The Complete Guide to Vacation Rental Revenue Simulation

When considering an investment in the vacation rental business, the most important question boils down to just one thing: “Will this property actually be profitable?” The only compass that can guide you to that answer is a highly accurate “revenue simulation.”

Let’s start with the conclusion of this article.

The success or failure of a vacation rental business is largely determined before you even begin—not by passion or gut instinct, but by a business plan based on **”accurate numbers.”** And at the core of that plan lies a realistic revenue simulation that sharpens the precision of your sales forecasts and leaves no expense unaccounted for.

In this article, we’ll walk you through, step by step, how to create a realistic and highly accurate revenue simulation—so anyone can put it into practice and avoid the regret of “this isn’t what I expected” caused by overly optimistic projections.

Why “Rough Estimate” Business Plans Fail 99% of the Time

Business plans built on wishful thinking and rough estimates—like “this area should bring in about this much”—are almost guaranteed to fail.

• The Trap of Hidden Costs: Beyond initial costs like property acquisition and renovation, monthly operating expenses—OTA commissions, cleaning fees, property management fees, and more—eat into your profits. If you don’t account for these accurately, you can end up in a situation where sales are coming in, but no money is actually left in your pocket.
• The Trap of Overly Optimistic Revenue Forecasts: If you ignore realities like competition and the tourism off-season, and instead assume “always fully booked” and “always high room rates,” you’ll end up struggling with the gap between your plan and reality.
• The Risk of Running Out of Cash: As a result, you may be unable to cover unexpected equipment repairs or fixed costs during months of low occupancy, making it difficult to keep the business running.

[Step 1] Three Variables for Realistically Forecasting “Revenue”

The starting point of any revenue simulation is a sales forecast. Let’s use the following three variables to arrive at realistic figures.

Variable 1: How to Calculate ADR (Average Daily Rate)

ADR (Average Daily Rate) refers to the average nightly rate. To calculate this, thorough competitor research is essential.

• Competitor Research: Using sites like https://www.google.com/search?q=Airbnb%E3%82%84Booking.com, list at least 5–10 competing properties in the same area, with a similar room type (size, maximum capacity), and similar quality to the property you’re considering.
• Price Analysis: Record in a spreadsheet how much these properties charge for “weekdays,” “weekends,” “holidays,” and “peak periods such as long holiday stretches.”
• Setting Your ADR: Based on your research, provisionally set your property’s average nightly rate (ADR). It’s a solid approach to start with the competitor average or slightly below.

Variable 2: How to Calculate OCC (Average Occupancy Rate)

OCC (Occupancy Rate) is the percentage of days actually booked out of the total number of days available for booking in a month—in other words, the average occupancy rate.

• Estimating Competitor Occupancy: Check competitor booking calendars to see how far in advance they’re booked out. You can also estimate rough occupancy from the frequency of reviews (e.g., if a property gets 15 reviews a month, it’s been booked for at least 15 nights).
• Setting Realistic Targets: Even the most popular properties never achieve 100% occupancy. Accounting for cleaning block-out days and off-season periods, it’s realistic to set an initial target in the **60%–80%** range.

Variable 3: Forecasting Monthly and Annual Revenue

Using the two variables above, calculate your revenue.

• Formula:
  • Monthly Revenue = ADR (Average Daily Rate) × 30 days × OCC (Average Occupancy Rate)
  • Annual Revenue = Monthly Revenue × 12 months

For example, if the ADR is ¥15,000 and OCC is 70%,

monthly revenue would be ¥15,000 × 30 days × 70% = ¥315,000.

[Step 2] Identify Every Single “Expense” Without Exception

Once you’ve forecast your revenue, the next step is to list every single expense that will be deducted from it, without missing a single item.

1. Initial Costs — Investment Required Before Launching the Business

• Property acquisition costs (purchase price, or deposit/key money for a rental)
• Real estate agency fees
• Renovation and interior construction costs
• Fire safety equipment installation costs (can run into hundreds of thousands of yen)
• Licensing and permit application costs (e.g., fees for administrative scriveners)
• Furniture, appliances, linens, and supplies purchase costs

2. Operating Costs — Recurring Monthly Expenses

Variable Costs (Costs That Fluctuate with Revenue)

• OTA Commissions: Approximately 15% of revenue (e.g., Booking.com)
• Property Management Fees: 10%–30% of revenue (varies by company and scope of services) if outsourcing operations
• Cleaning and Linen Costs: Either a flat fee per turnover, or 15%–20% of revenue

Fixed Costs (Costs Incurred Regardless of Revenue)

• Rent or mortgage payments
• Utilities and communication costs (high-speed Wi-Fi is a must)
• Consumables (shampoo, toilet paper, garbage bags, etc.)
• Various insurance premiums (fire insurance, facility liability insurance)
• System usage fees for tools like a site controller (PMS)
• Fixed asset tax and city planning tax (if you own the property)

[Step 3] Calculate Your Final “Profit (Cash Flow)”

Once you have both revenue and expenses laid out, it’s time to calculate your final profit and the key metrics that determine whether the investment is worthwhile.

Calculating Annual Profit

• Formula:
  • Annual Operating Expenses = (Total Variable Cost % × Annual Revenue) + (Total Fixed Costs × 12 months)
  • Annual Operating Profit = Annual Revenue – Annual Operating Expenses

This annual operating profit is the amount that ultimately stays in your pocket (before tax).

Calculating the Payback Period

• Formula:
  • Payback Period (Years) = Initial Costs ÷ Annual Operating ProfitThis gives you a rough idea of how many years it will take to recoup your initial investment. Generally speaking, the shorter this period, the better the investment.

A Key Metric: ROI (Return on Investment)

• Formula:
  • ROI (%) = (Annual Operating Profit ÷ Initial Costs) × 100ROI (Return On Investment) is a crucial metric showing how much profit is generated relative to the amount invested. The higher this number, the more efficient the investment.

Pro Techniques to Further Sharpen Your Simulation’s Accuracy

• Leverage Data Analysis Tools: Using specialized tools like AirDNA, you can obtain objective data on competitor average rates, occupancy rates, and revenue forecasts for a specific area—dramatically boosting the accuracy of your simulation.
• Build Multiple Scenarios: In addition to a “standard scenario,” create a “pessimistic scenario” for when occupancy falls short of expectations, and an “optimistic scenario” for when business performs exceptionally well. This helps you understand the range of risk your business can withstand.
• Consult the Experts: Asking a property management company with a proven track record in your target area to prepare a revenue forecast is also an extremely effective approach.

Conclusion: A Simulation Is Your Nautical Chart to Success

A revenue simulation is not just a numbers game. It’s the one-of-a-kind “nautical chart” your vacation rental business needs before setting sail into stormy waters.

With this chart in hand, you’ll know exactly where the dangerous reefs (risks) lie, and which route (strategy) will lead you to the treasure island (your target profit). It may seem like a tedious task, but this initial, meticulous planning is the surest way to maximize your chances of success.

Is Your Simulation Really Based on “Realistic Numbers”?

“I understand how to build a simulation now. But I’m still not confident in my forecasts for the most important factors—’average nightly rate’ and ‘occupancy rate’…”

“I’ve listed out my expenses, but I’m worried I might have missed something, or that my figures aren’t accurate…”

These concerns are completely understandable. Building an accurate simulation requires objective market data, a thorough grasp of countless expense items, and above all, the specialized knowledge and experience to analyze it all. Deriving trustworthy numbers is especially difficult for an area or property with no operating track record yet.

Here at Stay Buddy Inc., through operating numerous properties across Osaka City, we’ve accumulated **real “performance data” that isn’t available anywhere else.**

Using this proprietary data, we’re able to build an extremely accurate revenue simulation for the property you’re considering.

We won’t just present you with an “optimistic scenario” full of rosy promises. We’ll show you a realistic **”standard scenario”** as well as a **”pessimistic scenario”** that accounts for potential risks, giving you concrete, objective numbers to prove whether your investment decision truly holds up.

Move from instinct-based real estate investment to data-driven business investment.

As your first step, take advantage of our free revenue assessment. Let us show you the true potential your property holds.