Keep it Simpler

Dream of running your own hotel? Start with Airbnb.

Would you like to run your own hotel in a tropical paradise? Or perhaps a gorgeous mountain resort? These are great aspirations with wonderful rewards. They are also wonderfully expensive.

But there is a way to get your feet wet without the hefty price tag. I'm talking about vacation rentals. Most popular of which is Airbnb.

Here are three ways that a vacation rental business can help you get started on that dream hotel. Even at this time of very low travel demand, or perhaps specially at this time of very low travel demand, these tips would prepare you for when the business opportunities come roaring back.

And if you are already an owner, think of the following as tips for expansion to another location.

1 - Try the location before you build

We got started in the small hotel business with vacation rentals. Many years ago, we got a few apartments and leased them out to short-term travelers. It was quite profitable, and pretty soon we grew to about 50 units.

We didn't have to take loans. We used the earnings each month to renovate the succeeding apartments. We tried to expand to different locations. Some were profitable, some were not. Those that weren't, we quickly stopped.

This approach allowed us to grow quickly without risking too much time and money. Eventually, we put up our own small hotel using the proceeds from the vacation rentals.

These rentals enable us to test the profitability of each location before we invest a lot into it. We can verify if there is good demand and if we can compete effectively in that area.

Equally important is to consider our own relative location. Are we able to service those properties quickly? Or are we going to waste countless hours on the road? Should we get a "satellite office" nearby?

This was a mistake we did once. We took on a property that was too far away from our usual routes that we weren't able to give it enough time and attention to be profitable. The location is in a business district and close to other hotels, but it just wasn't optimal for us. Good thing it was only a single unit and we can quickly close it and cut our losses.

Can you imagine if we built a hotel on a location based only on an optimistic assumption and a nice-sounding theoretical business plan? Reality has a tendency to veer away from business plans (specially the very thick ones that nobody reads). What if the location doesn't work for us? Well, too late, we cannot move the building.

Vacation rentals give us that ability to try before we build.

2 - Experiment with business models

I'm assuming that you don't own the apartments you intend to lease out. And even if you have ready funds to invest on dozens of properties, it might make more sense to "use other people's money" and spread the risk by working with other unit owners.

For this there are several arrangements possible:

  • Profit sharing. You and the unit owner shares the proceeds after expenses. The percentage is agreed upon beforehand. To come up with a "fair" sharing ratio, try to compute for the average return that the property can make if it was leased to a regular long-term tenant. This should be the conservative average that the owner will probably receive. Then there should be a much larger upside if the room performs well. This reduces the risk in case the property doesn't get a lot of bookings, but you also have lower average profits.
  • Fixed lease. You essentially act as the long-term tenant with full disclosure that you will run an airbnb operation. This is more risky, but it can give you the highest profits. You can justify a low rate by saying that your operation will ensure that the unit is taken cared of, cleaned and maintained several times a week. The owner will not have to worry about those horror stories of tenants ruining their property.
  • Fixed lease + Profit sharing. A possible middle-ground wherein you declare a low fixed lease to guarantee that they receive something, but also offer an appealing upside. The profit sharing ratio in this case can be lower given the guaranteed returns. Another pleasant thing about vacation rentals is how much latitude you have to be creative. Try out new arrangements, keep experimenting until you find the perfect model that suits you. We once had 5+ different models going on at the same time (to the immense annoyance of our accounting officer). Looking back now, I think it would have been better to simplify it to just 2. But hey, experimentation teaches us a lot. Which was the whole point of this exercise.

3 - Do you have what it takes to deliver outstanding customer service?

Many hotels profess that they are not in the business of selling rooms. Rather, they are in the business of providing excellent customer service. The best run properties have mastered this. And we have a shot at learning it by practicing with vacation rentals.

The expectations with guests from airbnb are quite different. So there's a lot of room for trial and error. Don't have a standard check-in procedure yet? No problem. Housekeeping still learning as they go? The guests will probably forgive it (if you show a good attitude).

You can use these rentals to develop your own style of customer service. Your own unique ways to "wow" the guests. But you need to be committed to continuously learn and figure out ways to improve the experiences you provide.

You will also learn a lot about your own preferences and how you like to communicate with your customers. Take an honest look at where your inclinations are. If you do not feel like customer service is your strength, do you have someone in the executive team who can lead that in the long run?

I once met a vacation rental entrepreneur who likes to lecture his guests about house rules and what they should and should not do. He was treating this business as selling rooms, and all the rules and regulations that come with that. Needless to say, his guests were less than pleased. It didn't take long for him to abandon the venture.

Customer service is what hospitality is all about. And to succeed in this business, one must commit to this fully.

In Summary

Vacation rentals give us a quick way to get our feet wet before diving in and building our own hotel. It allows us to test the location, experiment with business models and practice customer service skills. Whichever way we take afterwards, we'll be much closer to our dream hotel.

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