After analyzing hundreds of profit and loss statements from short-term rental properties, we have developed expectations regarding the costs you can anticipate when running a vacation rental in a foreign country. Below, we provide general guidelines for the expenses you should be prepared to pay.
1. Rental Management Costs
The most significant expense when operating a short-term rental property overseas is the cost of a rental management company or an individual who manages your property, bookings and pricing, greets customers, and ensures its proper maintenance. Unless you choose to manage the property yourself, you should expect to pay anywhere from 10% to 30% of the revenue to the property manager. Make sure to compare different providers, their reviews, and what services they provide for the price that you pay.
For instance, if your property generates gross revenue of $50,000 per year, you can anticipate paying between $5,000 to $15,000 for a rental management company.
2. Electricity/Power/Heating Costs
Electricity costs are rising globally, although they are highly dependent on the property’s size, features, and the country where you make the purchase. For example, a 6-bedroom villa with a large pool and air conditioning will have significantly higher electricity costs compared to a small 1-bedroom apartment in Europe with central heating. That being said, electricity expenses can range from $1,000 to $15,000 per year.
During the due diligence process, it is crucial to double-check the property’s power costs.
Water costs can also vary significantly, typically ranging from $500 to $10,000 per year. In some countries, where water is expensive or if you have a large pool with heavy guest usage, costs can reach up to $15,000 per year. While water expenses usually pose no issues when purchasing a condo or an apartment, it is wise to double-check when buying a villa with a substantial pool, particularly in the Caribbean.
If you are financing or mortgaging your property, insurance is likely a requirement. Even if you are purchasing the property without a mortgage, it is still advisable to insure it.
Insurance costs can vary greatly, ranging from $500 to $40,000 per year depending on factors such as property size, location, and value. For example, high-end villas in the Caribbean may incur insurance costs of up to 1% of the property’s price. If the property costs $500,000, expect to pay $5,000 for insurance. In Europe, especially for condos and apartments, insurance costs are generally lower, accounting for 0.1% to 0.4% of the property price.
5. Other Utilities (Garbage, Internet/TV, HOAs)
Garbage collection, internet, and homeowners association (HOA) fees are typically relatively low for overseas properties. It is challenging to assign a specific price to these utilities as they can vary greatly, but internet and TV expenses usually do not exceed $3,000 per year, and garbage collection costs are typically lower.
HOA fees depend on whether the property is a villa in a gated community or a condo in a large apartment complex, but they are generally not excessively expensive. Expect to pay anywhere between $500 to $1,500 per year for HOA fees.
6. Maintenance and Repairs
As a general rule, allocate approximately 5% of the revenue towards maintenance and repairs. In hot climates, if the air conditioning stops working, your short-term rental customers will not tolerate it. Therefore, your rental management company will need to hire someone to fix it. The same principle applies to the pool, kitchen appliances, and other items that can unexpectedly break down.
Ensure that you have sufficient funds set aside to address problems as they arise.
For short-term rentals, there are ongoing expenses associated with purchasing necessary supplies. Fortunately, these are typically handled by the rental manager, but you will still need to cover the costs. General supplies for short-term rentals include bed linens, kitchenware, toilet paper, soap, and hangers among others. While most of these supplies are affordable individually, they can add up over time.
8. Booking Platform Fees
Platforms such as Airbnb, VRBO, and Booking charge fees either to clients or property owners in order to sustain their business operations. You have the option to pass these costs onto your customers, allowing them to pay the fees during the booking process. Alternatively, some property managers choose to absorb the fees and adjust the nightly rates accordingly. Regardless of your approach, you will still need to make the necessary payments to the booking platforms.
9. Currency Exchange and International Banking/Accounting
If you are operating a short-term rental property in a foreign country, you may encounter currency exchange fees and fluctuating exchange rates when managing rental income and expenses. It is advisable to explore international banking options and consider the associated costs and risks of currency conversion. Additionally, in most cases, you will need a local accountant to manage filings and tax payments.
Taxation is a complex and varied topic, with different countries implementing different tax schemes. In some countries, rental income tax may be low, but accommodation tax could be high, and vice versa. If you require assistance with tax calculations pertaining to short-term rentals in foreign countries, please feel free to reach out to us. We can provide guidance and support to ensure compliance with local tax regulations and help you navigate this important aspect of your rental business.