If you are treating your vacation rental property as a business, you should be making time to create a Budget Reserve. One of the most important aspects of the budgeting process is to allocate a percentage of the income to maintenance reserves.
Over the years plenty of data has been accumulated and analyzed to assist landlords in this process and there are various budgeting models that annual rental landlords lean on.
Whereas renting in the traditional sense has been around for centuries, vacation rentals are a relatively new concept. The infancy of the vacation rental industry coupled with the uniqueness of vacation rental properties means the data available on the subject is sparse.
In this blog, we offer some expert Sarasota property management guidance to vacation rental owners so that they are not hit with unwelcome and unplanned expenses.
For budgeting purposes, both the annual rental and vacation rental models share the traditional expense classifications.
- Property taxes
- Capital Improvements
- Major capital expenses
Uniquely, vacation rental property owners must also consider an increased routine maintenance budget and Furniture, Fixtures, and Equipment (FF&E) Reserves.
Just think of how often your own home needs TLC. A vacation rental home is no different.
How often do you take care of seemingly incidental items in your own home? You probably do not realize how often you tighten a doorknob, adjust the toilet seat or remove hair from the bathroom sink. A vacation rental faces the same challenges, just without the homeowner on hand to keep up with the chores.
In the annual rental market, a few of these maintenance responsibilities will fall on the tenant. We can all relate to a smoke alarm beeping in the middle of the night. In the annual rental world the tenant would replace the battery in the sensor, and even if the tenant called maintenance to address the landlord would not foot the bill. In the vacation rental world, the guest would not take care of this themselves, rather they would call our maintenance dept. to handle.
Even when the maintenance issue falls on the shoulders of a landlord, responsible tenants often take it upon themselves to fix it. We have all encountered the squeaky door, rather than call maintenance for an easy fix, most tenants would simply tackle the issue themselves with a can of WD40. In the Sarasota vacation rental world, a guest is unlikely to do this themselves. After all, they are on vacation. Instead, they would call the management company and have maintenance fix the problem.
As a professional Sarasota property management team, we understand all rental property owners are proud and want their properties to always look their very best. However, even the most fastidious annual rental landlord would only agree to pressure washing the exterior or to cleaning the carpets once a year. The successful vacation rental owner will budget 3 times this frequency. They understand that initial appearances impact the guest experience, and a positive guest experience leads to better reviews and ultimately more revenue.
Now you see some of the differences between the annual rental and vacation rental approaches to maintenance.
In addition to increased routine maintenance expenses, the Sarasota vacation rental owner needs to budget for furniture, fixtures, and equipment (FF&E) Reserves. With increased traffic, you will see an uptick in wear and tear. What should you consider FF&E?
- Painting – Interior and exterior
- Flooring – Carpets, tile, laminate of hardwood
- Light fixtures – interior and Lights and fans
- Window dressings – Drapes, blinds, shutters
- Furniture – Sofas, beds, mattresses tables and chairs pool, furniture
- Decorative items – Artwork, flowers, and ornaments
- Entertainment Equipment – TV’s, speakers, smart home hubs
Just as they apply business sense to budgeting, successful vacation rental owners are objective about the appeal of their property. They understand they need to be constantly updating and tweaking their vacation rental. Fashions change and outdated properties with grandma’s furniture will not yield premium rental rates and high occupancy.
The concept of budgeting for FF&E Reserve is foreign to most investors. This is an area where Sarasota vacation rental investment is more akin to hotels rather than the traditional investment model.
Vacation rentals are in competition with hotels, therefore let’s look at how hotels look at their FF&E Reserves when it comes to remodeling and upgrading.
A Real-Life Example
Steve Wynn, the successful Las Vegas luxury hotel operator sets the lifespan of hotel rooms and common areas at 5 years. Now I am not advocating that vacation rental houses need to be remodeled every 5- years, but it does bring into perspective what travelers are looking for.
Just like establishing rates is not a "set it and forget it" exercise, your vacation rental is never complete. There are always more that can be done to your home.
Like vacation rental, hotels live and die on the guest experience, they both understand the higher occupancy delivers more revenue, and with increased revenue, they can expect increased expenses.
Taking inspiration from the hotel industry where we learn a 2-star hotel room costs around $6K to renovate and the 5-star equivalent costing around $35K.
You can see we are not talking small change and most owners would struggle to stump up these expenses in one hit, which is why budgeting is critical.
So How Much Should a Vacation Rental Owner Budget for Routine Maintenance and FF&E Reserve?
As mentioned previously, macro data on the subject is sparse. We can however draw on the data we have accumulated over the years.
In the annual rental world, as Sarasota property management experts, we advise landlords to allocate 8% of revenue to ordinary maintenance expenses. Based on the years of data we have accumulated; we advise that the vacation owner should allocate another 5% for routine maintenance and FF&E Reserve?
8% + 5% = 13%. Unlucky for some but the successful vacation rental owner does not leave anything to luck!