The Math Behind Long-Term Discounts: How to Make Sure You’re Not Losing Money

Welcome back to the Short Term Rental Riches podcast. We're talking about long term discounts this week, not necessarily monthly, but this could be weekly as well, and how we go about actually calculating them. There's quite a few things to consider. If you missed our episode 140, we talked about the pros and cons of offering long term stays. So I'm going to recap just a couple quick things on that here. But if you missed that, go back and check out that episode because we're going to talk about that in much more depth. And there are a lot of important things to consider just to cover a few of the pros of having a guest stay in your property longer. So this could be a week, two weeks, three weeks, four weeks and beyond. Right. One of the things that's very obvious is that we have less operations, so we have less housekeeping turnover, which makes it easier for us. We also have less communication with our guests most of the time because after a guest has been in one of our properties for just a few days, even really just a few hours, most of the time they don't have any more questions. They've kind of figured out the property and everything should be good. So it's quite a bit less work for us. Depending on the OTA where your property is listed, if you have long term discounts in place, you're also probably going to get search ranking boosts, which we all want those, right? And hopefully it all comes down to our bottom line and by having long term discounts, we're making more money. That's really the only reason why we would have them in. Right. So we are boosting the combination of our occupancy and our average daily rate to earn the max revenue possible. So we're going to talk about how exactly we're going to calculate that to make sure that we're not leaving money on the table. But before I do, I want to throw out just a couple of the cons from longer term rentals. And when I say longer term rentals, I mean a longer term guest reservation. Right? But this could be a week, two weeks, three weeks, whatever it happens to be. The longer a guess is in our property, really the less we know what's going on in that property. And that's one of the nice things about a short reservation is that we're in there with our housekeeping team after the guest has checked in, usually, you know, just a few days or a week afterwards and not too much can happen, unlike long term rentals. So I, I have long term rentals as well. And I just had some tenants vacate that had been in one of my properties for about three years and they were living with their dogs, that was known, it was in their lease but unfortunately they didn't take care of the place. Now this was just a little guest house and not very large. I mean, I'd say 750 square feet, but it had a yard as well. So nice little place, but it was, it was not in good shape. After three years, pretty much a full redo and it's looking like five to six thousand dollars potentially for new flooring, for new paint, for any damaged drywall, for just all the miscellaneous things. A little bit of appliance issues there. That's a lot of money, right, to just shell out. Unfortunately, with our short term rentals that's rarely happened. My team and I have managed almost 30,000 guests now and we've never had anything like that happened with this long term rental. So that is one of the benefits to short term rentals. Even though it's kind of opposite, most people think, right, they think we're going to have a short term guest coming in here and they're going to throw a party and it's going to be a big disaster. But the reality is most of the time we don't have these large expenses like we do with our long term rentals. The other con to having long term discounts is that you're potentially giving up future days at a discounted rate to what you might be able to offer if you didn't have that long term discount in place. So let's go ahead and just get into how we calculate this. The first piece is we have to do some deep diving on the performance of our property and the averages with our property. If we're creating a long term discount for the future, then we're going to have to estimate our future revenue and we're going to have to estimate our future expenses. So let's go ahead and start with the revenue. The first thing we can do is if we have history with our property already, well, we can go back and look at what the average occupancy is. We can go back and look at what the average daily rate is. And with those two things multiplied together, we can project what our income would be. So let's just take a quick example here. Let's say we're trying to determine if we want to offer a discount in December. And let's say our average occupancy last year was 70%. So we rented 20 of the 30 days. And our average daily rate just makes make things easy. Our average daily rate was $100 a night. So we rented for 20 nights at $100 a night, it's $2,000. So if our future is looking like our pasted, then of course we wouldn't want to offer a long term discount that's going to go below that $2,000 mark. But there's some other things that we need to be considering here. One thing, and this is a pro tip, if you're using a dynamic pricing tool. I've mentioned price labs a lot on this podcast and there's other ones out there like Wheelhouse, but this has the ability for you to look at what's called pacing. And so pacing is basically comparing where we're at today versus performance in last year. So let's say today we're in June and we're trying to determine December's occupancy. Let's say right now our occupancy is 10% as we are in here in June. But last year in June, our occupancy in December was 30%. Well, that would mean that we're pacing behind. Hopefully this is making sense. But it's basically a comparison of our performance at a certain date and time in the past. So that is a pro tip. Google that. Check out some other YouTube videos to learn a little bit more on pacing. I want to give you just the basic calculations today to help you better determine what the the best thing for you to be doing in regards to your long term discount is. So we need to know our average occupancy. We need to know our average daily rate. Now there are people that dedicate their careers to this. Revenue managers, for example. This is all they do. They calculate trends and seasonality and discounts and last minute stays and all these types of things. But one thing that they often leave out are expenses. And us as investors, as owners, we have to calculate our expenses, right? Because at the end of the day it's our net income that makes the big difference. It doesn't matter if, if we earned twice as much of our expenses were twice as much at the same time. So we need to make sure that we're calculating our expenses and these change based on the length of our reservation. So one easy thing we can do, just for starters, is exclude our fixed expenses. So these are things like our mortgage payment, our insurance, our property tax. Any fixed monthly payment that you have or annual payment that you have is not going to affect whether you should be Offering a long term discount or not, because it has no effect there. What we do need to include are the variable costs. And so these are things like utilities, these are things like housekeeping. So the longer your reservation, the less your housekeeping cost. We also have things like transient occupancy tax and I'll touch a bit more on that here in a second. But Most reservations under 30 days, you have to pay a local transient occupancy tax. And this can really add up. So these are all variable expenses based on the length of your reservation. And so in order to estimate a future discount, we need to know the averages of these. And so we can go back in time, look at prior months and pull out the average utility expense. So maybe the utility expense is $500. We do want to take account seasonality. So maybe your utility bills much higher in the winter than it is in the summer because you have really cold winters. So you want to make sure that you're accurately, as accurately as possible, estimating your average variable expenses. With our average expected income in the future and our average variable expenses, we can subtract the two. Let's just say our expected income was $4,000 and our expected expenses our $1,000. That leaves $3,000 left over. So based off that number, we wouldn't want to offer a long term discount, a monthly long term discount. In this example, that brings our estimated revenue below $3,000 because the likelihood of us being able to rent for that $3,000 is already there. Right. So when might we we want to offer long term discount? Well, let's say December is still six months away from now, and so our pricing is higher because we have plenty of time to get bookings still. So let's say right now on the platforms where we have our properties listed, let's say it's listed for $9,000 a month right now and you could easily add in a long term discount, future long term discount for 25%. Right. Because it's still going to bring down your price to a point that's higher than your expected revenue. So that's all we're really trying to do here. We just want to have an accurate picture of our average expenses and an accurate picture of our estimated revenue and make sure that we're not discounting below that. That's about it. Now you're always going to get guests asking for additional discounts. I think it's best to always ask them first. So if they say, hey, do you offer a long term discount? If I go ahead and book your December for the whole month. Well, instead of saying sure, we'll offer 25, it's better to reach out to them and say what did you have in mind? Or what do you think's fair? And then you can work with them around that a little bit. But most of the time if we're using a dynamic pricing tool, it already has a lot of that kind of factored in. But this is just the bottom line numbers to help you make a decision to know whether you can offer these discounts or not. Now the one thing that you need to add back in there, let's say that $3,000 estimated income has a transient occupancy tax on it. Let's say it was a 28 night stay just to make things easy and you're still making $3,000 a month, but you're paying 10% to the city for a transient occupancy tax versus maybe that reservation changes to a 31 night stay and now you have no transient occupancy tax because your city doesn't charge on stays over 30 nights. Well, you really need to consider that in right, because that's a 10% difference. So hopefully that made sense there. And hopeful you're using a dynamic pricing tool, so your far out pricing is already adjusted. For now, you might be wondering what's happening with Airbnb's weekly and monthly discount if you're already using a dynamic pricing tool like Price Labs or Wheelhouse. Remember, if you're already using one of those tools and you apply Airbnb's discount, a weekly or a monthly discount, that's going to add an additional discount on top of whatever you have set up in your pricing software. So make sure that you're not setting up duplicates because we learned that lesson the hard way quite a while ago. Remember, this can also be a really good strategy. Setting long term discounts far out in the future or during times where your rental is in a low part of the season where the occupancy is lower and it makes sense to bring in a guest for a longer term reservation, even with a discount. But of course you're going to check your expenses, you're going to check your average income during that timeframe and make sure that that's all in line with whatever price you happen to be charging. And remember, if your guest asks you for an additional discount, make sure to take all these things into account and go ahead and ask them first what they think is fair. And knowing your expenses, knowing your income, you will be able to make a good decision. I hope that helped. There's a lot that goes into pricing and so we could talk for a long, long time on this. Like I said, there are people that dedicate their careers to this, but hopefully it gave foundation to be able to calculate whether or not you should be offering long term stay discounts.

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