Cottage Rental Economics, how do you figure out your costs?
Do you know what your costs are? Does it frustrate you seeing other owners advertise rates that you know from your own end are unfair or outrageous? I’m sometimes asked to justify my rates and how I came by the pricing I established for the various time periods: 3 day weekends, 5 days or a week or even a month. I put a lot of thought into this process as I felt there would be times when I would have to justify it. I’m not suggesting I divulge to my regular clients what my expenses are. Nor do I share that information with new rental guests. However, as an owner, it is important that you learn and understand, month to month what your expenses are, and how to manage them. If someone asks you to negotiate from say 1000 for the week to 450 for the week, you’ll know that your cost for a week’s usage is based on $600.00, so you will not be able to accept that price suggestion. And you would have to advise them that it is below your cost and therefore cannot be approved. Perhaps you can then suggest $800 and allow them a later departure time from noon to 4 pm.
It’s a simple user formula that I’ve adopted for years, and I’m sharing it with you to help. Please note, this is not a perfect methodology to what I call, “Cottage Economics”. But is a fairly consistent method and its accuracy depends more upon the auditor who is accounting for his/her expenses. If you are looking for perfection, hire a CGA or CA and they can assist. My ways are for the average cottage rentals owners. This way you will be consistent in:
- Managing your cottage expenses
- Establishing rates that are fair and competitive
- Knowing your bottom line so than you do not quote less than cost
- Being Profitable and establishing a margin that is negotiable
- Create a payment grid that can also provide rebates for volume visits
1. List your expenses and establish the total annual cost of each. You’ll be surprised how quickly it adds up and once you actually know the total amount, it will shock you. Cottages are not cheap to run.
- Hydro if applicable
- Property Tax
- Mortgage Interest if applicable
- Fees (landscape, snow, septic, repairs, cleaning/housekeeping, property maintenance)
- Water if applicable
- Gas or Propane if applicable
- Wood if applicable
- Toiletry extras if applicable
- Cleaning and sanitation extras if applicable
- Inspection costs if applicable
2. Count up the number of months you are operating or host seasonal rentals, short or long term. You’ll find that in all cases, it’s not 12 months of the year. My annual average ends up being 8 months, on average of the year. Some years it has increased to 9 or 10 and some it has decreased to 6 or 7. *Remember something, the more months you are open for business, the more the cottage rental is in use, the higher some of the costs end up being, BUT ultimately, the lower the user costs become even with the increase because the divider increases. When the divider amount increases from 8 months to 12, the cost amounts reduce on average.* You need to understand this if you have any hope in understanding my formulas.
3. Next you are going to want to total up all of your expenses. Always remember to separate your HST payments because if you are properly registered as a business, you are entitled to a reimbursement from the government on the business portion of HST. And when you are invoicing your clients you SHOULD be charging HST and then paying the government. (Let’s use $12000.00 as a round number in this hypothetical formula.)
4. Total Expenses ÷ Average # of months in operation = monthly user fee.
(Example: 12000 ÷ 8 = 1500.00 cost for user fee) Now you know what your minimum monthly fee needs to be to cover your costs. When you add at this point, the additional amount is profit. If you add $500.00 for example, you will charge $2000.00 and earn a 30 % margin of profit on your monthly rate, assuming you rent it for 8 months. Should you decide that 30 % is not enough to justify the hassle of a cottage rental, increase the amount? There are many assumptions to consider so review my articles on previous months on www.cottageme.com to learn about how to establish what some of those variables are.
5. Total Expenses ÷ Average # of weeks in operation = weekly user fee.
6. Total Expenses ÷ Average # of weekends in operation = weekend user fee.
7. Combination formula: Total Expenses ÷ Average # of months in operation (divide by 4) for weekly amount or (divide by 10) for 3 day weekends. (This should be a fair way to establish costs based on time period.)
(Example #4: 12000 ÷ 8 = 1500.00 cost basis for user fee)
Now you know what your minimum monthly fee needs to be to cover your costs. When you add at this point, the additional amount is profit. If you add $500.00 for example, you will charge $2000.00 and earn a 30 % margin of profit on your monthly rate, assuming you rent it for 8 months. Should you decide that 30 % is not enough to justify the hassle of a cottage rental, increase the amount? There are many assumptions to consider so review my articles on previous months on cottageme.com to learn about how to establish what some of those variables are.
(Example #7: 12000 ÷ 8 = 1500 ÷ 4 = 375.00 per week for cost, and 1500 ÷ 10 = 150.00 for 3 day weekend cost)
Whatever you decide, cost recovery, larger profit, keep in mind your market can only sustain what the market rates in your area are. Nothing frustrates me more than a cottage rental owner who owns 12 dwellings on a tiny plot of land and charges next to nothing for this Home Depot Sheds that he/she calls “cabins”. Renters come away believing that 500.00 per week are more than fair to accommodate a family of 6 for a week. Or conversely, the slum lord who repairs nothing ever cleans and has this massive building that can warehouse 30 bodies. Yet you wouldn’t let your dog use their bathroom led alone your 5 year old. And they expect 3500 for the week.
I know times are tough. And I know families must go looking for value and a good deal. BUT—we also need to understand that hydro is one of the MOST expensive utilities in cottage country. The higher the occupancy, the more they hydro will cost. We also need to remember that cottage owners need to be realistic in their expectations as to what rates really are. If your costs are very low, is it truly fair to charge a ridiculous amount just because? Know your costs, know your margins, and understand what is good rate to work with, as I always say, “do your homework and you will do well.”