Analyzing the Economics of a Remote Hospitality Business
Are you considering venturing into the world of remote short-term rentals or envisioning an eco resort? If you are seeking an understanding of the economics behind remote hospitality, you've come to the right place. In this guide, we will share the important numbers to consider when planning your hospitality business.
Wellness Tourism
Wellness tourism, focused on enhancing physical, mental, and spiritual well-being, is a rapidly growing segment. According to a market research report by Grand View Research, the global Wellness Tourism market is set for a compound annual growth rate (CAGR) of 12.42% from 2023 to 2030. The beauty of this trend is that it spans all socio-economic sectors, from glamping to luxury, ensuring growth opportunities regardless of your property’s price point.
Glamping
The gateway to wellness tourism often begins with glamorous camping or 'glamping.' Unlike traditional camping, glamping offers a nature-immersed experience without sacrificing essential comforts. Grand View Research reports a projected compound annual growth rate of 10.2% for the global glamping market from 2023 to 2030.
Starting with Airbnb
The success of any hotel or short-term rental business is dependent on the number of nights booked. In order to book nights, people must first know that your property exists, and this is where Airbnb is an excellent platform. Consider this: Airbnb's 2023 marketing budget amounted to a staggering $1.5 billion. How many cabins would you need to rent out to have a marketing budget like that? The answer is a lot of cabins. Start by leveraging Airbnb's extensive resources while focusing on crafting exceptional experiences for your guests.
Unique Stays
Airbnb's shift towards 'unique stays' offers a valuable opportunity. The platform recognizes that cookie-cutter accommodations aren't the future. They're actively promoting distinctive properties that hotels can't rival. In 2023, Airbnb's algorithm caters to hosts passionate about unique hospitality stays such as remote cabins.
Occupancy
While Airbnb favors near 100% occupancy, aiming for 70-90% is more sustainable. Most hotels target a 70% occupancy rate, balancing profitability with the appropriate time needed for proper maintenance.
Profit Margin
Let's estimate a 60% profit margin based on the following expense breakdown:
Management Fee: 15%
Repairs and Maintenance: 3%
Pest Control: 0.25%
Utilities: 4%
Internet/Cable: 3%
Insurance: 5%
Household Supplies: 3%
Property Tax: 3%
CapEx (Capital Expenditure): 3%
While expenses will vary from property to property, this is a good starting place. Remember that there will be some cost savings when multiple units are being operated together on the same property.
If you are managing your own property, any management fee would be paid to you as the operator. While this should still be thought of as an expense (your personal time is valuable), this can be viewed as a higher personal profit margin, closer to 75%.
Cash on Cash Return
There are multiple metrics that can be measured, but for the purpose of this article, we will be focusing on the cash-on-cash return. A cash-on-cash return is the total cash earned in a year compared to the total cash (equity) originally invested in the property. This return ratio measures how quickly you recover your initial investment. Let’s begin with simple numbers that assume you are purchasing your cabin outright and placing it on your existing property. We will get fancy later.
Starting Conservatively
Suppose you purchase your portable cabin for $140,000 and rent it with a 70% occupancy rate, a 60% profit margin, and an average nightly rate of $180.
(Nights Booked Per Year) x (Average Nightly Rate) x (Profit Margin) / Purchase Price = Cash on Cash Return
(365 x 0.70) x ($180) x (0.60) / $140,000 = 19.71% Annual Return
This translates to a roughly 20% annual return, resulting in an annual profit of $27,594 and a payback period of just over five years. A 20% annual return is impressive, outperforming many traditional investments. These calculations consider the payment of property management, minimizing the owner's time investment.
Exploring More Favorable Scenarios
In reality, many remote hospitality businesses achieve much higher revenue, especially in sought-after destinations. Let's calculate a 90% occupancy rate and a $250 average nightly rate, reasonable numbers for areas outside of major cities.
(Nights Booked Per Year) x (Average Nightly Rate) x (Profit Margin) / Purchase Price = Cash on Cash Return
(365 x 0.90) x ($250) x (0.60) / $140,000 = 35.20% Annual Return
This roughly 35% return would result in $49,275 profit annually, giving you a payback period of under 3 years. Beyond that, the cash flow is pure profit.
Financing Considerations
For those exploring financing, let's examine a scenario where you aim to create a mini eco resort with three cabins. You find the perfect property for $300,000 and want to build three cabins for $140,000 each. You put $144,000 down on a $720,000 investment (including closing costs), and your monthly mortgage payment is $5,000/month.
[(Nights Booked Per Year) x (Average Nightly Rate x Number of Cabins) x (Profit Margin)] - (Monthly Mortgage Payment x 12) / Purchase Price = Cash on Cash Return
[(365 x 0.90) x ($250 x 3) x (0.60)] - ($5,000 x 12) / $144,000 = 61% Annual Return
This roughly 61% return would result in $87,825 profit annually, giving you a payback period on your initial $144,000 investment of under two years.
Choosing the Right Market
Certain markets offer better cash-on-cash returns, typically in areas with lower land values but growing popularity. Some investors prioritize land appreciation, which will be higher in markets with substantial traffic drivers.
Ultimately, your personal preferences should guide your investment, aligning with the dream life and goals that you have outlined for yourself.
In Conclusion
Investing in a remote hospitality business is an exciting endeavor. By researching the market, understanding your numbers, and choosing the right location, you can create a profitable and fulfilling sanctuary.
