A Deep Dive into Profit-sharing Model for Short-term Rentals

by Zainal Zikri
October 24, 2023
Business
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In the short-term rental accommodations (STRA) business, several models are commonly practisedbetween property owners and hosts, including the profit-sharing model. For decades, profit-sharing is known as one of the popular management schemes that are favourable to maintaining a long-term business relationship and fortifies a steady income stream in the STRA industry.

Let’s dig a little deeper into the profit-sharing model and what it brings to the table.

What is Profit-sharing

Profit-sharing is basically a system in which people who engage in the same group of businessesreceive a direct share of profits earned. In STRA, the major parties who engage in profit-sharing are property owners and a property hosts. An owner engages the service of a host to market or temporarily rent his or her property and shares an agreed percentage of profitability for the services rendered.

In short, profit-sharing is mutually beneficial for property owners and hosts who complement each other’s needs through a signed consensus.

Comparison between Profit-sharing and Fixed-rental

As you can probably imagine from its words, fixed-rental is another business model that is widely used whereby property owners rent their homes to others at a fixed rate for a fixed income. That being said, profit-sharing is more fluid when it comes to yielding returns while fixed-rental is, well, fixed.

Both of these models have their benefits and downsides, depending on each risk appetite and operational preference.

	Profit-sharing	Fixed-rental
Owner and host’s involvement	A more collaborative venture in which the owner will bear certain costs such as utilities and may be in the loop about the host’s income generation from the property.	The owner’s commitment is required to ensure the property is conducive renters.
Rental or lease agreement	Typically no lease agreement and the owner has the flexibility to terminate the arrangement within an agreed noticeperiod.	The owner may not change the rental price even when market demand is high or introduce new rules before the rental agreement period ends.
Marketing	The host has the flexibility to promote and boost a property’s booking in any way the host sees fit.	The owner is just a landlord.
Profit	Profit will fluctuate monthly. Both the owner and host will enjoy all profitsaccording to the agreed percentage depending on the occupancy rate.	The owner gets a fixed monthly rental.
Loss	Both the owner and host will bear any loss depending on how the business is doing.	The owner won’t experience any loss except when the rental fee is not paid within the agreed time frame or when the rental lease is not renewed.

In general, a property owner has very minimal involvement in the fixed-rental management scheme because once the owner rents a property to a tenant, both parties only need to carry out their roles in accordance with the signed agreement.

Through profit-sharing, an owner and a host will agree to a respective percentage to share both profits and losses together. MyRehat normally practises a range of profit-sharing schemes with owners depending on where the property is located.

Profit-sharing illustration

A common profit-sharing scheme is the 70% – 30% model as an example, whereby the total revenue accrued will deduct the operational expenses including host’s fees, cleaning fees and utility bills to calculate the net profit.

Using one of the 2-bedroom units that MyRehat is operating in Petaling Jaya as a reference, we can see how the owner and the host receive a percentage of payment based on various occupancy rates.

On a higher occupancy rate such as 80% to 85%, the net profit earned is almost double from lower occupancy months, all of which averaged more than a typical rental rate for the same unit. This means that a property with a fixed-rental model will only receive a fixed rental rate of around RM1800 (based on the current rental rate for this unit) but profit-sharing brings a more lucrative result for the same property.

The same financial forecast goes for the studio units, allowing a more profitable scheme that can reach more than RM1,900 as compared to the current market rental of RM1,500 per month.