Why Minimum Guarantee is a Good Proposition on Paper, but Hurts your Beloved Home
If you are a Home Owner and looking to rent out your property, you may have heard the term ‘Minimum Guarantee’ crop up in various discussions. What does it really mean? Overzealous operators would have mentioned offering an MG, the minute they hear they are competing against a better brand.
So, what really are the options for the Home Owner in making the best choice for their property — both in the long term and short term? What do they do when they need to decide whether a Minimum Guarantee is a better choice to make or is it wise to opt for a Management Contract?
We know the turmoil you are in, and that is why I would like to bust some myths about the market — that taking minimum guarantees is the best choice you can make in a fluctuating real estate market.
What does Minimum Guarantee mean in the vacation rental business?
Before we tell you why you should not opt for it, let us understand this term. When an operator or a property management firm comes to secure your property to sublet, they assure you a minimum guarantee. Usually, it is just one part of the whole financial deal.
This means that no matter what happens in the market, you will get an assured sum. Usually, they offer this for the first few years claiming that the property needs to stabilise and they are protecting your interests.
“Minimum guarantee became the norm when large venture capitalists started pouring their money in hospitality start-ups to create supply. They hoped to build large brands with a large supply that will eventually generate enough demand to cater to the minimum guarantee requirements.”
Since most Home Owners are apprehensive of market fluctuations and seasonal demand in the vacation rental business, they take this deal.
This seems like a huge win: the property is in the hands of a seasoned team, you do not have to worry about demand generation, and there is money in the bank.
But is it really practical? What is the hidden text causing so much turmoil and uncertainty in the hospitality sector?
Pitfalls of Minimum Guarantee deals
While minimum guarantee deals look great on paper and like
the ROI you deserve, there are a few issues with this
proposition.
- It creates a tussle between the operator’s interest and the
Home Owner’s interests
When hospitality start-ups or even property management firms want to expand aggressively with multiple minimum guarantee deals in their kitty, it makes them a little desperate. The brands scramble to ensure that they can meet their financial commitments instead of working for your welfare.
For example, brands that have too many properties in a particular area distribute the demand in a way to fulfil their minimum guarantee commitments. So, this means that the minimum guarantee becomes the most you will ever earn because the operator is not even working on filling your property.
“Minimum guarantee becomes the maximum amount you will ever see; as the operator has to meet every Home owner obligation. So even if your home deserves more, you will never see that happen.”
- It exploits the property
Minimum guarantee is a deal characteristic of the hotel industry. And it makes sense there because a good operator can host corporate events, marriages, and offer bulk corporate deals to make ends meet.
But a home deserves a little more nuanced approach to maintain its charm and keep it running for longer. When you enter a minimum guarantee deal like a hotel, you open your home to exploitation, damages, and reducing valuation rates.
Minimum guarantee is not sustainable
The luxury vacation rental business is seasonal but pays well if you position it right and work on it during the peak season. But what happens in minimum guarantee deals is that the operator is under pressure to deliver throughout the year. This makes it an unsustainable business and may even drive the operator into losses. You want an operator who can stick with you for the long term, not someone who makes promises they can’t fulfil.
So, all in all, minimum guarantee deals have to be seen as the lose-lose deals they are. Neither can the operator work on delivering quality, nor does the home get the attention and love it deserves.
- It reveals the desperation on part of the Operator
Minimum guarantee reveals the desperation of the Operator…to win the deal, at any cost. Why? Perhaps, to show to an equally overzealous investor/ VC/ PE? Perhaps, they are raising a round of Funding, and number of homes acquired is the metric they want to showcase to the incoming investors. Perhaps, a denial strategy to other competitors. Who knows!
The problem is, if an Operator is known to offer an MG and the contract you have signed with this Operator does not guarantee you one, your property will never ever receive the attention it deserves, as the Operator has ’n’ other obligations of MG to honour (!).
A Catch-22 situation, indeed!
What can you do instead?
Now comes the question — what can Home Owners do instead? What is a good way to collaborate with Operators to rent out their luxury properties for vacation rentals to holiday bound families?
We recommend entering into a management agreement with operators instead of working on minimum guarantees. Even though this takes away a guaranteed amount, these create win-win structures that align Home Owner, Operator and even Guest interests. Will write more about this, in my next article.
Operators have also evolved their operating mechanisms that allow for a consistent and high quality service offering, this ensures that homes are well maintained and the experience is hassle-free, the primary benefits sought by Home Owners who look to hand over properties fully to the operator.
Evolved operators work alongside Home Owner to achieve strong net margins and earning upsides truly, thereby making Management Contracts an attractive proposal for Home Owners in the long run.
And if you are looking for a team to work with you on this, reach out to partner@saffronstays.com. We would be happy to assist you.
