Lessons from The Overlook: Know Your Financials

Note: Lessons from The Overlook is a monthly update on lessons learned from owning a vacation rental property in the Southern California mountain town of Idyllwild. It's a hands-on opportunity to apply some of the techniques I advise my clients to use. You can find past updates here.

Many customer service leaders tell me they struggle with financials.

Things like margin, variable costs, and fixed costs are a mystery. Capital expense doesn't making any sense at all. Cost centers are confounding.

This makes it difficult to ask for money. 

You might want to invest in new technology, hire more staff, or boost wages to improve retention. Knowing the cost isn't enough. Fluffy platitudes about investing in service won't get you there, either. 

You need to convince executives there's a financial benefit to spending that money. 

I can relate. My wife, Sally, and I wanted to turn the garage at our vacation rental property into a game room. But first, we had to run the numbers.

Photo credit: Jeff Toister

Photo credit: Jeff Toister

Why We Wanted a Game Room

We thought it would be a great addition for our guests.

An analysis of similar vacation homes in the area revealed that guests generally looked for a few benefits:

  • A well-equipped kitchen
  • Expansive views
  • A spa
  • A deck
  • Walking distance to town

Our property, The Overlook, already has all of those features except for walking distance to town. Pretty difficult to change that one.

A few rentals had a game room, which many guests called out as an added benefit, though not the primary reason they booked. Most game rooms had a pool table in a kitschy room that looked like somebody's basement from the 80s. 

We thought we could do better.

The Overlook has a detached single car garage. Guests don't expect to park in a garage, so we thought we could make better use of the space. Our vision was to finish off the garage and put in a ping pong table. 

Truth be told, we also really wanted a ping pong table to enjoy ourselves. 

 

Running the Numbers

First, it's important to know exactly how much adding a game room would cost. 

We had a few contractors come out to give us estimates. It wasn't pretty. The garage needed a new roof, a new side door, and new windows. The roll-up garage door was unsightly. The floor wasn't level. 

Total price tag, including a ping pong table, was $16,500.

Now that we knew the cost, we had to calculate the return. What would we gain financially from having a game room.

We talked to our property manager. She told us that in her experience, game rooms were nice added features, but it would be difficult to justify a rate increase on that alone. 

This actually jibed with our earlier analysis that guests liked game rooms, but it wasn't a primary factor when booking a rental.

If we couldn't get a rate increase, could we get more bookings? 

There are two factors that might drive this:

  • The game room could be a tie-breaker between two similar properties
  • Guests might be more likely to return if they enjoyed the game room

We didn't have a lot of data here, having only owned The Overlook since last October. So we took a guess.

The Overlook was already booked most weekends during the busy winter season. A game room couldn't improve upon that. But perhaps we could gain two extra rentals during the summer. 

Here's how that works out:

  • Rate: $325 for two nights, $275 for each additional night. 
  • Average stay: 2.5 nights 
  • Total gain: $975

Would you spend $16,500 to gain $975 per year? Wait, the math gets worse.

Our nightly rate includes the cleaning fee. We also have to pay our management company and some other miscellaneous fees. That means our take on the $975 is really about $500.

Here's our payback calculation:

$16,500 ÷ $500 = 33

This means it will take us 33 years for the game room to pay off. Suddenly, that game room seems like a terrible business decision.

 

Apply This Lesson to Your Business

Let's step through what we did to run the numbers. You can apply the same lesson to an investment you want to make in your own business.

Step 1: Identify the costs. Know exactly what you're getting into. For instance, if you want to add staff, the cost isn't just their wage. It's the cost of employment taxes, benefits, equipment, etc. Costs are almost always underestimated.

Step 2: Identify the financial benefits. Do your homework to get an accurate estimate.  Many leaders make the mistake of making up numbers without doing their research. Those estimates are almost always too optimistic. For The Overlook, we analyzed the competition and talked to our experienced property manager who oversees more than 40 properties. 

Step 3: Calculate Your Return. The easiest way to do this is to divide the cost by the gain. This will tell you the amount of time it will take for that investment to pay off. Hint: executives usually want to see unplanned investments payoff within the current fiscal year.

 

Epilogue

There's one more lesson you can take from our game room example.

You can often find money in the budget for a project that the business owner or a key executive passionately believes in, even if the financial return isn't there. This means you need to do more than just run the numbers. 

You need to get your executive emotionally committed.

In our case, we imagined epic ping pong battles with family and friends. We wanted to put barn doors on the garage that opened wide in the summer to let in the cool mountain air. Perhaps a couple of bar stools for guests to sit on while waiting for the next game.

It was a terrible investment, but we really, really wanted a ping pong table. So yeah, we did it.

Garage before

Garage before

Garage after

Garage after