Budgeting For Short-Term Rental Expenses: Strategies for Effective Financial Planning

Tracking expenses per asset, developing a budget, and using centralized software can help property managers ensure effective Short-Term Rental expense budgeting.

September 12, 2023


Budgeting For Short-Term Rental Expenses: Strategies for Effective Financial Planning

Property managers commonly either own their Short-Term Rental property and/or manage the rental asset on behalf of one or more property owners. These real estate professionals often face challenges pertaining to expense budgeting/management, such as cost minimization or pricing optimization. These challenges often occur due to missing information, the use of multiple bank accounts, and/or mixed expense transactions with costs associated with multiple Short-Term Rental properties in their portfolio.

When a property management company or property managers use multiple bank accounts to manage their business finances, they have additional transaction sources that they need to track and monitor, which can make expense budgeting difficult.

Oftentimes, they are left having to centralize the data first, then they can continue with their financial review and budget projections. Catering to these challenges requires both time and effort that property managers can not spare.

In these cases, the impact of the financial challenges limits a property manager from focusing on core aspects of their business like increasing bookings and other customer management tasks; this can really hinder them from scaling their business and bringing in revenue.

In this article, we’ll focus on exploring strategies for managing Short-Term Rental expenses and learn how to properly estimate expenses for your Short-Term Rental business.

What Is Financial Planning?

Financial planning is the process of determining how to acquire and manage monetary resources required for achieving business goals and objectives. The financial planning process involves assessing the current financial situation of your business and developing mitigation plans for financial issues that may arise in the future.

Most property managers often confuse financial planning with asset management. It’s important to understand that asset management is when a real estate professional manages the investment assets of clients. Whereas financial planning is about managing their own business’s monetary resources. Financial planning can help property managers:

  • Determine Capital Requirements - capital requirements are based on different factors, which include your annual expenses related to each Short-Term Rental properties, promotional and marketing expenses, technology expenses, initial expansion investment requirements, and more.
  • Develop Financial Policies - financial policies are set to give guidance for what healthy business finances should look like. They encompass different aspects of a Short-Term Rentals financial projections, like cash flow and debt-to-equity ratios. Further, they can provide expense guidelines and spending rules which help keep your business’s finances on track.

Developing a financial plan allows property managers to effectively utilize financial resources for managing their Short-Term Rental portfolio. When you estimate expenses for a given month, or year, it’s important to understand that your Short-Term Rental expense calculations should include a detailed breakdown of current and forecasted expenses, taxes, vacation rental income, cash flow, and debt payments.

Predicting future expense details can be challenging. It can be a good practice to look at historical data, if available, to help drive the calculation process. If you are just getting started and don’t have historical data to rely on, you can connect with property managers in your area and learn about their expense expectations. Doing your research to get the expense projection as accurate as possible is never a bad idea, so be sure to collect and review a vast amount of information prior to finalizing your budget. Next, we will dive into some strategies that can help with financial planning.

Strategies for Effective Financial Planning

In the Short-Term Rental industry, effective financial planning can help property managers leverage monetary resources for maximum returns. In addition, it can also help identify areas where costs can be reduced. Now that you have an understanding of what financial planning is, let's look at some strategies that can help you manage Short-Term Rental expenses more effectively.

Tracking Expenses

As a property manager, you need to keep transaction records of operating expenses for each rental property. Such transactions may include maintenance and cleaning fees, utility costs, taxation, insurance costs, other fees, and more. Keeping track of such expenses can help you identify areas where costs can be minimized.

Using A Centralized Software

Manually keeping track of expenses for multiple Short-Term Rental properties can require a significant amount of time and effort. Using centralized software like Clearing can help property managers track and monitor such expenses with ease. Such software can even be used to integrate bank accounts, and credit cards, bringing all transactions into one place for reconciliation and financial report generation. This can be a game-changer for your short-term vacation rental home or business.

Tracking Occupancy Rate

The occupancy rate is basically the time your Short-Term Rental properties are occupied. Monitoring the occupancy rate can help you make informed decisions about pricing strategies. It can also help you reduce and, in some cases, eliminate unnecessary expenses for services that are not needed when the property is not occupied.

Developing A Property Specific Budget

Creating a budget can help you manage your financial resources and expenses. However, it’s important to remember that the operating budget of a vacation rental business may include income from all your rental properties. Utilizing trust accounting to segment funds in trust for each property, and rolling the transactions through zero-balance accounts into your operating account will give you a better idea of each property’s individual budget and their respective expenses. Creating a budget per vacation rental property can help you foresee the amount of potential expenses related to each property and aid in financial planning per property.

Analyzing Maintenance and Repair

As a property manager, you need to actively monitor and analyze any maintenance and repair requests your customers have. Monitoring such requests will help you determine their probability of occurrence and the potential expense they are likely to cost. Such insights are essential to developing a rental property maintenance budget and can help ensure the sufficient availability of monetary resources. Keeping funds in segmented trust accounts per property can take this a step further, as you will be able to manage your maintenance expenses per property, and track the costs associated with each of your assets.

How Can Clearing Helps Property Managers With Expense Budgeting?

Clearing provides a comprehensive financial management solution that’s specifically designed for property managers and real estate investors in the Short-Term Rental space. It allows property managers to integrate multiple bank accounts and credit cards into a centralized platform. This ensures that property managers are able to view all transactions from different properties in a single dashboard.

Clearing can also automatically organize each transaction based on expense categories for each of your rental properties. This not only helps property managers to save money, time and effort but also allows them to have a comprehensive view of their expenses - in a categorized format. The insight gained from monitoring these expenses can then be used to forecast and allocate monetary resources effectively. Lastly, these insights can also be shared with homeowners, helping property managers ensure financial transparency.

Finally, Clearing allows property managers to facilitate trust accounting, which is truly a game changer if you have multiple properties or work with multiple Short-Term Rental owners. With Clearing, property managers can spin up multiple virtual accounts (zero-balance accounts or sub-ledgers) and coordinate their cash flow to automatically segment funds as per property or asset entity.

This allows property managers to budget per property, and get a deeper insight into the financial performance of each property. Without trust accounting, operating budgets can be messy. The total operating budget can look inflated, because all monies are in one account, which gives no insight into the operating budget of each of the assets.

When a big cash call comes for a larger expense, property managers operating out of a single operating account can risk overspending on an asset, without even knowing they are doing so. Segmenting accounts by property and financially reporting on each of the properties individually gives property managers much more control over their Short-Term Rental business finances, and is something every property manager with multiple properties should be considering.

So, what are you waiting for?

Sign up for a demo now and automate your bookkeeping and trust accounting operations with Clearing today!

Clearing is a Financial Technology Company, not a bank. Deposit Accounts are issued by Evolve Bank & Trust, Member FDIC. All company names are trademarks or registered trademarks of their respective holders. Use of them does not imply any affiliation with or endorsement by them.

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