ADR? Occupancy? RevPAR? Is this some kind of foreign language I've never heard of?
Similar to other industries, the short-term rental (STR) business has it's own 'lingo'. To be successful and seen as knowledgeable, one must understand the basic terminology.
Before diving into the specifics, you must understand that the STR business IS the hospitality (e.g. Hotel) business. Thus, if you want to really go deep on the hospitality terminology, I'd encourage you to read the 10k or 10Q of one of the large hotel operators (such as Marriott or Hilton). But I digress...for purposes of this article, let's focus on the basics:
- Short-term rental: Defined as a stay that is less than 6 months; however, these stays are often a week or less.
- Occupancy: The number of nights the property is occupied in a given period as a % of the total nights it could have been occupied (15 days rented per 30-day month = 50% Occupancy).
- Average Daily Rate (ADR): average rental income per paid occupied room in a given time period (source: Wikipedia). In other words, this is the nightly rate that your guests pay you to occupy your unit. if you have a 5 unit building and you generated $10k of rental income for 5 nights at 100% occupancy, your ADR was $400 ($10,000 divided by 5 units divided by 5 days).
- Revenue per available room (RevPAR): calculated by dividing a property’s total revenue by the total number of days in a given period. Said another way, it tells you the amount of revenue you made per day on average, regardless of whether the unit was occupied or not [Note: ADR * Occupancy = RevPAR]. Continuing the above example, if your occupancy was 40% instead of 100%, the RevPAR would have been $160 ($400 x 40%). The ultimate goal is to maximize RevPAR, which is accomplished through a proper balance of occupancy and daily rate (ADR).
- Capital Expenditures (capex): If you are buying a turn-key property for STR, you will still need to spend additional cash furnishing the unit with couches/beds/chairs/etc. This is often referred to as 'capex' and needs to be included in your financial analysis to quantify 'total investment in the property'.
- Furniture, Fixtures and Equipment (FF&E) Reserve: Short-term rentals will create higher than average wear and tear. If you are operating a short-term rental, you are operating an independent hotel and with that comes an increased requirement to fund upgrades or replacements to furnitures, decorations, household items (glassware), appliances, etc. There are things you can do to combat the amount of expenditures like protecting furniture with Scotchgard or using mattress protectors on all mattresses. These are $30-40 expenditures that should extend the life of furniture by years
This certainly isn't an all-encompassing list, but it's a good start and will elevate your knowledge when talking with other industry experts. Anything obvious you think we missed? Let us know in the comments below.
And as always, happy STRing!