How To Crunch The Numbers For Your Serviced Accommodation Deals
Do you know how to crunch the numbers for your Serviced Accommodation deals?
Discover how to work out your nightly rate, calculate your predicted expenses and how to crunch the numbers...
In this episode I will be covering how to crunch your serviced accommodation figures. I will go into detail on the five key steps to consider when looking for a profitable deal.
The first consideration you need to make is looking at the nightly rate. It's important when you do your research to take an average, I like to be more on the conservative side with my projections. When I first started looking at Serviced Accommodation, I did my research by benchmarking on websites such as Booking.com, Expedia and Airbnb. To arrive at your average, you also need to consider the number of guests as the price may differ for group bookings. I like to look at different properties on multiple dates for two, four, six and eight people. I then input this information into a spreadsheet to generate the average nightly rate.
The second way to calculate your average nightly rate is to use software which will do the research for you, an example being Air DNA. This option would, however, require a monthly subscription.
Now you have your average nightly rate, and you can calculate your monthly income; it's time to consider your expenditure. For this example, I want to keep it simple and only look at the property specific expenses initially. You will, of course, have additional business expenses on top of this.
Here are some property-specific costs I consider when calculating expenditure:
Mortgage or Guaranteed Rent
Council Tax/Business Rates
Utilities
Internet plus any other amenities you wish to supply
Channel Manager (Property Management System)
Commissions
Property Redress Schemes
Please note that this is only an example of how I look at the figures; it is not advice, make sure you do your due diligence.
Now that step one and two are complete we have the information we need to calculate your Serviced Accommodation break-even figure. Listen to this weeks episode where I run through how to calculate your break-even plus two further steps to consider when crunching the numbers for your SA deal.
In this episode, you will learn
How to calculate your nightly rate
How to calculate your overhead
Why it's essential to have a cash float
Why it’s important not to forget the refurb cost
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Podcast Transcript↓
[00:00:56] Hey, thank you very much for joining me for another episode of the podcast where we talk all things property, Creative Cashflow and how to be financially independent today, not in 25 years. And it's a bit of a celebration this week. We had our biggest ever day last week. We have 30 student tenants moving in. With those, plus all the professional move-ins, we amassed 25,000 pounds worth of rental income in one day, biggest day ever for the business and a massive, massive achievement.
[00:01:36] I just never, ever, ever could have imagined this sort of level of growth, and I just want to thank everybody for the support, we've got an amazing community of people that supporting and changing their lives through property, which, of course, is why I did the podcast.
[00:01:55] I did the podcast because I'm just a normal guy. I had no experience in property. I've made tons of mistakes. It's been hard at times, don't get me wrong, but you can do this. If you want to change your life, if you want to be your own boss, if you're tired of going to work or not having certainty for you and your family's future. Then now is the time. So without further ado, today's episode is about how to crunch your serviced accommodation figures. How do you crunch them? How do you know if it's a deal? How do you know what costs to account for, the sort of average occupancy rates, what your nightly rates should be? How do you work all this stuff out so you can pull the trigger on your deal? And by the way, guys, whether it's rent-to-rent or property you own, these principles are largely the same. OK, and if you're brand new to me, you'll know, I do a combination of rent-to-rent HMO, rent-to-rent SA, for cashflow as my cashflow strategy, Creative Cashflow. And then I reinvest it into assets that I own, OK, for the long-term legacy and the capital appreciation. So I am going to do an episode on how to crunch the figures for Schmoes, so stay tuned for that. But today is SA. So, OK, there's five steps you need to take. The first thing you need to do is you need to work out your nightly rate. Yeah. What nightly rate are you going to go for? And it will differ, but you want to create a bit of an average, which is probably on the slightly conservative side, because I'd rather underestimate and be good than overestimate and be in trouble.
[00:03:45] And I remember when I first did this, I did it the old school way. And that was by going on your Booking dot com, your Expedia, your Airbnbs, and looking at what other people were charging. Now, the thing to consider when you're doing this is the price may be different depending on the amount of guests you are. So what you'll want to do is you'll want to look at different properties on different dates for two, four, six, maybe even eight different people, depending on the size of the property to find out what their average rate is. When I did it, I did a spreadsheet and basically I worked out what a good nightly rate for a two-bed, which was what I started with, an SA would would achieve. OK, now there is another way, the second way. And the...you know, it's a bit of a cheat, but there are certain websites and sort of softwares there where they'll share some of these statistics with you so that you don't have to do it. They'll tell you the nightly rate. They'll tell you the average occupancy rate in your area. And a great one of those is called Air DNA. I think it does cost a little bit, but check it out. But you can do it the traditional way and you don't have to overthink this. You don't have to overthink it. You just want to get an average, pick a figure, make it on the conservative side and then put that on paper so you know what it is.
[00:05:12] OK, my nightly rate's £100. So if your nightly rate's £100, you know, the total amount you could earn in that month would be three thousand pounds. OK, so now you've worked out what the potential income for the month is. You now need to find out the potential expenditure. A lot of people struggle with this, but generally speaking, I think if you go for these things, you won't go too far wrong. So you're going to want to work out the guaranteed rent or the mortgage that you're going to have to pay out every month. You're going to need to do the utilities, the council tax or business rates, depending. The water, the internet, you know, any other amenities that you want to supply. And then there's going to be certain additional costs, such as your insurance, your channel manager, your commissions, any sort of property redress schemes and sort of business costs that you might want to take into account.
[00:06:07] Right? But for the purpose of this podcast, I want to keep things really, really simple, just go for the property-specific expenses initially. Right? And a common question I get is, should I put cleaning fees? How do I know the cleaning fees? It's impossible to know the cleaning fees because you don't know how many bookings you're going to get. So if you had somebody coming in and out every night, you would have a cleaner every day. If you just had one booking, then you only might provide a cleaner at the end of the stay. So what I recommend is when you're choosing your rate, choose a rate that basically excludes cleaning. What I mean is if you're £100 per night, then charge cleaning on top, and it might be 30 pound, 50 pounds, 60 pounds, 70 pounds per clean, and pass that on to the client. That way you don't have to worry about that. OK, so once you've worked out your expenses, you're going to write them down as well. Once again, don't overthink it. They just need to be decent estimates.
[00:07:17] So you've worked out your nightly rate. You've worked out your predicted expenses, now what you need to do is you need to work out your break even point.
[00:07:26] How many nights do you need to be booked before you break even? And, you know, to give you the same example, if you could bring in three thousand pounds a month and your expenses are 1500, then your occupancy rate would be 50 percent. You'd need to book 50 nights at 100 quid to make 1500 pound and therefore break even. Alright, so once you've done that, generally speaking, this is one of the key indicators of if it's a deal, I aim for 40 to 50, 55 percent occupancy at break-even point, because then I know that I've got another 50 percent of profit to make. So in the example just given three thousand pound income 1500 pound expenses, that means I've got the ability to make an extra 1500 pounds if I'm 100 percent occupied. Now, by the way, guys, all this is assuming that there is a demand, you know. This is not about demand, this podcast, this is about how to crunch the figures once you've established that you think there is a demand.
[00:08:34] Point number four, you need to then find a way to protect your downsides.
[00:08:40] And I see a lot of people really worried, like, what happens if I don't get no bookings and I'm guaranteeing this rent or I've got the mortgage? What if I only get booked for a couple nights? And, guys, the best way to do this is to cover your downside by always having a couple months' float.
[00:09:00] So if your expenses are fifteen hundred, you need three grand in the account just so that you've got that cushion.
[00:09:07] Don't force a deal too soon and put yourself under too much pressure. Having said that, my first SA deal at the beginning, it was tough. I was terrified.
[00:09:19] I was checking all the time online to see if the adverts were really live and I was speaking to the people, the channel manager, to see what was going on and why I wasn't getting any interest. A channel manager, by the way, guys, is a central sort of management system that allows you to manage all the different online travel agents from one place. And I'll never, ever forget the first time I ever called them up, they said to me, where you based?
[00:09:46] And I said, Derby, and they searched on the system and said, you're the first person that we are working with in Derby. And I wasn't sure if that was a really, really good thing or a bad thing, but then having launched to just air, I was seriously, seriously worried.
[00:10:06] But guys, you will be surprised where there is demand for short-term accommodation. It's not just your holiday destinations. It's not just your Londons and your Manchesters. There's demand everywhere.
[00:10:20] But I was stressing and I had no bookings, you know, and the first rent's come out, the refurb's cost me a bit more. When am I going to get bookings? What's going to happen? And it was a bit stressful for me, but I did all my due diligence. I thought there was demand and the booking slowly built up. And as we got more and more reviews, more and more bookings came in, and to be honest with you, as I've said, the key now is direct bookings with corporate clients that take the property on for a while. No, I don't do one-nighters, two-nighters. I'm not interested.
[00:10:55] I want the three month bookings with multiple people working away from home. That's the key. They're working away from home. But the thing is, guys, a lot of people don't know this, but when a lot of people, especially in this climate, purchase orders for work in, you know, for companies, purchase orders are only approved last minute because nobody wants to overly risk and overly leverage. So what will happen is they might start off with a three week contract, but they could be there two years. But in terms of their point of view, they can't commit to a tenancy agreement because what if they pull the plug on the project a couple months later? And so that's why SA's amazing, because you can have long term tenants, big corporate bookings, and you're offering the flexibility that they need. So that's why I love SA. So you need a bit of a float, yeah? Just so that you can take your time, you don't have to reduce your prices, you don't have to worry. And finally, there's always the break, even in terms of the refurb to consider, because at the end of the day, your occupancy rate break-even could be as low as 40 percent, which is great.
[00:12:16] But if you're only making 300 pounds, you've spent six grand on the property refurbish, ot's going to take you 20 months or whatever to break even. Too long. So what I look for, particularly in my rent-to-rent deals, I want to break even after three to four months on my initial investment. So in other words, if I spend four and a half thousand pounds on the refurb, then at 100 percent occupancy, on the last example, it would take me three months of 1500 pound profit per month to break even. Great. If it's going to take me two years, I'm not interested. It is going to take me six months, I'm not really interested because that would, you know, it just takes too long guys. We want to get financially independent today, not in two years time.
[00:13:10] So I'm just going to summarize those one more time, how do you crunch your figures, how do you know if a deal is a deal? First thing to do is work out your nightly rate. The second thing is work out the predicted expenses. That's your guaranteed rent or mortgage, utilities, council tax or business rates, water, internet, amenities, you know, you might give them some shower gel and waters and chocolates every time. Cleaning fees add on top and then make sure, obviously, you're going to need insurances, channel manager and bits and bobs like that to take into consideration as well. Commissions from OTAs. So just do your best at estimating those figures. If it's your first deal, it's not going to be perfect. But, you know, if anything, be more conservative. Next point is you're going to want to see what your occupancy break even point is. So ideally, you want 40 to 50 percent. So that means if your maximum income...we'll use a different example, let's say, for example, you're able to achieve 200 pounds per night. It's a bigger property. That would mean a total potential income of six thousand pounds, 30 days times two hundred.
[00:14:22] And if your expenses are two thousand pounds, yeah, then your occupancy break even would be around 33 percent. Great. That would work. Point number four is, guys, make sure you've got a bit of a buffer. So have a couple of months of expenses in the bank so you don't have to stress, except for guests. Change the parameters, get too flexible and open up a can of worms. And last but not least, don't forget about how much you've got to invest in the property in the first place. Yeah, we want to make sure that we can break even as quickly as possible and then we're home and dry. So guys, that's all for me. I love serviced accommodation. If you want to know more about it, please check out other episodes in the podcast. Subscribe. Feel free to drop me a line if you have any questions on social media and I will see you next week. Take care. Bye. Thanks for listening. For more information, check out Simon Smith Online dot com. See you next time.