yearly rate, right? Yeah. Which essentially comes down to an average daily rate, but take the yearly amount, take amount and divide it by 365 if you want. Okay. So if that's the case, then where, how do we even get started? Let's let's talk about. the tools that you can use to, to come up with that number.

[00:06:56] Right? Cause that is a problem like that. It's, it's way easier to come up with that number if you've been operating for a year, right. Or even six months. Cause at least you have six months of data, but if you, if you're just starting and this is your, you know, only property of that type in this area, you have to have some way of figuring or at least estimating.

[00:07:18] out to figure out, okay, what on average? And by the way, it's like, Hey, what you're really asking is does that sound reasonable? Can I get half the month rented and break even, or whatever that number is? Yeah. I think that is at the actual question that people really want to know the answer to. Right. Cause I always ask, why are you asking?

[00:07:37] Well, I I'm afraid. do well. Right. And that's the concern is the fear that I'm not gonna get it rented. Yeah. And how do I estimate that? Yes. So yeah, here, here's a, a, a way to estimate that there's a tool out there called air DNA air DNA. Yep. And it's a subscription service you're going to want to pay for at least a month of it.

[00:07:59] That's the [00:08:00] only way you're gonna get all the data you need. What it does is it looks at all of the reservations in your area on two platforms, Airbnb and V R B O. And it will come up with averages for every, say, two bedroom in that area and say, Hey, here's the average revenue for two bedrooms in your area.

[00:08:24] But, but not all two bedrooms are created equally. Right? They're not. So you can, they're not even if they're next door. Yeah. And air DNA doesn't know that part. That's the problem. So the, you can't while it's all the data, that's the good part about it. The bad part about it is it's all the data. Right? so if I, for example, if what you're really looking for are, because remember, we're trying to figure out what is the annual revenue for.

[00:08:54] The two bedroom I have. Well, I don't know yet because I don't have data. So I'm gonna go out to the market and look at other two bedrooms and what you have to do with a tool like air DNA is realize that 78, 80% of the data is actually junk and it's not useful to you. So what you have to do is go find true comps, cuz you're true.

[00:09:13] Comps are not necessarily just other two bedrooms. Right? We've talked about this. It's not about the real estate. It's also about, are your photos good? Were they professional or did you do cell phone photos that affects profitability? Did you have it designed or did you let your cousin do it? Who bought stuff off Facebook marketplace?

[00:09:33] The, you know, these things come into play. How long has that listing been up? In other words, is it someone who. Has this two bedroom that they make it available all year and it's only for guests or. is it the place they actually live in and they only rent it out when an event comes to town and then they go on vacation.

[00:09:54] Right. But, but both of those types of properties are on air DNA and air [00:10:00] DNA doesn't know the difference. Right. And it's just gonna say two bedrooms do this. So what you have to do then is go in that area, open up air DNA, pay for an area. Usually it's a zip code or a city, and it will show you all the little dots on the.

[00:10:16] and guess what you're gonna have to do, and you're gonna have to click on those click on every single one of those and click through to the listing. And here here's what you're looking for. And air DNA will tell you some of this and the listing will tell you the rest. So, oh yeah, this is good. So here's your three criteria for a true comp you're looking for a property that's been available at for at least 300 days to the last 365, 3 available for at least 300 days.

[00:10:41] out of the last 360 out the last 365. So I'm looking for some, somebody that's actually it's been operating for a year, essentially. Right? Mm-hmm I'm looking for, does it have reviews? I mean, active reviews for every single month in the last year, like recent reviews? No, I mean every single month in the last year specifically, because I want to know that okay.

[00:11:01] It was available, but were people actually staying there? Yeah. Right. That's that's your that's you have to click through the listing to find that. You know, does it have reviews? Is it truly an active listing? Cause it could be on there. And if it has no reviews in the last year, then it's not a comp, right.

[00:11:18] It wasn't truly available for some reason, right. People weren't staying there. And the third criteria I'm looking at is, is it truly comparable to the property? I'm looking at meaning if, if it has a pool and mine does not, then I may expect it to actually make more money than. right, right. Or am I planning on doing professional photography, but this one has cell phone photos.

[00:11:44] Well, I would tend to do better than that property. Right. And so, so I'm looking at the amenities. I'm looking at the quality of the listing. I'm looking at frankly, it's location. If it's, you know, on the lake, that's different than being two streets back, right. That's a [00:12:00] good point. So I'm, I'm looking for something and, and what I'm really trying to find is who's, who's the top of the market.

[00:12:06] Because it will show you their annual revenue, as long as it meets those criteria. Who's at the middle of the market and who's at the bottom of the market and I'm gonna get a range there. And then I'm gonna go back to my property and be very true to myself and say, where does my property fall in that spectrum?

[00:12:28] Hopefully we're not ever in the bottom of the market. Right. Cause we're at least gonna have good photos. Right? at. But that will tell you what the bottom is. You know, even if you do poorly, I know I can beat that. Yeah. Here's what he can expect. Yeah. But like I said, the top of the market may not be you because maybe that's recently renovated and has a pool and right.

[00:12:48] A great location and you don't. Right. But if you have all those things, then, okay, that's your, that's your cop, but it's gonna give you a range in there. And I like to pick something in the middle, cause I know always I can always compete in the middle. Right. Just being an experienced operator. . And now that I have that yearly revenue number from that kind of middle ground, now I can back that into, well, I can simply divide by 12 and get monthly average revenue.

[00:13:13] So you take the yearly number and air DNA will tell you what that year it's. It's gonna tell you yearly revenue. Yes. And that remember that's what, that's the mindset shift that we're, that we're trying to. Talk about and, and teach you about, so you take that yearly number and divide that by 12, and that at least gives you a monthly number and that will at least give you a monthly number, right?

[00:13:37] Yes. And if I simply divided that by 30, it would tell me what my average daily rate was. Right. Because remember, I know it's not gonna be a hundred percent occupied, but the revenue has taken that into account already. Sure. Right. Right. So you take the yearly average. Divide that by 12, that will give you a monthly average.

[00:13:58] And you can take that monthly [00:14:00] average and divide that by 30. And that will give you an average day, an average daily rate that then now I can say, okay, now that I know what my expenses are, I can simply take my expense average expenses, divide that by the average daily rate. And then I'll tell me on average per month, what I need to do to break.

[00:14:22] but again, then you kind of look at seasonality and you know, you're not gonna do that exact number every month. You're just not right. Right. Hopefully that's just break even hopefully do better than that on average. Well, we're not in business to break even. Right. But that that'll, that'll give you an idea, but at least it'll give you an idea.

[00:14:37] A start. That's a good starting point. If you're just getting started and keep in mind, it's just an estimate. So it's, it's not gonna be exact. Right. And there are other things that come into play. Like I, it's not gonna be vacant. We're gonna have cleaning. We typically charge a little more than the cleaners charge us.

[00:14:53] So there's a revenue source there, right? So there are other revenues early, late check-ins pet fees. Yep. All those kind of things that Aird a isn't considering, right. Extra cleanings that are actually sources of revenue as well. But you can almost just treat those as icing on the cake and kinda leave 'em out of the equation.

[00:15:09] Sure. I think that's smart to do, because we really were just choose, you know, talking about average daily rate. Right, right. The, the, the, the room rate mm-hmm, what we charge for the room. So air DNA is a great tool that, that you can use. And we've just explained how to use that. And you also have another really great.

[00:15:32] for people. Oh, another source of figuring out that uh, yes. So here's, here's another way you can kind of estimate what the average daily rate is call up your local extended stay and it has to be an extended stay hotel. Yeah. You're looking for a place that has a kitchen at that's that's the primary criteria.

[00:15:50] So you're, you know, extended stay Americas, a large one you're, you know, Candlewood suites. There's different brands of these extended stay hotel. And you're looking [00:16:00] for a hotel room with the kitchenette. Cause that's the closest they're gonna get to what we do, right. And simply call them, don't go on the website.

[00:16:08] No, don't go on the website. Like simply call them and get a quote for an actual two months. Stay say, I wanna stay September 1st through. November 1st. Yeah. can you tell me what the bottom line rate is on that? Cause they're gonna add all their fees in and all their other stuff. Mm-hmm and then simply divide that by two, cuz you asked for two months and that'll tell you what they're charging per month.

[00:16:32] Yep. And that should be, and, and, and the reason I go there is because, well, they spend a lot of money. They have data scientists and analysts and their, the professionals in your market. So I want to know what are they, what's their average daily. over that two month period. And how does that compare to what I'm doing?

[00:16:51] Right. So get a two month or a 60 day quote. Yeah. Cause that, yeah. Cause you're gonna get their, you're gonna get their best rate. Yeah. If you ask for a two month quote. Yes. Yeah, exactly. So get that number for the 60 days. Divide that by two, that will get your monthly for them. And then divide that by 30 and gives you at least what their average daily rate.

[00:17:15] Right. So it kind of gives you a sniff test of, you know, where it, it is what I'm doing comparable now. Obviously they're one bedroom hotel rooms, in fact, they're studios really? Yeah. With a kitchen net. Yeah. So that's more apples to apples with like a studio apartment. So if you've got a four bedroom house, you should make more than that.

[00:17:37] But it at least gives you on a room by room basis. What, what they're doing. Oh, that's good. That's good. On the room by room basis. Mm-hmm mm-hmm yeah, I like that. So, so those are two ways that may help you. Yeah. It's another data point to, to determine that information. So anything else? No, it's just all about knowing what your [00:18:00] base expenses are.

[00:18:01] Yeah. That's that's number one. Because you have to know what breaking even looks like for you, for you, and then figuring out what historically has that market done. And then with those two numbers you can kind of back into, okay, what's my average number of days that I need to have booked to at least break even.

[00:18:21] Right. So that, again, we're looking at 12 month period, we're looking at averages, but that's about as close as you're gonna. To coming up with what, what is break? What does break even look like for me? Right? Mm-hmm good job. Nicely done. Excellent. Who are a wealth of information? Well, you are too. I am well, we, we hope that you found some value in the information that we have shared with you today.

[00:18:48] If so, be sure to like, and subscribe and we will see you next time onto the next, onto the. Nice.

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