A Property Owner’s Guide to Short-Term Rental Expenses

Key Takeaways

• There are traditional property ownership costs as well as expenses specific to short-term rentals. You must understand and manage these different expenses well to maximize your rental’s money-making potential.
• Key expenses include mortgage payments, property management, maintenance, insurance, and utilities. Each cost contributes differently to the financial health of your rental business.
• Tracking expenses and focusing on impactful costs can improve guest experiences, boosting bookings and income.

Turning your short-term rental into a profit powerhouse is easier said than done. 

Mortgage and interest payments are just the beginning. Mastering the art of managing both expected and unexpected expenses is your key to not just surviving, but thriving in the competitive short-term rental market. 

The Costs of Traditional Property Ownership

Before diving into the specific operating costs associated with short-term rentals, it's essential to understand the baseline expenses of traditional property ownership. 

Principal and Interest

The principal is the original sum borrowed to purchase the property, while the interest represents the cost of borrowing this money. Recent trends in the real estate market have significantly impacted these two elements.

Based on an AirDNA analysis of Zillow data, the average monthly principal and interest payment for short-term rental properties has almost doubled since January 2020, increasing by $1,350. Why is this the case? It comes down to two factors. 

• The average value of a single-family home increased from $462k at the beginning of 2020 to $633k at the end of 2023, a 37% increase. (Note that home values were averaged by zip code and weighted by their exposure to short-term rental supply in this statistic.)
• Mortgage interest rates have also risen in the same period. The average interest rate was 3.6% in 2020 for a 30-year mortgage. According to Freddie Mac, interest rates are 6.6% as of February 2024. 

This hike in interest rates, coupled with soaring property values, has led to larger mortgage payments. If you held home values constant, this growth in the interest rate increased the monthly payment for a 20% down payment loan by $729. 

It’s important to recognize that your mortgage payment will likely be the largest recurring expense. This cost affects your immediate cash flow and also influences long-term financial planning for your property.

Loan Closing Costs

The down payment is an obvious cost related to purchasing a short-term rental. Loan costs, on the other hand, are often an overlooked or under-estimated expense. Typically, loan costs can range from 3-4% of the loan amount (Adam Windham, Host Financial).

Although loan costs are not continual short-term rental expenses, it's crucial to grasp the upfront purchase costs to budget effectively for subsequent operating expenses.

Property Taxes

Property taxes are yearly fees imposed by the local government. They are determined by the value of the property. Property taxes fund various public services and community infrastructure projects. The amount can vary greatly depending on where the property is located and its assessed value. As property values have risen, property taxes have also gone up in many places. 

HOA Fees

Homeowners' association (HOA) fees contribute to the maintenance costs and upkeep of common areas and shared amenities like pools, gyms, or security gates. HOA fees can vary widely based on:

• The type and location of the property.
• The range of services and amenities that the HOA provides.

While they add to the overall cost of property ownership, HOA fees can also increase your property’s value by providing well-maintained and attractive communal spaces.

Keep in mind that when you buy a short-term rental property, most loans will ask you to pay the full amount of property taxes and insurance upfront. With each mortgage payment you make after that, a portion goes into an escrow account to cover these costs in the future. 

Additionally, some loan programs may require you to put aside an extra 1-3 months' worth of taxes, insurance, and HOA payments upfront to make sure there's enough money in the escrow account. While property taxes and insurance are ongoing costs, this initial pre-funding of the escrow account is a one-time expense when you purchase the property (Daniel Ramirez, Host Financial).

15 Short-Term Rental Property Expenses to Budget For

Vacation rental expenses range widely, from substantial monthly commitments to smaller, incidental expenses. We've organized this section from the most expensive to the least expensive costs, on average. We want short-term rental property owners to understand how to prioritize their budgets and how to avoid any financial surprises along the way. 

1. Property Management Fees

Opting for a property manager can be expensive for short-term rental owners, but it often pays off in terms of convenience and efficiency. These fees typically range from a percentage of the rental income to flat rates. They are based on the level of services offered. 

A property manager handles tasks like guest communication, check-ins, maintenance coordination, and sometimes marketing. Owners who cannot manage their properties full-time should see this as an investment in the smooth, professional operation of their rental business.

2. Repairs and Maintenance

STR owners must stay on top of maintenance and repairs if they want their properties to last and to continue attracting guests. These operating costs can be substantial, especially for major repairs. Repair costs vary depending on the property's age, wear and tear from guests, and how much maintenance is required. 

Regular upkeep might include painting and fixing appliances, while major repairs could involve roofing or plumbing work. It's important to budget for both predictable maintenance costs as well as unexpected repair needs.

3. Short-Term Rental Insurance

This specialized insurance goes beyond what standard homeowner policies offer to cover risks unique to rental activities. It typically includes protection against property damage and liability issues. Depending on the policy, specialized insurance can also cover loss of income caused by unforeseen circumstances that make your rental temporarily unavailable. 

Given the frequent guest turnover and the unique risks of operating a short-term rental, you need specialized insurance to protect your investment–and your peace of mind. 

4. Utilities

Utilities like electricity, gas, water, sewer, and internet can add up, especially when guests come and go frequently. The amount you spend on these depends on how much the property is used and where it's located.

5. Cleaning Services and Supplies

Keeping your rental clean is key to guest satisfaction. Cleaning costs are an ongoing expense that may cover professional cleaning services and/or cleaning supplies.

6. Income Taxes on Rent Received

Taxes on rental income are a notable expense and vary based on the owner's income bracket and property location.

7. Airbnb Host Fee

It costs money to host on platforms like Airbnb. Host fees are typically a percentage of each booking's total. This variable cost is a necessary evil if you want to take advantage of Airbnb’s popularity as a booking platform. 

However, it’s important to regularly assess the host fees, in combination with other performance metrics, to make sure that your rental business is as profitable as possible.

8. Accounting and Legal Fees

Professional accounting and legal services are essential for many property owners. They help you stay in compliance with various regulations. Consider these fees to be an investment in your property's legal and financial health.

9. Sales Tax

In some jurisdictions, sales tax applies to short-term rental income.

10. Gardening and Lawn Care

For properties with outdoor areas, gardening and lawn care costs are important for maintaining curb appeal. Luckily, landscaping costs tend to make up only a small percentage of overall vacation rental expenses.

11. Replacing Bed Linen and Towels

Regularly replacing bed linen and towels represents a smaller yet ongoing investment in your rental property. Providing a comfortable and luxurious night’s sleep can pay off in guest satisfaction and guest reviews. 

12. Restocking Consumables

Restocking consumables, like toilet paper and cleaning supplies, is a continuous but relatively minor expense in the larger budget. Consumables represent any items that guests will use up during their stay.

If you’re shooting for that Guest Favorites badge, you may consider offering other amenities that require restocking (such as wood or s'mores supplies for a fire pit). The best pet-friendly rentals often have supplies for cats and dogs that need to be replaced between guests. STR owners who offer unique consumables can often charge more.

13. Home Improvements

Property improvement costs can vary widely, depending on the project. Home improvements are important for enhancing your property's appeal and they can significantly increase its value.

 14. Emergency Fund

An emergency fund allows STR owners to handle unexpected situations and costs, such as natural disasters or dips in occupancy. It acts as a financial buffer, enabling you to address emergencies promptly without negatively impacting the guest experience or forcing you to spend personal funds. 

15. Miscellaneous

Miscellaneous operating expenses, such as online booking platform fees or guest amenities, can come up unpredictably or vary by property. They usually make up a smaller portion of overall costs.

How to Keep Track of Your Short-Term Rental Expenses

Effectively managing vacation rental expenses has ripple effects that improves the guest experience, leading to repeat business and positive reviews. 

Setting up a system to track expenses is vital for a successful short-term rental business. Rental property accounting software such as QuickBooks Online, Buildium, or Hostfully can automatically monitor income and expenses, providing a clear view of your financial status.

Incorporating insights from AirDNA can enhance your expense management strategies. For instance, analyzing market trends and competitor pricing can help you make informed decisions about setting rental rates and optimizing your property's performance.

Balancing Expenses to Boost Your Short-Term Rental Income

To successfully run a short-term rental business and maximize profit, prioritize expenses that have the greatest impact. Not all expenses are equal. 

Remember, the short-term rental industry is always changing, as are the costs that come with it. Regularly analyzing your rental's income and expenses offers invaluable insights, allowing you to make adjustments that can significantly boost your financial performance.