Inflation in the US has reached a record high, rising to a 13-year high in June. The recent surge in inflation may not come as much of a surprise to those of us who drive, shop, eat, or just generally live. The majority of experts believe the recent substantial hikes in the prices of the majority of goods and services will only be temporary. However, if handled poorly, it might have an impact on business owners for a very long time.
We made the decision to look at how the vacation rental industry is impacted by inflation and, more importantly, what hosts and property managers should do as a result.
What Inflation Pressure Feels Like for Short-Term Rentals
When we hear about inflation, the most frequently used measure of the cost of a typical basket of goods is the CPI (Consumer Price Index). However, it goes beyond only the cost of milk and gas from the perspective of property management. The expense of living, wage pressure, and the cost of materials to keep rentals open and clean for guests are all rising, making property management an extremely labor-intensive profession.
As inflation increases, property managers must quickly adjust to changes in their costs. Although some companies may be able to absorb rising costs, the majority will have to pass those costs on to their customers in the form of higher pricing. ADRs (Average Daily Rates) have climbed by as much as 30% compared to 2019 in the previous year, suggesting that this has already happened.
The Best Ways to Combat Inflation
Your first action should be to review your marginal cost per listing, or how much it costs you to host a visitor for a night. To ensure that every reservation is lucrative, make sure your minimum rates are at least covering your expenses. Of course, it makes sense to raise the guest’s overall bill, but how exactly should we go about accomplishing this? Is increasing your nightly fee the best line of action, think about it. Or must you only increase your fees?
It is advised to respond to this by becoming aware of the type(s) of inflation pressure you generally feel. When using an owner commission model, raising the nightly rent may be preferred because doing otherwise will result in the owner’s capital investment (their home) depreciating under your management, increasing the likelihood that they will look for other property managers. This is especially true in markets with rising rents and home prices.
Alternatively, if labor and material goods costs are the primary driver of inflation, it could be preferable to seek additional revenue through higher fees. If the nightly fee is raised, the owner will receive the majority of the increased guest spending (if that is even possible given the flat rental market). The property management will be completely responsible for paying the rising costs of the cleaning personnel and the reservation staff, which will not be covered by the owner. Instead, think about fees, which would be a better way to make sure that people who pay the bills are accountable for supporting rising costs. They can provide between 25 and 50 percent of the total income for each property that the property manager manages.
It Is Not an Option to Do Nothing
Whether it be through an increase in fees or nightly rates, there is an urgent need to intervene in this sector. Supply chains and wages are exerting pressure on property managers, while at the same time, demand for their inventory is rising. According to James Breece, an economist at the University of Maine, “the run-up in inflation might be related to a wrinkle in job markets and supply chains that gets smoothed out quickly or goes on for years, driving prices further higher.” For anyone working in the hospitality sector, this is a real test.
Those who alter their costs will see record-breaking revenue; meanwhile, those who maintain the same pricing will continue to provide unprofitable reservations well into 2022. There is only one thing we can be certain of: increased prices tend to attract attention and new competitors, so it’s critical to be at the top of your game.
