How To Build A Vacation Rental Cancellation Policy To Maximize Profits

When you work in the short-term rental business, you need to ensure that cancellations do not have too much of a financial impact on your profits. Building a cancellation policy can help to ensure that you still reap the rewards of running and managing an STR property, even when there is a last-minute change in plan for your guests. 

This guide to building a cancellation policy will take you through everything you need to know about creating watertight terms and conditions in a comprehensive way for your guests to understand. Varying levels of stringency in cancellation policies are dependent on the type of STR you operate, turnaround times, and the overall financial structure of the business. 

What to include in a vacation rental cancellation policy

When writing or drawing up a cancellation policy, it’s vital to include all the information for guests to peruse before committing to making a booking. Some of the key points you should include in your cancellation policy include: 

• Instructions for your guests' arrival and check-in. This should include check-in times specifically, as this will dictate the timeframe in which guests can make their cancellations.
• The maximum cancellation notice a guest can provide before their booking. For example, you may offer guests a full refund if they cancel up to 24 hours before their scheduled stay.
• Information telling your guests about the fee structure should they choose to cancel their booking at shorter notice.
• Information about what travel insurance will cover if this is an option for guests. 
• Information about additional services that will be refunded such as cleaning fees and administration fees.
• Information about how the cancellation penalties will be charged. For example, will you charge their provided credit card directly? Or will you charge them up front and refund your guest the balance?
• Any exceptions in the cancellation policy. If a guest cannot fulfill the booking due to illness, or a serious family matter, will you make an exception for certain circumstances?

With these crucial pieces of information in place, your guests will be able to read your cancellation policy for your STR and make an informed decision before booking their stay at your accommodation. 

What are the different types of cancellation policies?

The key to a good cancellation policy is having the document laid out clearly so that there is no room for miscommunication with guests. If you have your property portfolio listed on STR platforms like Airbnb or Vrbo, the platform offers you brilliant templates that are mostly populated. Of course, you can update these with information that pertains specifically to your business. 

These policies are usually classified under three tiers, namely, Flexible, Moderate, and Strict. The type of policy you choose to implement depends on the costs associated with preparing for a booking and therefore should be considered in line with your overall financial structure. 

Flexible

A flexible cancellation policy for short-term rentals typically allows guests to cancel their reservation and receive a full or partial refund within a specified time frame before the check-in date. The specific terms may vary depending on the platform or property management. Typically, flexible cancellation policies are more appealing to those who do not have a plan set in stone, or who have busy schedules and may need to rearrange their plans at the last minute. 

Many hosts also implement flexible cancellation policies to attract more bookings. Common specifics of a cancellation policy include: 

• Offering a complete or partial refund up to 24 - 48 hours before guests are due to check-in.
• A guaranteed full refund for cancellations made up to one week before scheduled check-in
• Full refunds are offered for extenuating circumstances under which the cancellation was made if outside of the specified period.
• A small or zero security deposit is required upon booking.

If you’re thinking about implementing a flexible cancellation policy, then you need to ensure that you will not make a loss on your property should you, as the host, be required to provide your guest with a full refund. 

Moderate 

Moderate cancellation policies have slightly more strict rules and regulations for guests to adhere to. They usually contain longer notice periods for cancellations. Typically, a full refund is offered to guests if they cancel well in advance of their stay. Typical terms of a moderate cancellation policy are: 

• A full refund is offered up to 5 days before the guests are due to check-in.
• A partial refund if the guests cancel 24 - 48 hours before check-in.
• No refund if guests cancel in a shorter than specified notice period.

These moderate cancellation policies are best suited for STR businesses who require time and resources when preparing for a guest’s arrival. 

Strict

Strict cancellation policies mean that guests have to cancel within a significant amount of time to receive a full refund. These policies are usually for larger properties or those that require a lot of preparation prior to arrival. These policies also help hosts to ensure that they still make a profit after a booking is secured. Typically, a strict cancellation policy means that: 

• Guests must cancel within 48 hours after the booking has been made to receive a full refund.
• The cancellation also has to be made at least two weeks before check-in.
• If a shorter notice period of between one and two weeks is given, hosts are still entitled to charge their guests for at least 50% of the booking.
• If the cancellation is made in a notice period of less than a week, then no refund will be issued.

A strict cancellation policy suits hosts who have larger properties that can accommodate big groups. Properties with strict cancellation policies may also specialize in certain events like weddings or similar celebrations. The property may come with optional extras like catering, regular cleaning services, or activities that require booking in advance. 

If you are running your own property, there are other types of cancellation policies you can implement like super strict 30 - 60-day cancellation policies, however, these are more suited to event venues or mid-term rentals. 

Why is a cancellation policy for vacation rentals important?

Implementing a cancellation policy for vacation rentals is of paramount importance for various reasons that directly impact both hosts and guests. Here's why having a well-defined cancellation policy is crucial:

• Encouraging Responsible Booking Behavior: A cancellation policy encourages guests to commit seriously to their bookings. When guests know there are consequences for cancellations, they are more likely to make bookings only when they are certain about their plans, reducing the likelihood of last-minute changes.
• Operational Stability and Efficiency: A well-communicated cancellation policy provides hosts with a level of predictability in their operations. Knowing how cancellations will be handled allows hosts to make informed decisions, particularly when it comes to managing resources and preparing the property for guests.
• Legal Protection: Having a documented cancellation policy ensures that hosts comply with local regulations and industry standards. This can be particularly important in jurisdictions where specific rules govern short-term rentals and accommodation providers.

If a guest agrees to a comprehensive cancellation policy, it’s less likely they can issue any legal action in the event of a dispute. 

• Helps with Cash Flow: Different cancellation policies allow hosts to tailor terms based on their specific business models, property types, and financial considerations. This flexibility ensures that the policy aligns with the unique aspects of the short-term rental business and helps prevent losses and increases profits.

How to reduce last-minute cancellations

Last-minute bookings can pose challenges for short-term rental hosts, impacting operational efficiency and revenue predictability. While it may not be possible to eliminate them, hosts can implement strategies within their cancellation policies to reduce the likelihood of last-minute bookings. The following are some of the steps hosts can take to mitigate the risk of last-minute cancellations: 

• Provide incentives to encourage guests to book well in advance. When bookings are made far in advance of check-in, it’s less likely that guests will cancel as they will have their stay on their calendars beforehand. Hosts can offer discounts for early bookings or complementary amenities when bookings are made ahead of time.
• Implement minimum stay requirements. This will encourage your guests to make a trip out of the time they have with you, making it less likely they will cancel.
• Provide the option to reschedule. Instead of outright cancellations, provide guests with the option to reschedule their stay. This can be an attractive alternative for guests facing unexpected changes in plans. Rescheduling is also a great way to ensure you still make money from bookings, albeit at a later stage.

Cancellation Policies For Your STR

Drawing up a cancellation policy has to go hand-in-hand with your financial goals and cash flow predictability. Depending on the resources required and preparation time, your policy should be used as a tool to ensure you get the most out of your STR. 

After reading this guide, you should have a good idea about what to include in your cancellation policy and what to consider before implementing your cancellation terms and conditions.