What nightly rate do you need? Working back from a monthly profit target
Most hosts set their nightly rate by looking at what nearby listings charge and picking something in the middle. That approach works fine if your goal is simply to fill the calendar, but it says nothing about whether the month will actually produce the profit you need. If you want to know the rate that gets you to a specific monthly profit, the most reliable way is to work backwards: start with the number you want in your pocket, add up everything that has to come out first, and solve for the price per night.
Why work backwards from a profit target
Setting a rate by benchmarking competitors tells you what the market will bear, but it does not tell you whether that price covers your costs plus the profit you need. Two hosts in the same neighbourhood with the same nightly rate can end up with very different monthly profits because their fixed costs, cleaning expenses, and occupancy differ.
Working backwards forces you to answer a simpler question: given my costs and my target, what is the minimum per-night price that makes the math work? You can then compare that number to what the market will actually pay. If your required rate is below what comparable listings charge, you have room. If it is above, you need to adjust something else — your costs, your occupancy, or your target.
The formula in plain words
The calculation has three steps:
- Add your fixed monthly costs to your profit target. This gives you the total amount of money that must come in from booked nights each month.
- Divide by the number of nights you expect to book. This tells you how much each booked night must contribute after its variable cost is paid — the margin needed per night.
- Add the variable cost per booked night (cleaning share, supplies, platform fee, and anything else that scales with each booking) to the margin. The result is your required nightly rate.
You can verify the answer by running it forward: multiply the number of nights by the difference between your rate and the variable cost, subtract your fixed costs, and you should land exactly on your profit target.
Example numbers
The figures below are a worked example for illustration, not market data.
| Item | 20 booked nights | 16 booked nights |
|---|---|---|
| Fixed monthly costs | $2,100.00 | $2,100.00 |
| Monthly profit target | $800.00 | $800.00 |
| Total to recover from nights | $2,900.00 | $2,900.00 |
| Margin needed per night | $145.00 | $181.25 |
| Variable cost per booked night | $28.00 | $28.00 |
| Required nightly rate | $173.00 | $209.25 |
| Occupancy (out of 30 days) | 66.7% | 53.3% |
| Check: nights × (rate − variable cost) − fixed costs | $800.00 | $800.00 |
With 20 booked nights in a 30-day month, the required rate is $173.00. If occupancy drops to 16 nights, every night must carry more of the fixed-cost burden, and the required rate rises to $209.25. The check line confirms that both rates produce exactly the $800.00 profit target.
What to do if the required rate is above what you can charge
If your calculated rate exceeds what comparable listings in your area command, the math tells you something is out of balance. You have three levers, and any combination of them works:
- Lower your costs. A cheaper cleaning arrangement, a different platform with a lower fee, or negotiating supply prices all reduce either the fixed or variable side of the equation, which pulls the required rate down.
- Book more nights. Every additional booked night spreads the fixed costs across more revenue. Moving from 16 to 20 nights in this example drops the required rate by $36.25 per night.
- Set a smaller profit target. If your living expenses or debt service do not require the full target, lowering it directly reduces the total you must recover and therefore the per-night price.
None of these choices is inherently better; the right mix depends on what you can realistically change. The point of the backward calculation is that it makes the trade-offs visible before you commit to a rate.
Related reading
The same arithmetic with a zero profit target gives your break-even occupancy: the number of nights you must book simply to cover costs. See Break-even occupancy for a short-term rental for that version of the math.
This is general bookkeeping math, not tax or financial advice.
The STR Host Profit Tracker does this arithmetic for one short-term rental: enter your own numbers and it shows annual net income, cash-on-cash return and cap rate.