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New Revenue: Innovative Revenue Models from the Vacation Rental Industry and Beyond

After such a positive response to our session at VRMA East, and in preparation for conducting a similar session at VRMA West, we wanted to share some of the ideas with those who were not able to attend, or who would like additional color on the topics covered. To that end, this will be the first piece in a three part series covering “New Revenue: Innovative Revenue Models from the Vacation Rental Industry and Beyond.”


The three pieces will be:
  1. Growing your inventory
  2. Growing your business beyond your inventory
  3. Growing what you get from your inventory


   


Why growing your inventory matters
 
The single easiest, and most obvious way for a vacation rental manager (VRM) to grow revenues is to add properties.

The more properties under management, the more weeks it is possible to rent, and the more money comes through the door. When it comes to adding new revenue, there is a spectrum of options open to a VRM.  

At one end there is the “low risk/low reward” model. This is where someone else owns the property, but the VRM takes on responsibility for renting out and managing the home. In consideration for these services, the VRM collects a commission. This is low risk because the VRM has no exposure to swings in the property value. If the property market crashes, the VRM is insulated. Likewise if the property does not rent well, though revenues will no doubt go down, the VRM’s exposure is also limited. But with these lower risks comes lower reward.  For each dollar the VRM manages to bring in, she only keeps a fraction of it through her commission.
 
On the other end of the spectrum you have the “high risk/high reward” model. This is where the VRM owns, or perhaps even develops the properties she manages. The rewards are much greater. If the property increases in value, she pockets the gains. For every dollar brought in renting the property, she keeps 100%. But these higher rewards come with higher risks. The property, as we have all too recently seen, can go down in value as well as up. Also, if the property does not rent as well as expected, the VRM is still responsible for all the associated costs.  
 
A middle way
 
Typically VRMs fall into one extreme or the other. Those who do not like the limited upside involved when managing homes for other people typically are fine taking on the higher risks associated with owning and developing properties themselves. Those concerned with the risks inherent with property ownership accept the lower rewards that come with managing homes on a commission basis for others.
 
But the choices for VRMs do not have to be so binary. There is a middle way that has proven appealing to managers who traditionally manage only at one end of the spectrum or the other.  This third way involves purchasing wholesale rental weeks. This third way provides many of the benefits of the high risk model, with the more limited risk involved in the low reward model.  Higher returns with less risk? Yes please!
 
What does this middle way look like? It still involves homes owned by someone else. But rather than manage that home solely on a commission basis, the manager buys all of the rental weeks desired directly from the homeowner. This gives the homeowner a guaranteed income source, for which they are willing to take a discount, and provides VRMs with inventory they own. After purchasing the weeks in question at a wholesale rate, the VRM takes them and rents them through her traditional channels at a “retail” rate, pocketing 100% of the difference.
 
Managing inventory in this way enables managers to benefit from many of the best characteristics of owning properties outright: full management control, keeping 100% of revenues, and targeting only those properties you really want in your portfolio. And you get all of these benefits with the limited risk associated with the low reward model: no exposure to swings in the property value, risk exposure on the rentals limited to the wholesale price agreed with the homeowner.
 
Where it makes sense
 
When does it make sense for a VRM to implement this wholesale model? There are many instances where it can be the best option. Below are a few of them.
 
  • Growth – We have seen managers struggle to grow at the rate they want as more and more homeowners move to the RBO model.  Approaching homeowners with a pitch different from that of other managers (lower commission, higher rentals, relationship, etc.) can set you apart.
  • Expansion – Moving into a new market it can be difficult to attract homeowners without a track record.  Securing your initial set of homes in a new market through wholesale purchase/guaranteed contracts can make that expansion much quicker and easier.
  • Improving margins - As commission rates get negotiated down, VRMs can see their margins decline.  By securing properties at favorable wholesale rates, this can be a great way to increase your business’s profitability.
  • Flagship inventory – Sometimes there are certain homes you want because they will drive growth in your business elsewhere, either by attracting new homeowners to your program, or enticing renters to visit your site and look at other inventory.  These homes are often difficult to attract with traditional pitches, so taking a new, guaranteed approach, could be a great way to bring in a property you simply could not otherwise get.
  • Spread fixed costs – At present you might not be operating at scale. This can harm your operation, and make your business look less appealing. By broadening the base over which you can spread your fixed costs, this could be a way to improve the profitability of all the properties in your program.
 
How you do it
 
Step 1
 
The first step is identifying which properties you would like to add. Depending on why you are doing this, the properties may look different. For example, if you are looking to grow in your current market, they may look the same as your current inventory. If you are looking to expand to a new market, they may look very different. And if you are looking to add flagship inventory, the properties may be so specific as to only include a handful of homes.
 
Step 2
 
Once you have identified which homes you want to add, you need to project what each home will bring in. How much will it rent for in a good year? An average year? How about a bad year? How likely are each of these scenarios? How should they be weighted? This will give you a clearer sense of what adding the property will do for your top line.
 
Step 3
 
Now you need to calculate what rate of return you are seeking on each home. Again, here the answer will vary depending on why you are looking to add the home. If it is growth in your core market, the rate of return may be equal to your margins on your current inventory. If you are looking to increase your margins, that number will need to increase. If, on the other hand, you are trying to secure flagship inventory you may be willing to take a lower margin, break even, or in some instances even take the property at a loss assuming it will be able to boost your profits in other ways.
 
Step 4
 
With all of this calculated, and knowing your variable costs for managing the property, you are now able to calculate a “net offer” that you can take to the homeowner. This will be a number you are comfortable guaranteeing to the homeowner in exchange for her handing over the rental weeks you seek. This is not to say every homeowner will accept the number you offer.  Sometimes it is simply not high enough. Sometimes they don’t trust it is “fair.” There are certainly ways to get around this, for example by participating in open marketplaces (such as my company, VacationFutures). However, regardless of the homeowner’s initial response, this at least starts a new conversation, and a new kind of conversation, that can separate you from all of the other VRMs out there competing for the same inventory.
 
Conclusion
 
The vacation rental industry is experiencing unprecedented growth, and with that growth comes ever-fiercer competition. In such an environment, finding new and innovative ways to compete is critical. This is one such approach, and our next two parts in this series will address others. If you have any questions or comments on “wholesale rentals,” please use the section below, or feel free to contact me directly at Andrew.McConnell@vacationfutures.com.

 

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