Transcription
So I'm sitting in front of my tiny house in my backyard last winter. We listed it on Airbnb's first time host, and here's what happened.
In this video, I'll show you my initial projections, our startup costs, our monthly expenses, and then our total revenue and our cash-on-cash return. Even though your specific situation may be different from ours, either you're in a different market or you're just renting out one room in your house, I think this video will still provide some value because you can take the framework and apply it to your own project. And there are also some concrete costs that you can take into your own budgeting.
First up is projections. Naturally, one of the first questions we asked ourselves when we were thinking about listing on Airbnb was, "How much can we make from this? Is it even worth doing?" To project revenue, we need to figure out our average daily rate and our occupancy. Combine those together, and we should have our total gross revenue.
So, how do we figure out average daily rate and occupancy? Well, there are two main avenues. First, we looked at Airbnb analytic websites like AirDNA and PriceLabs. You can easily find out how much other listings in your market have made in the past year, and how much they were charging per night, and what their occupancy was. One thing to keep in mind is seasonality. Demand changes throughout the year, so some months are more highly occupied, and the nightly rate also goes up. For us, we were hosting in the middle of winter, so the nightly rate is lower, and the occupancy is about 55%.
Between those analytic websites, I personally rely more on PriceLabs because I really like the granularity, and also it's cheaper. As with all databases, there are inherent limitations. For example, if your offering is completely unique and there's nothing in your area that compares to it, it might be really difficult to project based on existing inventory. Or maybe supply in your area has skyrocketed, everyone's joining Airbnb as hosts, and so what the listings made last year in your area cannot be replicated in the next year. Or, I don't know, it's 2022 and you're entering a recession.
So, to be more accurate, the second method we used was market research from the lens of a potential guest. We figured out who our potential guest demographic might be. We browsed the other listings and other hotels in the area from the view of this guest avatar that we had in our mind, engaging what kind of offerings are out there for someone who might be looking for something unique, something more premium. And we looked at what quality these hotels and Airbnbs offer, and what nightly rates they are setting.
And so, based on this research, we figured an average traveler was willing to pay about $110 in the middle of winter for staying one night when we started in the slow season. And then from that number, we worked backwards, taking out the Airbnb fees and taxes, and then assuming a mix of one to two-night stays, we figured we would have an ADR of $73.
P.S. I think average daily rate can be kind of confusing, so I want to give a little bit more of an explanation. As it says, it's an average. The ADR, or the average daily rate on these websites, is cleaning costs plus the nightly rate that you put into your Airbnb calendar. So if you charge $50 nightly rate plus $35 for a cleaning fee, then together, the $85 could be your average daily rate. If you only host one-night stays. However, if you host more nights, then you would have $50 plus $50 plus $50, and then the $35. And so your average daily rate of that total number divided by three is going to be lower, right? But of course, your expenses are lower too.
In our specific example, we anticipated hosting one and two-night stays, mostly kind of split evenly. So we assumed it would be like $50 plus $35, and then $50 plus $50 plus $35. Dividing that out is how we get our average daily rate of $73 per night. I hope that made sense. If not, go to my calculator linked below.
In terms of occupancy, we figured we would do a little bit better than the market average of 55% because this is a unique offering, and we're going to have really nice pictures. On the other hand, though, this is still our house, so we would still be pretty picky with a proven guest. I would rather lose a booking than deal with a problem. So we figured we'll aim for like 60-ish percent.
So with $73 times 60% times like three and a half months because that's how long we wanted to host before in the winter, we projected a gross revenue of $4,600 total for the season, which would have been more than enough to cover expenses and then some. So we thought, "All right, let's do it."
As far as startup costs, the first thing I bought was the market dashboard from PriceLabs, and that was my first $10. Next, we took a month to do the interior design and purchase all the items. We did all this ourselves, so there was no cost associated with it. Furniture-wise, we bought a Frame TV, a cute, non-dorm-roomy kind of mini-fridge, some furniture from West Elm, decor from Zara Home, some unique art from Saatchi, and then handmade pieces from Etsy, and some nice bedding and other essentials. I had a lot of fun designing, and I think it turned out pretty good. The total furniture/decor came out to $4,786.12, which is about $15 per square foot. Keep in mind, we did already have a rug and a bed and a mattress, and that could easily add another thousand or fifteen hundred dollars if you're starting fresh. I'd say overall, this is on the higher end, and that was a conscious decision based on the target demographic of who we think might want to stay at this tiny house.
And then for photography, I did it myself. I know all the gurus would say, "Do not, not do it, hire a professional photographer." And for the most part, I agree. But you gotta understand that I'm in a smaller market, and you gotta see some of these other listings. Their photos are their pictures are not great. And also, to my defense, photography is part of my whole design process, and I have a DSLR camera, and I have some background and some editing of photos. So to find a legit photographer who can understand the difference between like basic real estate Zillow-style photos versus an Airbnb photo that would cost way too much, and I just don't have the budget for that. That brings my total startup cost to $4,800.
For ongoing expenses, we had our cleaner, which was $35 per flip. And over the course of the season, we spent $1,060 on cleaning. And I wish I could say the cleaner did every cleaning. We did have to do some of it ourselves. And again, this goes back with working in a smaller market. The infrastructure, it just isn't quite there. It's harder to find a reliable cleaner. And so we did end up having to clean it a couple times, which isn't the end of the world. I know people who do it themselves all the time. And very fortunately, all of our guests were amazing, and no one left a giant mess.
Next, we have the monthly bills, AKA utilities, mortgage interest, taxes, insurance, HOA fees. And I'm not counting mortgage principal because that is still going towards the equity of the house. It's kind of hard to put an accurate number on these because even if we didn't host on Airbnb, we would still be paying these monthly bills. And so really, what is the proportion of operating an Airbnb? Like, how, what is the amount of money that we're spending on doing the extra laundry for their sheets and heating the extra water, keeping the room warm in winter? It gets really hard to calculate. But the math needed to be done somehow.
So for tax purposes, we took kind of the conservative route and just did a square footage method. Our tiny house is about 10% of the whole house in terms of square footage. So we took 10% of our monthly bills and attributed that to our tiny house. And that gives us a total of $210 for the tiny house per month.
So for software subscriptions, I use Hospitable and PriceLabs, and that came out to $200 total for the season. Lastly, we have supplies. And we do not skimp on the supplies. We get the nice, fancy triple quadruple ply softest nicest Charmin TP, and people notice because they steal our TP, which is so weird. We get really nice sheets, we get we get fancy spa candles and hand washes, Pureology shampoo, legit small-batch coffee that we grind the morning of. We're not messing around here. Anyway, the total amount on these supplies was $900 for the season.
Taxes-wise, those are held by Airbnb and remitted on our behalf. Airbnb also takes a 3% commission. Because taxes and commissions don't come to my bank account, I'm not really counting these in my calculations. And that brings our total operating expenses for the entire season, December through April, to $3,210.
Hey, before I tell you how much we ended up making, please just thumbs up the video. It'll really help out the channel reach more people. Also, if you choose to host on Airbnb, use my link down below. You'll get a little bit of cash monies, and I'll get a little bit of cash monies. And cash monies are nice. So thank you for doing that.
Now, moving on to how much we made. So December, we made $543. Our occupancy was 60%. For January, we made a total of $1,434, and we had an occupancy rate of 91%. Now, I've blocked off the stuff on the right, and you may be wondering, "Why are these bars really scrunched? Are there bigger numbers on the right?" You'll have to come back to find out. I'll tell you in the next video.
Back to this tiny house. February was our best month. We made $1,916, and our occupancy was 96%. It was, it was insane, though. Like, it felt, it was intense. For March, we made $1,000. $1,515. All right, it's technically, yeah, it's technically 100% occupancy, but we did block off a bunch of nights just for personal reasons. For April, we had $1,171, and the occupancy was 76% for April because of, again, personal reasons, we increased the rate quite a bit, and we we required two-night minimum stays. And so logically, it's a lower occupancy, but we're still pretty happy with the amount we got.
So the total gross revenue for that time came out to $6,578.39, which is more than what we projected. The net income was that number minus the operating cost, which comes out to $3,368.
Now, to calculate cash flow, it would only be fair to add back the mortgage principal, which was about $200 per month for this house. Obviously, not for the whole house, but I'm not gonna go through the math again on how I decided it was $200. Even though we didn't lose that money, and we paid it into the equity of the house, that is still not liquid cash. So for the purposes of cash flow, our net cash flow totaled $2,368.
If you were to calculate cash-on-cash return, you can divide your cash flow by the startup cost of $4,800. It translates to a cash-on-cash return of 49%. Hooray! I think it's pretty insane because you have to recognize too that this cash flow or cash on cash, whatever, is only based on five months of operating the Airbnb. And it's the five slowest months in in the entire season. And within those five months, we blocked off a bunch of days just for personal reasons, and we're completely newbies. So I guess I'm just so grateful. This is our first experience hosting, and it went better than I thought.
Another way to look at it is what would be the difference between leaving this house completely empty versus hosting on Airbnb? For that, I would probably take out the monthly bills portion because I have to pay my mortgage and property taxes regardless if someone is staying there, right? Our direct expense, expense, or direct expense for operating that Airbnb, like for the cleaning, for the supplies, that was only $2,210. And our gross revenue was over $6,000, which minus the direct expenses leaves us $4,368. And that amount came pretty close to making back our entire initial investment of $4,800.
My intention in showing these numbers is not to flex. Not that $2,000 is a lot to flex about. I know there are plenty of people who pull in way more. My hope is that this financial walkthrough was helpful to you in some way in providing a framework on what to think about. And then more importantly, I hope that my story proves that there is room for newbies like me, whose knowledge is purely based on free YouTube content, and that there is opportunity in even smaller markets that are not national parks, not a beach town, not a major city.
I think personally, more than just the cash, this experience taught me so much from analytics to managing people to customer service to decorating, interior design, and marketing. All of that. And these are all skills I can now take to my next project. And I had fun learning it. So if you're on the fence about hosting, I would just say go for it. Especially if you already have a space like a long-term rental you can convert, or if you have a spare room that you can rent out. Like, what's the worst-case financial scenario? You put in some money for furniture, and then you have to switch it back to your original use. So look at your market, check out your local regulations, of course, and set a budget and just do it. And then if you run into questions, come back and post it here, and we'll try to figure it out together.
Anyway, thank you for sticking around for this super long video. I hope you got some value out of it. If you do decide to host, check out my links below. It would really help support me and the channel. So thank you. Thank you for doing that. And then come back next week. We'll talk about either the design process or all the mistakes I've made as a host. You let me know what you want. All right, peace.