In working with investors in a tourism-based market, vacation rentals are a constant discussion. Not only because other people are interested but because I am shifting my personal portfolio to focusing on them as well. The most common question I always get is, “Tim, you know the market, how much could I get per night and more importantly how often will I stay booked??”. Typically I go through the whole spiel about the various factors that can affect your ADR (average daily rate) and occupancy. Now I’d like to propose a question, why do we focus so much on occupancy when the base rate is what we should be focused on?
Let say for instance someone wanted to stay completely booked. Now I know it is rare to be 100% booked as there is always that stray Wednesday in there that no one wants but we want to look conceptually here. If high occupancy is the focus, they could set an absurdly low rate of $10/night and allow single night stays and they would stay booked 100% of the time in any market. That’s great and all but $300/month is nothing to write home about. Normally when I give this ridiculous example, I am asked, “Well how high can I raise the rate and still stay fully booked?”. Once again the thought is right but the question is wrong.
If you have a property that for $100/night is a complete steal and would keep you 100% booked, you are looking at an income of $3,000/month. Yes, yes, I know, there are factors like taxes and things that cut into it but for this discussion, we are talking gross numbers to keep things simple. Anyway, back to where we were. In order to make that same $3k at $125 you only have to be booked 24 nights. That’s a difference of 20% occupancy!! At $150, it becomes only 20 nights and brings you down to needing a 67% occupancy. These prices while they are increased are not outside of the range you could expect out of a house that is a steal at $100.
Now here comes the fun part! If you book your house 80% at $125 to reach the $3k, you are still left with 6 days empty. If those remaining days had their prices dropped down to $100, you could bring in an additional $600. That’s a 20% increase in your profits!
The next question becomes, “How high should my prices be and when should I start to drop them?”. The answer to this question is knowing when are the most people booking. When I first started working on bettering my pricing on my vacation rentals, I ran across sites like BeyondPricing & Wheelhouse. I personally use Beyond Pricing as it had certain integrations that I needed at that time. In Beyond Pricing have what they call a health score that helps you to gauge the performance of your unit. This is based on your occupancy rate for the next 30 days being close to 50% and your next 90 days being around 32%. The reason these rates are chosen is based on the percentage of people that book a unit within those time period. They found that roughly 50% of bookings happen within the last 30 days before their arrival!!! If you are fully booked for the next 30 days, you are missing out on half your potential clientele! Now obviously this will vary market to market, so I needed to know what were the booking patterns for Galveston. So using a tool called AirDNA which scraps data from AirBnB, here is a chart of booking % based on days away from stay:
Now let dive into this! Obvious by the time of check-in all bookings are booked or else they wouldn’t be there. But 6 days out, only 68% of bookings have been placed! That’s 32% of people who book within a week of their arrival!! If we look at within 30 days, that number jumps to 69% of renters haven't booked yet! If you are fully booked for the next month, you are missing out on 2/3rds of your potential renters!
While I understand that these percentages are an average across the island and there are other factors that can affect these, it is good to have an idea of the market you are in. Now I’d love to say that I try to follow these numbers and stay at 31% occupancy for my next 30 days, but I personally still strive to keep my average at about 50%. Even with all the data, there is a balance of comfort and risk that has to be taken into account.
Next, we need to figure out how to adjust our pricing for those last days. When you use tools like Beyond Pricing and Wheelhouse, the best thing is they adjust your prices for you. They will adjust based on seasonality, day of the week, events, and days left until a date. This is amazing for helping to not forget to adjust for major events! If I had kept my normal rates instead of adjusting for Biker Rally, I would have missed out on $200 extra a night on each of my 2 bedroom cottages! Now to further help and fill in these last-minute gaps, I suggest implementing last minute discounts. With Beyond Pricing, these percentages off can be set for the last 28, 21,14, 7, & 3 days. This allows for those people looking for a last-minute deal to fill in the gaps on your calendar. Personally, mine are set at 10% for 14 days, 25% for 7 days, and 33% for 3 days. This is an area I am still experimenting with but can be a valuable tool.
I say all this to make this point. We all want high occupancy because an empty rental isn’t making anyone money. However, occupancy shouldn’t be the end goal of success. Instead, it is a tool by which we measure the effectiveness of our pricing. It is a measurement by which we make adjustments on a regular basis. Once we’ve accepted this, we can move are the focus to making improvements to our properties to help us to raise our base price. This is what will truly make us successful and competitive in a vacation rental marketplace.
What are your thoughts?
