The Margin Mistake Killing Most STR Companies!

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Profit margins can make or break a short-term rental business - but most operators are looking at the wrong numbers.

In this video, I break down the real profit benchmarks for STR operators across different business models, including property management companies, aparthotels, hybrid models, urban portfolios, and resort/vacation rentals.

You’ll learn what healthy gross and net margins look like, why revenue alone can be misleading, and which KPI reveals whether your business is truly profitable or just looks good on paper: contribution margin per unit per year.

Resources

• AJL Atelier – Global STR Consulting [https://www.ajlatelier.com]. Led by our host Simon Lehmann, AJL Atelier is a boutique advisory firm helping professional hosts, property managers, and investors succeed in the short-term rental industry.
• Connect with Simon Lehmann on LinkedIn [https://www.linkedin.com/in/simon-lehmann-8375753b/] 

Stay connected:

• Apple Podcasts: https://podcasts.apple.com/us/podcast/str-global-unlocked-with-simon-lehmann-unfiltered/id1842946960 
• Spotify: https://open.spotify.com/show/3kke4wOx0tNv0duq9MMWtO 
• Youtube: https://www.youtube.com/playlist?list=PLWVkmUOkmhSHcFjzi28AhaQNR98vaG65O 
• Website: https://www.ajlatelier.com/podcasts 
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Transcript

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SPEAKER_00 0:00

There is one thing nobody tells you when you scale a short-term rental business. It's incredibly difficult to know whether you are actually doing well financially. I ran one of the largest vacation rental companies in the world. I was co-founder and chairman of Akasha Europe and made comfy in Australia. And today I advise more than 50 short-term rental businesses across 20 plus countries. That view across every market, every business model, and every portfolio size is something very few operators ever get. The question I get asked most often is the one about profit margins. And what I see in those mandates again, and again, is this. Most companies have revenue numbers that look impressive on the surface, but underneath the margins tell a completely different story. There's actually one specific metric that almost every operator interprets incorrectly. A number that decides whether your business is generally profitable or just looks like it. You'll find out which KPI I'm talking about in a moment. In this video, I'll share the gross and net profit benchmarks I use in my advisory work to assess whether an STR business is healthy or whether it's heading into a cash flow problem in the next 12 months that it doesn't see coming yet. And if your numbers don't match what you're about to see, there is a link below this video where you can book a consultation with me directly. Let's get into the actual numbers. Since margins look different depending on the business model, I'll walk you through the four most common models in our industry and give you the benchmarks for each. Property management companies, hospitality brands, and apart models, hybrid models, and finally the difference between urban and resort markets. So when you compare your own numbers in a moment, compare them to the model that is closest to yours. Property management companies. We call that the PMC model. Let's start with the classic PMC. The model where you manage properties owned by other people and you don't take a commission, typically somewhere between 15 and 25% of the gross booking value. Plus auxiliary fees on cleaning, damage waivers, and so on. The margin in this model comes from spread between what you charge the owner and what it actually costs you to deliver the service. That spread is much thinner than most operators realize, because every booking carries direct costs: cleaning supervision, guest comms, channel fees, payment processing, op staff, and software. Here are the benchmarks I work with. On gross profit margin, meaning your revenue minus the direct cost of delivering each stay, anything below 30% is in the needs work zone. You're either underpriced, your direct op costs are too high, or both. Between 30 and 45% is acceptable. That's where most well-run PMCs operate, and everything, anything above 45% gross margin is exceptional. That's a tightly run operation with strong unit economics. One net profit on net profit margin, after all, overhead, all GNA, all fixed costs under 5% is needswork. And frankly, that's where the majority of PMCs in our industry actually sit. Between 5 and 12% net margin is acceptable and indicates a business that's generally profitable. Above 12% net margin, it's exceptional. And below 18%, you are in the top decile of operators globally. The biggest levers in this model are three things in this order: pricing power on the owner contract, cost of guest acquisition, and operational efficiency per unit. Most operators focus only on the third. The winner gets the first two right. Hospitality brands and apart models. The hospitality brand and apart hotel model is structurally different from a PMC. You don't manage someone else's property. You control the inventory yourself, either through ownership or long-term lease. You take 100% of the revenue, but you also carry 100% of the cost. Rent or financing, full staff, utilities, Fapheny, and the working capital to operate it. This model has more in common with hotel economics than with vacation rental management. The margins look different because the cost structure is structurally heavier, but the upside per unit is also much higher when it's running well. On gross profit margin, revenue minus direct operating costs include rent and staff. Under 40% is needs work. You're being squeezed on rent or running inefficient operations. Between 40 and 55% is acceptable and aligns with industry standards, GOP benchmarks for branded hospitality. Above 55% is exceptional. And that's the territory the best apart hotel operators in Europe and the United States are operating in. On net profit margin, under 8% is needs work. Between 8 and 15% is acceptable. Above 15% is exceptional. And the best in-class operators in luxury and lifestyle segments are pushing 20 to 25%. The reason the margins here often look different from a pure PMC, you are capturing the full revenue, not a commission. So both your absolute margin per unit and your variance per unit are much higher. When it works, it really works. When it doesn't, the losses are also much bigger because you're carrying the lease. Hybrid models, PMC plus master lease or arbitrage. The hybrid model is where you run a PMC business on owner inventory, but you also carry some master lease or arbitrage units yourself. This makes strategic sense in two situations. When you have access, operational capacity that you want to monetize more aggressively, and when you want to test product market fit in a new segment without waiting for owners to sign up. It does not make strategic sense when you use it to artificially inflate revenue or when you take on lease risk in markets where you don't have proven RevPAR performance. That's where operators get in trouble. On gross profit margin for a hybrid model, under 30% is needs work. Between 30 and 45% is acceptable. Above 45% is exceptional. But be honest with yourself about whether the margin is coming from the PMC leg or the least leg because the risk profiles are completely different. On net profit margin, under 5% is needs work. Between 5 and 12% is acceptable. Above 12% is exceptional. And the top hybrid operators are landing between 15 and 20% net. The typical mistake operators make when mixing models is this. They let the leased leg subsidize the PMC leg, or vice versa. And they lose visibility into which leg is actually creating value. Every hybrid operator should run both legs as separate PLs. If one of them isn't profitable on its own, you don't have a hybrid model. You have a profitable business carrying a loss making one. Urban versus resort and vacation destination. Now on top of business model, the market type you operate, it changes the benchmarks significantly. Urban operators typically run higher occupancy, often between 70 and 85%, but with lower ADR variants and tighter competition, more regulatory pressure, and higher per night cost of operations because of labor and real estate. Net margins for urban operators typically sit in the 5-10% range when business is well run and pushing 12% if it's exceptional. Urban is fundamentally a volume game. Resort and vacation operators run lower occupancy, often between 50 and 70%, but with significantly higher ADR, larger seasonal swings, and weather and event risk built into the model. Net margins for vacation operators are typically 10 to 18% when well run, and the top performers push 18 to 25. Resort fundamentally a margin game. The operational difference that explains the gap. Urban operations are dense and predictable. So they reward efficiency and process discipline. Vacation operations are lumpy and seasonal, so they reward yield management, owner relationship depth, and the ability to run a tight chip through months without losing your team. If you're running a portfolio that mixes both, separate the PLs, mixing them obscures the truth on both sides. Now, I told you at the start there is one specific metric that almost every operator interprets incorrectly. The number that decides whether your business is generally profitable or just looks like it. It's contribution margin per unit per year. Not portfolio ABTR, not gross margin in percent, not occupancy, not ADR. Contribution margin per unit expressed in absolute Euros or dollars per managed unit per year. Here is why this is the metric that exposes the truth. Portfolio level metrics average everything out. You can have a business doing 5 million euros or dollars in revenue and a respectable looking EBITDA while underneath half of your units are losing money and the other half are subsidizing them. Every new unit you sign onto a portfolio like that makes the problem bigger, not smaller. That's the scale trap, and I see it in advisory mandates constantly. Most reports don't show this metric because most operators set up their dashboards at the portfolio level. They look at total bookings, total revenue, total margin. They don't divide by unit count, so the unprofitable long tail stays hidden. How should be tracking it instead? Pull the contribution margin. Revenue minus direct costs of service for every individual unit every quarter. Sort the list. Look at the bottom 20%. Those are your decision points. You either reprice them, restructure the owner contract, or you let them go. The operators who do this constantly grow their margin every year, even when they're not adding units. The ones who don't eventually hit the wall, usually around the 300 to 500 unit mark, where the long tail becomes too heavy to carry. That's the metric that's the one most operators get wrong. So what do the operators in the exceptional range actually do that the others don't? In my advisory mandates, I see three levers come consistently. The first is pricing power. The exceptional operators run revenue management as a discipline, not as a tool they bought. They actively manage RefPAR, not just occupancy. They renegotiate owner contracts upward when they prove value, and they walk away from owners who don't accept market terms. The acceptable operators chase occupancy, the exceptional operators chase yield. The second is portfolio quality discipline. The exceptional operators say no to units that don't fit the model, to owners who can't be served profitably, to markets where they don't have density. They prune the portfolio every quarter. The acceptable operators add units to grow. The exceptional operators remove units to grow margin. The third is cost discipline at scale. The exceptional operators use technology to scale operations without scaling headcount linearly. They invest in their data spine, they automate their decision loop and they keep the founder out of operational decisions. The acceptable operators scale headcount with units. The exceptional operators break that line. These are three levers compound. An operator that gets all the three right doesn't just land at 12% margin. They land at 18 to 25%. And they do it sustainably, year over year, even when the market gets harder. Those are the benchmarks I use in my advisory work. And no matter where you currently land, one thing always stays the same. The operators who scale sustainably are the ones who know their numbers, call, and treat margin as a strategic decision, not just as an accounting outcome. And if you want to see how the operators with the highest margins in our industry actually think, watch my panel discussion with Maxim Fries of Emerald Stay, Max Anirod of Le Collectionist, Stephanie Chai of Deluxe Nomad, and Scott Wiseman of Nocturne Luxury Villas Next. Four operators from the luxury segment who build their pricing power, their margins, and their positioning differently than 95% of the industry. I'll see you there.