For typical property management the fee structure for how property managers get compensated is pretty standard but with vacation rentals the way vacation rental managers are compensated is all over the place. Here, we’ll walk through some of the different ways this all works and what to expect as a property owner.
The most typical fee model for vacation rental managers is the commission model where the manager receives a percentage of the gross revenue generated by a vacation rental. This rate typically ranges between 20% and 25%, although that can vary depending on the location, the manager themselves, and how much competition there is in the area amongst vacation rental managers. In this model the property owner typically covers all costs associated with listing and maintaining the property including marketing fees that may go to platforms like Homeaway or VRBO, any costs to maintain the property such as plumbing or electrical, and furnishing the property.
Of course this commission is generally negotiable but how much a vacation rental manager is willing to sacrifice on their end of this commission will really depend on the earning potential of your property. If your property is on the beach in a big tourist destination you’ll probably have better luck getting a lower commission from a property manager than if it’s out in the middle of the desert. The commission model is ideal for property owners who seek to benefit from the high earning potential of their property and are comfortable with the potential risks of not renting their property out. In this model the property owner also has a say in things like the base nightly rate and minimum night stays that are administered by the vacation rental manager, however any good manager will steer a property owner in the direction of maximizing revenue. We generally see this model preferred by property owners who wish to continue to use their property while it’s being rented out short term such as with a vacation home.
We often see property owners get a flat rate from their vacation rental manager. In a model like this the property owner generally treats the vacation rental manager as a tenant that is paying a premium to rent a space and then sublet it on a short term basis. In this arrangement the vacation rental manager is fully responsible for furnishing the unit and the cost of maintaining the furnishings and accessories while the property owner is responsible for everything that they would generally cover in a long term lease such as appliances, HVAC and any issues with the property itself. This model is beneficial to the property owner who seeks consistency on their income and is willing to sacrifice a potentially large upside in favor of a consistent higher return. The flat rate model works well for property owners who have no intention of using their property while it is being rented short term.
On the rare occasion we see a model where the property owner gets both a flat monthly rental rate in addition to a percentage of the profits on a unit. In this model the flat monthly rate a landlord receives won’t be a premium rate but it will be enough to cover the property owner’s cost and will be supplemented by the potential upside of a portion of the profits generated by a vacation rental. While this model may seem like a nice mix of the previous two models it can get a bit complicated especially for vacation rentals in areas that are particularly seasonal in their business.
Furnishing a unit
Outfitting a unit to become a vacation rental is no small endeavor and can be somewhat costly. It shouldn’t cost you near what you would pay to remodel and furnish a property you live in but the costs can still be significant. While these costs are typically covered by the property owner, vacation rental managers will occasionally agree to handle these costs for a property that has significant potential earnings. In the case where a vacation rental manager covers the cost of furnishing it’s common for the furnishing costs to be either paid back out of some portion of the property’s gross earnings or the vacation rental manager will be guaranteed to recoup the costs in some manner.
We generally find that property owners who want to occasionally use the property themselves, such as for a vacation home, tend to prefer to furnish the property themselves so that they can do it to their own tastes and standards while property owners who are more driven by return on investment of the property tend to push vacation rental managers to foot the bill or furnish a property as inexpensively as possible. While we always have an eye toward affordably furnishing a property, keep in mind that cheap furnishings will impact your ability to charge premium nightly rates and cause you headaches in the form of fixing and replacing furniture more frequently.
Finding the right financial arrangement for your relationship with your vacation rental manager is important to your long term satisfaction for both financial reasons and because it will have a significant impact on your property. Just keep your own situation in mind and what your goal is not just financially but also for your property and how you plan to use it.