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

welcome back to the short-term rental richness 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 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 there right so we are boosting the combination of our occupancy and our average daily rate turn 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 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 is 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 have 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 I 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 uh 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 the benefits to short-term rentals even

though it's kind of opposite of what 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 percent so we rented 20 of the 30 days and our average daily

rate just makes make things easy our average daily rate was a hundred dollars a night so we rented for 20 nights at a hundred dollars a night that's two thousand dollars so if our future is looking like our past did then of course we wouldn't want to offer a long-term discount that's going to go below that two thousand dollar 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's 10 as we are in here in June but last year in June our occupancy in December was 30 percent 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 with in regards 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 or 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 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 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 five hundred dollars we do want to take into 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 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 four thousand dollars and our expected expenses are one thousand dollars that leaves three thousand dollars 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 three thousand dollars because the likelihood of us being able to rent for that three thousand dollars

is already there right so when might we we want to offer a long-term discount well let's say December is still six months away from now and so our pricing is higher because we're 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 nine thousand dollars 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 it's better to 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 uh 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 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 three thousand dollars estimated income has a transient occupancy tax on it or let's say it was a 28 night stay just to make things easy and you're still making three thousand dollars a month but you're paying 10 percent to the city for a transient occupancy tax versus maybe that reservation changes to a 31 night stay and now you have no Transit 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 hopefully you're using a dynamic pricing tool so you're 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 the that time frame 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 you the foundation to be able to calculate whether or not you should be offering long-term stay discounts want to get on the fast track to Financial Freedom through short-term rentals what all starts with the properties you acquire but you want to make sure that you acquire the right properties I

want to give you my ebook that will show you how to do just that there is no charge it's my gift to you for being one of our subscribers just go to restmethods.com that's r e s t methods.com