The Math of Ozarks Vacation Rentals: Revenue

Over the next few posts, we’ll be taking a look a the economics of Lake of the Ozarks Vacation Rentals. Though we’ll go into deeper detail at a future point for our subscribers, the objective here is to take a quick look at some of the numbers as one might expect to find at the Lake. Like most financial analyses, we begin with a look at revenue.

By far the simplest of the elements to both construct and comprehend, let us begin by discussing the two drivers that determine the annual revenue generating ability of a vacation rental. The first of these is the number of nights the vacation rental property will be rented to revenue-generating customers per year. Employing the simplest of sensitivity analysis styles, let us give Nights Per Year, NPY, the values [15,40,65] where 40 nights per year is the point estimate and 15 / 65 nights represent the 10th and 90th percentile expected values (akin to the minimum and maximum). The other key determinant of revenue is Nightly Rate, NR, and let us assume that it averages $200 per night after seasonal rates and discounts are factored in. Given those values, it follows that:

• The expected annual revenue (50th percentile value) is $200 x 40 = $8,000
• The minimum annual revenue (10th percentile value) is $200 x 15 = $3,000
• The maximum annual revenue (90th percentile value) is $200 x 65 = $13,000

The significant thing to take away here is the huge disparity in possible top-line outcomes. If were were to hold the 40 NPY constant and instead give NR the values [150, 200, 250], annual revenues calculate as:

• The expected annual revenue (50th percentile value) is $200 x 40 = $8,000
• The minimum annual revenue (10th percentile value) is $100 x 40 = $4,000
• The maximum annual revenue (90th percentile value) is $300 x 40 = $12,000

The disparity is again rather significant, but the final revenue is not quite as sensitive to the expected NR range as it is to the NPY variable. That, coupled with the fact that nightly rate is more a function of property specifics (location, size, amenities, etc.), leaves the property owner with one clear lever to pull to generate more revenue out of his or her income-producing vacation rental. That is not to imply that a property owner shouldn’t invest the time or money to determine the correct nightly rate, but rather that getting close on the rate and then spending  that time and money on marketing efforts to rent the unit for additional nights (some of whom will become repeat customers and thus offer an ongoing revenue stream) may be the more profitable tactic. As alluded to earlier, these tactics will be discussed in greater detail at a future point.

Up next: Variable Expenses.