Canada: In the third feature of this series, Canadian turnkey interior design firm Fulhaus analyses whether hosts should rent or buy furniture when furnishing their rental units.
To rent or to buy, that is the question.
Whether short-term or long-term, the key to higher returns is getting your rental unit furnished in the shortest possible timeline and for the lowest possible cost (not to mention the results that come from good design). When we talk about furniture cost, the price tag is not the only factor, one should consider where your current cash on hand would best be spent. Is spending on upfront furniture costs today, to save money later, the best use of your funds? Or does it make more sense to spend less at the outset, and amortise the cost of furnishing, to better utilise your funds towards your growth.
When it comes time to furnish your rental units, you have two options: rent or buy.
And while standard practice for hosts has been to buy furniture upfront, when is it appropriate to rent? What are the benefits of renting furniture compared to the benefits of owning it?
In this article, we’re going to compare the benefits and costs of both rental and owning options.
The Benefits of Furniture Rental
According to the below report from Cushman&Wakefield, the cost of furnishing a Hotel Room with full FF&E can range from 12k to 90k.
Assume you are a short-term rental operator in the master-lease model, with 100 units under management. You likely understand that the growth of your business revolves around acquiring more units as quickly as possible to solidify your brand through market share.
Therefore, let’s be modest and assume you will have to double your inventory of units year over year. The next 100 leases you sign will require first and last month’s rent, and often a security deposit equivalent to one month’s rent. In London, the average cost of renting a one bedroom unit is $1,650 (USD). Each unit you onboard will require $4,950 up front, multiply that by 100, and you need to have $495,000 on hand to double your inventory.
Congrats – you’ve managed to secure 100 more units in London! Go you!
Now let’s talk furniture.
If the lowest cost of FF&E for a Hotel Room is $12,000, let’s use a $10,000 metric for a one-bedroom unit in London to assume the lowest possible spend on furniture. Therefore, your new 100 units will cost you $1,000,000 in furniture. More than double what it cost you to acquire your inventory. With that same $1m you could have nearly tripled your inventory of units.
So it begs the question, why are rental operators spending their growth funds on furniture? You may argue, that over time, the cost savings will result in more growth, but you’ll have to wait for that time to come. The value of offsetting the cost of furniture can bring your expansion plans to the forefront, and unburden your cash flow. Furthermore, the revenue generated from your unit should cover the rental expense each month, and even add to it!
Let’s break these down with some concrete examples :
A) You don’t need to have tons of cash on hand to get a new unit up and running
Rental furniture is of incredible value to small and medium scale hosts looking to expand their operations, potentially into new markets.
If you want to furnish a new unit but don’t have much cash available – or the resources on the ground to help with a new install – renting makes a lot of sense.
Here is a rough breakdown of the rental costs from the leading furniture rental companies in the market:
This furniture rental package is based on the following furniture items:
Living Room: Sofa, Chair, Cocktail Table, Floor Lamp, 1 x Artwork, 1 x Rug, 1 x TV (33″-43″), 1 x TV Console,
Dining Room: Table + 4 Chairs
Bedroom 1: Queen Bed, Dresser + Mirror, Table Lamp, Nightstand, 1 x Artwork, 1 x Rug, 1 x Additional Table Lamp, 1 x Additional Nightstand
Bathroom 1: 1 x Stainless Steel Bathroom Accessories
This furniture rental package is based on the following 38 furniture items:
Sofa x 1
Armchair x 1
Rug x 1
Large Framed Artwork x 2
Throw Pillows x 2
Throw Blanket x 1
Accessories x 5
Floor Lamp x 1
Coffee Table x 1
Side Table x 1
Rug x 1
Console Table x 1
Bathroom Accessories x 3
Dining Table x 1
Dining Chairs x 4
Queen Bed x 1
Queen Mattress x 1
Dresser x 1
Night Stand x 2
Table Lamp x 2
Standing Mirror x 1
Throw Blanket x 1
Throw Pillows x 2
To summarise, your furniture rental package will cost you between $469 – $700 monthly. Both examples require some form of up-front payment, (i.e. Cort: $700, Fülhaus: $1500 onboarding fee). Even at the highest end, $1500 x 100 units, will only cost you $150,000 up front, liberating the balance of your $1m to acquire more inventory, faster. And over a year long period, your monthly rent, at the highest end (Cort at $700) adds up to $8,400. Less than the average up-front cost of furnishing a hotel room.
The monthly expense is justified in part because it means hosts do not need to spend money and managing an inventory of used furniture they may or may not need anymore. Additionally, renting ensures they have access to the newest design trends as they hit the market. And if the sharing economy phenomenon has shown us anything, it is that companies that respond best to current trends will reap the greatest rewards.
Renting furniture is like taking out an insurance policy on design quality, giving the operator the flexibility to change designs as they see fit, while financing the payment over a longer term. A longer payment term is incredibly appealing because it helps operators manage their cash flow better, freeing up capital that would otherwise need to be invested in a bulk order of new coffee tables or television sets.
Rental operators that want their units to remain attractive to guests over time need to stay current with design trends. This means buying new furniture, and so the list of costs detailed above repeats every two-three years.
The average cost of managing a furniture inventory obviously vacillates greatly throughout the year.
Suffice to say: inventory overhead is a thorn in the side of many host companies that buy furniture because it takes up a lot of space on the monthly expense budget.
As the above examples illustrate, renting furniture is appealing for operators with some combination of the following features:
Manage many units
Have high occupancy rates
Want to scale rapidly
Want to ensure they stay current with design trends
So when it comes time to furnish your next unit, take a minute to consider whether buying really is the best option for your business. Like the master lease model, which operators use to reduce their risk exposure while maximising cash flow, you might find that you can save some dough by renting instead of owning.
For more information, visit the Fulhaus website here.