“The shortest period of time lies between the minute you put some money away for a rainy day and the unexpected arrival of rain.”  Jane Bryant Quinn

I see saving up for a rainy day, or establishing a Reserve Fund, kind of like how my kids see their vegetables.  We both know what needs to be done and we both know why it should be done…

“But if broccoli smells this bad, won’t it taste even worse?”  - Me My Kid

The idea of putting additional money (we can’t spare) aside for some unknown thing that may or may not happen just smells bad.  Then after that first month where you reduced your owner draw by 20% to start the Reserve Fund, the originally smelly idea ends up tasting just as bad as it smelt.  Or is it smelled? 

I am here to tell you that I am now a believer who LOVES broccoli. 

Termites? Not so much…  Pesky little termites gave us our first opportunity to dip into our Reserve Fund, which we reluctantly and nearly did not set up a year ago as we started renting the third house. 

I never thought paying thousands of dollars to eradicate tiny little house-biting bugs could feel so good. 

The first time a band of termites set out to eat one of our houses it caught us completely by surprise and $3,600 later we were left thoroughly bummed out.  We had the money in our account but we were headed into our off-peak season when cash is tighter, and it made for an uncomfortably long winter and some dismal owners draws.

Here’s How The Rainy Day Fund Works (adjust according to your house’s specific circumstances.)
*I’ll assume that you are in some way tracking your revenue and expenses.  If you are not, yet, then be sure to read the next blog.

Step 1: Determine a target amount to have in reserve (as cash, and accessible).  Let’s say $10,000.

Step 2: Figure out how much you can pull from your monthly owner draw, enough that you will feel it but it won’t disrupt your ability to cover monthly expenses.  Let’s say 20% of monthly net income.

Step 3: Set this money aside and use your first month’s reserve to open a new savings account.  *Not a must-do, but we’ve found it to be convenient for book keeping.

Step 4: Don’t cheat the fund.  You’ve got to be consistent and build your monthly P&L to account for this money being set aside.  Now watch it grow! 

Here’s Why I Wanted to Tell All of You About It

Consistent Cash Flow is the first reason our reserve fund worked great.  We took a $3,000 expense hit in stride and still received 100% of the owner draw that month.  We had enough money in the reserve account to cover the extraordinary and unforeseen expense.

Consistent Level of Service is perhaps a more valuable reason to establish a Reserve Fund.  We did not have to scramble for the money, wait for more bookings or put it on the dreaded profit-munching credit card in order to take care of the problem.  The repairs were completed over our first three day opening because we had the cash on-hand to do so.   We did not have to inconvenience guests with our problem, and even if we had to put them in other accommodations we had the money on-hand to do so without worrying.

Peace of Mind is what the first two benefits above add up to.  But there’s more.  Our Reserve Fund is more than 60% to our goal even after the termites, Lord willing it will hit the goal in 2013.  Once that happens we can look forward to a 20% Increase In Owner Draw, a welcome pay raise.

The Bottom Line: Saving up for a rainy day is a good idea that is worth the short-term pain to get there.  Having a Reserve Fund will stabilize your monthly cash flow and provide a nice sustainable boost in owner draw once your fund is met.  The peace of mind in knowing you have that cushion will pay dividends every day, and the immediate access to cash in the event that something major happens will help you make the repair sooner, accommodate the inconvenienced guests and ultimately provide that WOW moment in the face a potentially bad situation.  Those are the moments that create a customer for life, and we could all use more of those. 

Here’s to the month after our Rainy Day Funds spill over.

Cheers!

Michael

“You got to know when to hold ‘em, know when to fold ‘em,
know when to walk away, and know when to RUN!”

Kenny Rogers - The Gambler

You may be thinking “What does Kenny know about the Vacation Home Business?”  Well, maybe not much.  But those lyrics above are very appropriate when it comes to dealing with security deposits.  Humor me for another 660 words and I’ll explain.

Why Have Security Deposits? 

We like security deposits for two reasons:

1. They constitute an agreement between the vacation home owner/operator (O/O) and the guests.
2. They provide a great opportunity to create incremental bookings and maximize ROI.

Think of it like this: 

“Look, I realize unforeseen accidents can happen while you are in my home.  In the event that they do, I just want to know you are good for it if it was your fault.”

“If I damage something I’ll pay for it so I don’t mind the deposit…as long as you don’t look for reasons not to give it back to me.”

Therein lies the problem: how to establish a clear line on when to keep deposit funds or when not to.  Ultimately you hold the money so it’s you that determines the line.  We break ‘em into four categories.

Take it away Kenny!

Know When To Hold ‘em – O/O and guest both agree that deposit money should be kept.

Guest’s kid climbs the pool umbrella and breaks it.  Dad calls, apologies profusely and along with insisting to pay for a new umbrella assures you that his kid “never acts that way at home.”

Know When To Fold ‘em – O/O wants to keep deposit but the guest doesn’t openly agree.

This is the biggest opportunity of the four because it will likely have a direct impact on your future business with that guest, specifically their likelihood to:

• Consider your home for their next trip
• Give you a positive review
• Recommend your home to others

You may be able to turn these lemons into lemonade if you can find middle ground.  Let your guest know the costs you will incur and explain that prior to their check-in the damage did not exist.  Ask them what they think should be done about it, and then use that as a starting point to find an agreeable solution for both sides.

**Possible Best Practice:  On two occasions we have offered guests a credit toward their next stay in the amount of the withheld deposit funds.  Full disclosure: Neither has taken us up on the offer…yet.  But, we recovered our loss, planted a seed for future business and the conversations ended on a positive note.

Know When To Walk Away – Keeping the deposit is expected by the guest, but you choose not to keep it.

Here’s where we can make a customer for life.  For three years in a row Rick and Raul have stayed two weeks with us while attending an annual convention.  This year one of them accidentally walked through our screen door and destroyed it.  At checkout they apologized and asked us to take it out of their security deposit. 

Valuing their business we elected to eat the $150 and use the opportunity to tell them just how much we appreciate their business.  We jump at every opportunity to show some Love to our high value guests.

Know When To RUN! – Flagrant damage happened and the O/O doesn’t ever want the guest back again.

This has happened with us three times out of 500+ bookings.  Gross negligence resulting in excessive damage to our home gave us no option but to withhold deposit funds.  As Lovingly as possible we informed our guests that there was substantial damage at checkout and provided an itemized detail of the expenses incurred, including our time to repair them.

**Best Practice:  The Loving approach meant we recovered our loss AND avoided a nasty guest review.  

The Bottom Line:  How we handle deposits when damage occurs in our homes provides us with an opportunity for incremental business in the form of Repeat Business, Strong Guest Reviews (our next topic) and Referrals.  If we can utilize the Fold ‘em or Walk Away approach effectively we turn a negative experience into a positive experience, all but obligating our guests to reward us with more business.   

Here’s to customers who take care of our homes and won’t stay anywhere else!

Cheers!

Michael

There are many ways to measure the success of a vacation home rental business.  How do you measure yours?  Are you hitting the goals you’ve set for yourself?  Or more importantly, do you even have goals for your vacation rental business beyond “to cover our mortgage” or “make a profit?”

In this blog we’re going to look at a few different ways to set goals for your vacation rental business in order to track your success.  Some of them can be tied directly to your profits and losses, while others may not directly impact your bottom line, but are good indicators for success, nonetheless. 

To start off, it’s a good idea for any business owner to establish goals.  As a general practice, I like to use the old business adage that every goal should be S.M.A.R.T.  (For more information on S.M.A.R.T. goals visit http://en.wikipedia.org/wiki/SMART_criteria)

For example, let’s suppose one of our goals is to increase our revenue from $65,000 to $77,000 the following year.  Here’s how we make it S.M.A.R.T.:

• S – Specific:  Increase revenue by $12,000 to $77,000 in the calendar year 2011.
• M – Measurable:  If our annual revenue reaches $77,000 at year end, we will have been successful.
• A – Ambitious:  The goal represents your very best effort or maximum output. 
• R – Realistic:  Considering vacancy rates (in this case) a $1,000/month increase in revenue is achievable.
• T – Time Bound:  We are using the 2011 calendar year as our time constraint.

Other examples of S.M.A.R.T goals may be that your vacation home does not sit vacant more than 5 nights in any calendar month, or that your non-rental revenue in the year 2012 exceeds $5,000.

This may seem like a simple exercise but you’d be surprised how easy it is to set a goal that doesn’t line up with the S.M.A.R.T. principles.  Using this approach to set appropriate goals for your vacation rental business will help ensure your goals are driving your business towards increased profits.

Equally as important as the goals you set are the metrics you employ to track your progress. Many businesses refer to their primary metrics as Key Performance Indicators, or KPI’s.  My wife, Angela, and I established our KPI’s early on in our vacation rental business and have stuck with them ever since. 

We set our goals using the following KPI’s:

• Rental Revenue – includes regular nightly revenue and fees for additional guests
• Non-Rental Revenue – includes cleaning and pool heating fees, underwater camera and video game console rentals, and commissions from attraction ticket sales
• Booked/Occupied Nights– the total number of nights in a year our home is occupied  including:    
  • Personal Use – nights we stay in the home for our own use
  • Donations – nights we are able to give away with little or no revenue in return
  • iTravex Exchange – nights we’ve taken in trade using iTravex.com 
• Vacant Nights  – missed opportunities during the year when our home has sat empty

We have kept track of these KPI’s by month and by house for more than four years.  The historical data has proven to be invaluable to us in terms of understanding and managing our business while maximizing our ROI. 

I spend 30-45 minutes each month putting the KPI information we gather into a simple Microsoft Excel spreadsheet that allows us to monitor the progress of our business over time.  If you have not been tracking this information, I recommend taking the time to go through past bookings to compile whatever data you can to give yourself a benchmark. Then going forward you’d only need to maintain the spreadsheet moving forward.  To me, this is definitely time well spent. 

With this information readily available, you can make more informed decisions on:

• Which reservations to take when check-in and check-out dates conflict
• Which bookings to discount
• When to run special offers or featured listings
• When to take trades
• Which nights are available for donations

Donations have become an increasingly more important KPI for us in our vacation home rental business.  In our next blog we will explore several ways to grow your vacation home business, (and your heart) by donating time in your vacation home. 

The Bottom Line:  Proper goal setting and tracking of KPI’s is an integral part of maximizing the ROI of any business.  A business running without goals or established metrics to track the progress towards attaining those goals is analogous to a ship at sea without a rudder or a compass.  The time you spend setting goals and tracking your progress will help you run your business more efficiently and profitably while paying dividends in the long run.

If you have success stories related to goals you’ve set for your business please share them in a comment below.  Until then, here’s to knowing where we’re headed and how we’re going to get there! 

Cheers!

Michael