[Article updated in October 2024]

Optimize the profitability of a vacation rental is essential to maximize revenues and ensure that the property is generating the best possible return. It's not just about increasing revenue, but also about minimize expenses and manage the property efficiently.

To get started, it's key to understand How to calculate the profitability of a tourist apartment, as this will allow you to make informed decisions about how to improve it.

In addition, the effective management of a vacation rental apartment can make the difference between a successful investment and one that is not successful. Therefore, in this article we also tell you some of the strategies that you can implement as a manager or owner of an apartment to increase the profitability of your vacation rental.

How to calculate the ROI of a tourist apartment

El ROI (Return on Investment) of a vacation rental measures the ratio between the income generated and the investment made in the property. To calculate it, follow these steps:

1. Determine the income generated by the rent: This is the total amount you receive for nights rented over a year.

For example, if the average price per night is 100 euros and you rent the apartment 200 nights a year, the annual income would be 20,000 euros.

2. Identify expenses: Includes all operating costs or operating costs - recurring vs. variable - such as cleaning, maintenance, supplies, taxes and any commission you pay to rental platforms such as Airbnb or Booking.com. You should also consider the initial costs of investment of the property for rent, and your financing if you're still paying off a mortgage. The expenses that are borne by the tenant should not appear in the equation, since they are already covered and it is not necessary to calculate them as own expenses.
3. Apply the ROI formula: The ROI formula is equal to (Revenue - Expenses)/Initial Investment x 100.

Example of calculating the profitability of a tourist apartment and ROI

Calculating profitability allows you to evaluate the financial viability of the investment and make informed decisions on how to optimize it. If the expenses do not exceed the costs in the total calculation, we will be looking at a profitable vacation rental.

• The traditional profitability equation for a rental is usually expressed as: Revenue - Expenses = Profitability. This basic approach calculates the net benefit obtained from the property.
• However, the formula that refers to ROI (Return on Investment) or “Return on Investment” in Spanish, is calculated as: ROI (%) = (Revenue - Expenses)/Initial Investment x 100. This metric is slightly different and broader, and is widely used in real estate investments to measure the efficiency of an investment in percentage terms.

Let's imagine that you bought an apartment for 100,000 euros. Your annual income is 10,000 euros, and expenses amount to 4,000 euros per year. The ROI calculation would be:

ROI = (10,000 - 4,000)/100,000 x 100 = 6%

This means that the Profitability of vacation rentals is 6%, meaning you get a 6% return on your initial investment.

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ROI is useful when we want to evaluate the performance of a long-term investment or compare different types of investments. While daily or monthly returns tell you about operating profit, ROI gives you an overview of the return you have generated in relation to the capital you initially invested.

Both formulas have different objectives, the important thing is identify which properties are profitable and which are not. To do this, it analyzes the financial performance of each property, taking into account factors such as location, size, amenities, market demand and associated costs. By separating properties that generate benefits from those that don't, you can make strategic decisions about how to allocate resources and maximize the return on your property portfolio.

Nowadays, thanks to the technological platforms, analyzing these performances is relatively simple, easy and fast. With our basic real estate supply management software, you can identify the attributable cost of supplies for each of your real estate assets, by period of stay, number of tenants and seasonality, and thus accurately analyze the performance of each period, thanks to the centralization and digitalization of invoices.

Strategies to improve the profitability of your vacation rental

Both in properties with the most benefits and those with the least, it is necessary to invest time and money to improve their operation. The better the user or guest experience, the better the review, the better the score and the more bookings.

Hay 7 strategies that you can follow as a manager or owner of a vacation or temporary rental to boost the profitability of the property:

1. Implement an automated system for communicating with guests and managing reservations

This makes it possible to provide a quick response to guest inquiries instantly, as well as to inform about cancellation policies or other issues that may interest before making a reservation or before arriving at the place of stay. In addition, it is a good strategy to expand the number of reservations thanks to the fact that the automated system allows you to be open 24/7 and resolve doubts or questions quickly and easily.

This speeds up the booking process and associated procedures, and it means that the hiring experience and all the previous steps before enjoying the stay are agile and positive.

Some rigs that can help you with this are Icnea, Avaibook, Avantio or Holidu.

‍2. Use dynamic pricing tools to attract more guests without sacrificing profitability

Before setting prices, research the area's vacation rental market. Analyze what types of properties are popular, what the average prices are and what services are usually offered. Then, set competitive prices that are in line with the local market and the quality of the property in question.

At present there are software programs to manage prices of a vacation rental with dynamic prices: the higher the demand, the higher the price, the lower the demand, the lower the price. Some of these platforms are Beyond Pricing, Pricelab, Listing OK or Turbosuite.

‍ 3. Use vacation rental platforms to expand your audience

List your property on vacation rental platforms such as Airbnb or Booking.com to reach a wider audience. These platforms usually have a large number of users who are looking for vacation accommodation.

The profile must be optimized, with high-quality photos and a detailed description. It is also recommended have your own website where potential customers can see more information or photos, access to offers, flexible check-in/check-out, and other conditions.

In addition, benefit from other digital channels such as social networks to reach a wider audience. Communication should always be clear and transparent.

‍4. Make even more use of the online environment to improve the positioning of your business and brand

Online reviews are crucial to improving the profitability of an apartment for rent, as they influence the trust of potential guests. Positive feedback can attract more bookings and drive up the price per night.

The feedback provided by tenants will help you in turn to correct deficiencies, optimizing the guest experience and generating higher long-term income for your property.

5. Expand your offer through welcome details

Without falling into a waste that would increase costs and decrease profitability, it is advisable to leave some details for guests such as some sweets, coffee or tea. Add amenities and additional services can make the property more attractive to guests and allow managers to charge higher rates.

This category also includes services such as high-speed Wi-Fi, smart TVs, streaming services such as Netflix or HBO, luxury toiletries, and others.

‍ 6. Keep the property in good condition and well furnished

Cleanliness and maintenance are essential to ensure a good experience for your guests and to get positive reviews. Make sure you keep the property clean and in good condition, and resolve any maintenance issues in a timely manner.

It also attracts a lot of attention from tenants, a flat with modern furniture, useful for their needs as travelers. Comfort is a key point in getting the guest to leave you a 5-star review.

‍7. Control the invoices that derive from the real estate asset

How to control the billing of a vacation rental apartment is one of the key strategies to consider if what we want is to make the asset more and better profitable. In this regard, the calculation of the nightly occupancy rate may not be correct if all expenses and utility bills are not taken into account.

With technological tools such as Polaroo, having control of all invoices in a centralized way becomes easier, since you can access to all expenses related to a property, and from there improve the calculations to know their profitability. In addition, having such detailed information also helps detect leaks or abnormal electricity or water costs, leading to improved profitability.

Frequently asked questions about vacation rental profitability

Is it important to calculate the profitability of a vacation rental?

Yes, calculating profitability is essential to evaluate if your vacation rental is generating the expected income in relation to the associated costs. Without this calculation, you could be operating a property that isn't financially viable in the long term.

Use the profitability and ROI formulas we talked about at the beginning of this article and measure how profitable your rental business is being, both in the short and long term.

Is a vacation or traditional rental more profitable?

It depends on several factors, such as location and demand. Vacation rentals tend to generate more revenue per night, but they have more occupancy fluctuations and additional costs (such as cleaning and frequent maintenance). Traditional rentals, on the other hand, offer a more stable income, but generally with lower rates.

In addition, there are also differences between the type of vacation home and Housing for Tourist Use (VUTs). What is the best rental option for your investment? We'll tell you about it here.

Do I need to hire a supply management service?

It's not required, but it can be very beneficial and cost-effective. A management service such as Polaroo software offers you a technological solution to control all bills and consumption related to your vacation rental.

By being able to digitize all utility bills, such as water, electricity, gas or internet, among others, and to have consumption data centralized. With Polaroo, you can detect leaks or abnormal expenses and optimize the profitability of your property. In addition, the team of experts at Polaroo works on optimization, savings and administrative management studies, such as the change of ownership of supplies, so that the real estate assets associated with the platform are up to date and have the best rates in the market.

To learn more about the Polaroo service and how to improve the profitability of your vacation rental, learn what some of our customers have already achieved and request a demo.