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Help with Income & Expenses Estimate

Start a Hostel

commander started this discussion 16 years 1 week ago

Hello,

I'm thinking of opening a hostel in Chicago. I've been doing research for about a month or so and anticipate several more months of work before I'd consider opening. I've put together a very preliminary income and expense estimate based on talking with a few hostel managers and investigating my local market:

Monthly Income & Expense Projection
Chicago Hostel

Income:
100 beds @ 60% occupancy @ $10 bed (100 *.6 *10 * 30 days)
=$18,000 Gross Monthly Income

Expenses:
$3500 Rent or Mortgage Payment
$2500 Manager's Salary
$5520 3 FTE (full time employee equivalents) @ $10 / hour
$1000 Electric Bill
$600 Gas Bill
$300 Cable TV / Internet Bill
$1000 Supplies
$500 Advertising
$500 Insurance
$500 Miscelaneous
=$15,920 Gross Monthly Expenses

= $2080 Net monthly profit

I've deliberately tried to be conservative. I expect year-round occupancy to average higher and I think I could get a higher rate than $10/bed. The rent and mortgage payment is accurate for ~5000 square foot (460 square meters) property in my desired area. The 3 FTE employees means any combination of employee hours that total 3 equivalent full time employees (could be 2 part time and 2 full time or whatever).

This is just a very initial estimate to get an idea as to whether I should proceed further. I am not including start-up costs, I am just for now interested to see if this is potentially viable on an ongoing basis once established.

What other expenses am I missing? Any other comments?

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aboriginalhostel

16 years

The rent and mortgage payment is accurate for ~5000 square foot (460 square meters) property in my desired area. The 3 FTE employees means any combination of employee hours that total 3 equivalent full time employees (could be 2 part time and 2 full time or whatever).
...
What other expenses am I missing? Any other comments?

Well, I'm based in Europe but IMHO what you definitely miss is taxes. VAT, social tax, maybe council tax or any other local taxes. A good accountant would be able to inform you about it but I'm not sure how it goes in the US.

Otherwise I'm not really convinced by the size of your property would fit the requested capacity. Our hostel has an average 8m2 per person and sometimes it feels small. IMHO you'll need around 10m2 for such size, but your plan indicates less that 5m2 (4,6m2). That's quite low especially if you include communal areas as well.

We've discussed a similar topic in this thread if that helps. ;)

About the staff and size, this thread will give you some hints to start with.

If you tell how much is 1kWh electricity or 1m3 gas worth over there, I might be able to do a checkup on those as well. It seems quite low priced for me but maybe that's because it's the US.

Do you have to pay for water, disposal or garbage? It doesn't seem to be indicated on your list. It's worth saving few bucks for maintenance which isn't on the plan neither.

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commander

16 years

If you tell how much is 1kWh electricity .

About $0.10 / kWh.....one dime per kWh

---

Thanks for the thoughtful reply! I appreciate your input!

The good news is that my room prices were deliberately low, so there is a lot of wiggle room here...there are only 3 (!) hostels in Chicago and the two best ones both charge about $30/night, or 3 times as much as my estimate.

The bad news is that you're saying I need a lot more space than I thought of, or I need to cut my bed count by maybe half, and increase staff. I'm counting myself as about 1.5 full time staff. I'll re-run the numbers and post some new ones after reviewing your other posts on these matters.

Also, taxes are mostly already figured in the calculation. For one thing - in the US room rates are almost always quoted without sales tax (equivalent to VAT), so if I advertise $10/night/bed the guest might end up aying $11.20. Property taxes (similar to council or community tax) are collected as part of rent or mortgage payments, as is property insurance. For the time being, let's assume taxes are paid as part of other expenses or paid by the guest at checkout. Private garbage disposal might be an option, but usually municipal garbage disposal is included as part of local "property" taxes (collected with rent/mortgage payment).

If you have an idea as to elecricity usage, that may be useful or if you can compare your costs to miy estimate, using the Chicago costs of $0.1 / kWh....

Thanks again for your kind help!

Commander

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santa klaus

16 years

If you can rent 460 square meters for $ 3500 and it´s in a good location (near nightlife and the sights, easy to find, safe area) - go for it, that´s very cheap.

A few questions though: if you rent it, what exactly do you rent? Will you ask your landlord to build in the facilities you need for a hostel and then rent the whole thing for $ 3500? In case you buy the property, how does it look like now - i.e. how much construction is needed?

Aboriginal is right, 100 beds on 460 m2 - no-go. I once tried very hard to make a project work and got 142 beds into 1090 m2. That would have been almost too crammed for my taste though. You´re welcome to email me the floor plans and I´ll tell you what I think is reasonably possible.

Prices: one safe way to drive guests crazy it to tell them upon check in that the prices on your website are without taxes. I want to know how much my bed costs. I don´t give a f*ck how much of that is tax. If all the hostels in Chicago charge $ 30, calculate with $ 25. If sales tax is 12%, calculate with $25/1.12 = $ 22,33.
You are right to calculate with 60% occupancy. You´ll have more, but if you can´t make ends meet with 60% the risk is too high IMHO.

Expenses:

Staff: I have no clue about America, but here in Austria you can add 30% to the salaries for health insurance, pension funds and taxes. Besides, we have to pay 14 salaries per year and staff has 5 weeks paid holidays per year. Make sure you don´t forget such costs.
Apart from that: 100 beds is the size where guests start to expect a 24/7 reception. Those are four full-time jobs alone.

Maintenance: You will have to make repairs all the time. Calculate $ 200 per year per 1 bed capacity. At least.

Laundry: If you run a big hostel, you won´t want to wash all the bedsheets (and maybe towels) yourself. There are companies which pick up the dirty laundry every other day and return them washed. Ask how much they charge.

Miscellaneous costs: If you´ll accept credit cards, you´ll pay a fee. You will have to hire a tax consultant to do your accounting and make the yearly balance sheet and tax declaration. Those aren´t cheap. If you are not a good accountant, don´t even think of doing this yourself.

Electricity, water, gas:: I´ll send you a private message.

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Josh Hostels

16 years

Prices: one safe way to drive guests crazy it to tell them upon check in that the prices on your website are without taxes. I want to know how much my bed costs. I don´t give a f*ck how much of that is tax.

This is a tough one in the US because competitors will quote prices without tax. It's not a good system, but nothing in the US costs what is says on the price tag or menu.

I used to list prices on the website in an HTML table without tax and with tax. The booking engines let you specify whether prices are with or without tax and they add a note.

100 beds is the size where guests start to expect a 24/7 reception. Those are four full-time jobs alone.

I think a 24-hour desk is probably needed in a big city -- otherwise guests are going to bring in weird characters from the bars and street corners to the dorms at 3am.

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gordo

16 years

Maintenance: You will have to make repairs all the time. Calculate $ 200 per year per 1 bed capacity. At least.

bah! i can do it for 1/2 that!

seriously.

assuming everything is up to scratch at the beginning that is...

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santa klaus

16 years

Well, I´d say much depends on what sort of stuff you have in the first place and how much the landlord takes care of.

Maintenance for an elevator is very expensive, for example. We also have a ventilation system for the bar, four washers+dryers per house and a lot of vending machines.

We also have wooden bunks. They are a lot cheaper than some good steel-pipe bunks (nevermind the IKEA steelpipe bunks, they are not good for commercial use) and we can´t unzip the matress covers. We have cheap matresses, but throw the entire things away when they look ugly.

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commander

16 years

If you can rent 460 square meters for $ 3500 and it´s in a good location (near nightlife and the sights, easy to find, safe area) - go for it, that´s very cheap.

Thanks for your reply!

Location is, of course, a huge issue. As you probably know, public transportation is very much more limited in the US than Europe, however, Chicago is significantly better than most of the US in this area. Chicago is one of the very few cities here that has airport train service, and I think it is especially desirable to be near a train station with direct service to O'hare Airport. (in Chicago - this means a "Blue Line" station) Does anyone disagree and think this is not so important?

One reason I feel this way is that Chicago's role as an air hub means that travelers are frequently caught here inadvertently and many can not afford the $300 / night airport Hilton or $150/night off airport Holiday Inn or even an $80/night budget motel. I anticipate some substantial business from travlers who see my hostel sign in the airport hotel kiosk area and need a place to stay for not much money - in other words not necessarily people who planned in advance of staying in a hostel in Chicago. Do we agree there is a potential market here? Being on a straight shot via the airport train makes things very easy.

Not being near a Blue Line station would mean budget travelers have to take a somewhat confusing and intimidating journey of bus and train transfers. So, I made my first priority being near a station. The good news is that the Blue Line is in the nicer parts of Chicago, and almost any station on this route is in a safe neighborhood. The 3-5 properties I've looked at in this size and price range are all within an easy walking distance of the train station and at least a few pubs and restaurants and small grocery stores. To get to the more intense nightlife area, however, would mean a few stops away on the train or bus. Do you think this is acceptable? All other things being equal, would you say its better to be right near the airport train station with a few pubs/restaurants/stores nearby or better to be in a more intense nightlife area with hundreds of bars, restaurants, etc...????

A few questions though: if you rent it, what exactly do you rent? Will you ask your landlord to build in the facilities you need for a hostel and then rent the whole thing for $ 3500? In case you buy the property, how does it look like now - i.e. how much construction is needed?

If I rent, I get empty space. Most of the building owners will provide modest help for re-arranging the space, mainly the labor of their maintenance people to install whatever I buy. Most also have modular walls on site (that look very substantial and are nice) which allows you to create any floorplan you want. They will also work with you on electrical wiring needs. I will, however, have to arrange any plumbing beyond toilets. I appreciate you pointing this out, and soon maybe I'll start a thread about startup costs, but for now I'd like to concentrate on whether it makes sense financially to run a hostel on an ongoing basis...startup costs are a secondary concern.

Thank you very much for your input!

Commander

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commander

16 years

Expenses:

Staff: I have no clue about America, but here in Austria you can add 30% to the salaries for health insurance, pension funds and taxes. Besides, we have to pay 14 salaries per year and staff has 5 weeks paid holidays per year. Make sure you don´t forget such costs.
Apart from that: 100 beds is the size where guests start to expect a 24/7 reception. Those are four full-time jobs alone.

Thanks for the insight! Right now I've got budgeted 5 FTE employees. (1 full time manager, me and 3 more FTEs) (FTE = Full time equivalents; or any combination of hours that = 40/hours a week) (2 people working 20 hours / week = 1 FTE) FTEs are the standard way of accounting for employee costs here. The $10/hour I have budgeted for non-management staff includes insurance and taxes. I spent some time on this, so an 18 y.o. student who comes in 4 hours a day in the early evenings might effectively earn $8/hour while a full time person with more experience might effectively earn $12/hour... I used the average of $10. (McDonalds pays $6.55/hour; slightly more experienced college students earn $8-12 / hour)

[As you've probably heard, the US does not require paid vacations, health insurance or pensions...health insurance is supposedly changing with Obama, but in any event I hope to provide it to full time staff and offer some vacation pay...but I don't have to]

Maintenance: You will have to make repairs all the time. Calculate $ 200 per year per 1 bed capacity. At least.

I didn't consider this, thanks.

Laundry: If you run a big hostel, you won´t want to wash all the bedsheets (and maybe towels) yourself. There are companies which pick up the dirty laundry every other day and return them washed. Ask how much they charge.

I did intend to do all the wash myself but I will look into laundry service, thanks.

Miscellaneous costs: If you´ll accept credit cards, you´ll pay a fee. You will have to hire a tax consultant to do your accounting and make the yearly balance sheet and tax declaration. Those aren´t cheap. If you are not a good accountant, don´t even think of doing this yourself.

I have substantial experience with running a business, already have a credit card processor and accounting/lawyer contacts. My impression is that business taxation and financials is somewhat less complicated than in the EU or elsewhere, but whatever, I feel comfortable using primarily software for finances and a nominal year end review by an accountant. Thanks for pointing this out.

Thank you for your input!

Comander

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Josh Hostels

16 years

The 3-5 properties I've looked at in this size and price range are all within an easy walking distance of the train station and at least a few pubs and restaurants and small grocery stores. To get to the more intense nightlife area, however, would mean a few stops away on the train or bus. Do you think this is acceptable? All other things being equal, would you say its better to be right near the airport train station with a few pubs/restaurants/stores nearby or better to be in a more intense nightlife area with hundreds of bars, restaurants, etc...????

What's the price difference between the train and an airport shuttle directly to the nightlife hotspot?

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santa klaus

16 years

All other things being equal, would you say its better to be right near the airport train station with a few pubs/restaurants/stores nearby or better to be in a more intense nightlife area with hundreds of bars, restaurants, etc...????

Good question.

In Berlin, we have a hostel in the middle of a good nightlife area and many sights are within walking distance. We have A LOT guests coming from the airport (Berlin is the main hub of Air Berlin, Germany´s biggest budget airline and a very important EasyJet hub). Unfortunately, it´s a real pain to get to the hostel from either airports (there are 2).

In Vienna, we´re far from the sights, far from nightlife but on a major shopping road and an airport shuttle bus leaves a one minute walk from the hostel.

We get positive feedback for the locations of both (both have 90% location rating on Hostelworld).

I wouldn´t focus too much on the blue line. You will have a lot of guests from Europe: we know how a metro map looks like and how to get from A to B with trains. Buses are sometimes hard to figure out, so I recommend to look for a spot close to ANY station.

I have never been in Chicago, so I can´t tell where exactly would be the nicest neighborhood for a hostel. Look for one which looks urban (in our European way) with a lot of small shops and pubs nearby. Where do all the green-haired vegetarians live in Chicago? I bet that´ll be a perfect location for a hostel! :D

If I rent, I get empty space. Most of the building owners will provide modest help for re-arranging the space, mainly the labor of their maintenance people to install whatever I buy. Most also have modular walls on site (that look very substantial and are nice) which allows you to create any floorplan you want. They will also work with you on electrical wiring needs. I will, however, have to arrange any plumbing beyond toilets. I appreciate you pointing this out, and soon maybe I'll start a thread about startup costs, but for now I'd like to concentrate on whether it makes sense financially to run a hostel on an ongoing basis...startup costs are a secondary concern.

Aha, OK.
My opinion: if you build in lots of bathrooms, wiring, flooring, etc, it´ll add value to the property, so I would ask for more than only a little help from the landlord. What we usually do is not renting "empty space" but a finished hostel (except the furniture) the landlord builds, according to our plans. That´ll make the rent more expensive of course and you will have to sign up for renting it for at least 10 years (so he knows he´ll get his investment back eventually), but your startup costs will be very close to zero.

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