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Short-stay let investment, could it be for you?

Our Experience of the ‘short-stay rental market’

I hope everyone has had a lovely Christmas and new year.  I don’t know about you, but I’ve found it quite challenging, getting my business head back on and trying to be more productive with my time.

With that said, I have taken some time to look back over the past 12 months to see what we have achieved as a business, whether that be positive or negative.  The obvious negatives being the impact COVID19 has had on the lettings market, not only this of course, but myself personally as a working mum, and how family, friends and associates have been coping.

We have had to adapt to constantly changing situations, whether that be our health, family-issues, working environment; how we do business, how we communicate and learning how to cope during these ever-changing times.

 

Looking back 

Last year we experienced an increase in bookings from Scottish travellers now wanting to, or having to spend their holiday time in Scotland.  In the years I have been offering short stay accommodation, this has been unheard of. Most of our holiday let bookings would be from guests travelling from England, abroad and occasional locals.

One of many other reasons for an increase in local bookings could also be the fact that our apartments are situated close to the V&A museum, and the newly developed waterfront, Mary Sellesor Gardens, in Dundee.  Travel time from our holiday apartments to these areas takes around 10 minutes by car, 15 minutes by bus, or, if you like a bridge walk with a view, you’d be looking at around a 30-minute walk over the Tay Road Bridge-lovely on a nice day, not so much on a windy day.

Newport on Tay is a perfect location for experiencing some great walks along the Fife Coastal Path, as well sampling some local fine dining at The Newport by Jamie Scott, Masterchef winner 2014.

The increase in local bookings certainly helped us during times where guests could not travel from abroad and cancellations were happening sometimes 24-hours before they were due to arrive.

During the latter part of 2021 we also marketed another new short-stay apartment in Newport on Tay; and it far exceeded our expectations in terms of bookings and income.

For those of you who may be interested in this type of investment, I’d like to give you an idea on the returns on this particular property.

 

A brief breakdown of the income vs expenses

One bedroom apartment

Location: Newport on Tay, Fife

Income averaged over four months £1100 (this income includes the guests paying £35 per booking on top of their stay for cleaning/laundry)

The average occupancy rate over the year would be 47%, however, considering we are calculating the rate over 4 months, if this particular holiday let apartment continued to receive successful bookings at the rate it has been, you’d be looking at an average of 80% occupancy.  A very, very successful occupancy rate.  But like everything now, nothing is guaranteed.  A realistic occupancy rate for most holiday homes in Scotland should be around 50-65%, from our experience.  You should be aiming for a minimum occupancy of 20 weeks per year.

If you’re curious about how much you can earn from your holiday let, you should also bear in mind that your income will depend on many factors, such as:

  • The location of your holiday home
  • The size of the property
  • Estimated nightly rate
  • Your advertising platforms

Now that I’ve shown you our occupancy rate figures, along with our estimated annual income of £13,200, this should give you some insight into possible income generated, but let’s not forget about the running costs when calculating actual returns.

Let’s look at a realistic breakdown of what to expect, based on some real-time expense figures from our holiday let:

One double bedroom apartment (2 guests)

Year 1

Occupancy and annual income

Occupied:                     28 weeks out of the year

Occupancy rate:            47%

Income:                         £13,200

 

Annual Expenses

Mortgage                                              £3,600

Utilities                                                 £720

Insurance                                             £180

WIFI                                                     £15

TV subscription                                     £10

Annual safety costs                               £355

(Gas, PAT, Fire Extinguisher Service)

Welcome baskets (milk, eggs, etc)         £70 (average)

Key safe installed                                  £90

New furnishings                                    £1500

Window cleaner                                    £96

Sundries                                                 £36

Total expenses                                      £6672

Total profit                                         £6528

 

Also. I’ve included in the above the annual safety costs for the items listed below.  The figures included have been averaged over the term.

  • Legionella Risk Assessment every two years £60
  • EICR every 5 years £125

You may also have an additional cost if you decide to use an agency to deal with the management of your holiday home, so remember to take this into account.

You’ll be looking at around 15-25%, per booking, depending on which agency you go for.

We charge 12% per booking for our holiday let management service – mainly due to the fact we are a smaller agency and do not have the overheads that some of the larger holiday letting specialists have.

Council tax has not been allocated into the expenditure because council tax is exempt when running a holiday let home; your accommodation would change from council tax to business rates relief.  You would need to apply for business rates relief by visiting https://www.gov.uk/apply-for-business-rate-relief

Some benefits to consider

  • Income generated from a holiday home is classed as ‘relevant earnings’ meaning you can make tax-advantaged pension contributions.
  • Capital allowances – the cost of kitting out your holiday home means the costs can be deducted from your pre-tax profits.
  • If you should come to sell your holiday home property, you are able to claim certain Capital Gains Tax (CGT) reliefs.
  • If you have used a mortgage or loan to purchase the holiday let, then you can claim the interest of repayments back against your tax in full.

 

Regulations to do with offering short lets in Scotland

The Scottish Government announced in November 2021 that legislation is being tabled that would require all local authorities to establish a short-term letting license scheme by October 2022.  If the scheme is approved, existing hosts and operators will have until 1 April 2023 to apply for a license. All properties that are used as ‘short-term lets’ across Scotland will have to be licensed by 1st July 2024.

If you are individual with multiple short-term let properties, you will need a license for each property.

Exactly what the criteria of the licensing scheme will be remains unclear at present.

The current short-term let legislation passed in April 2021 allows local authorities to establish short-term let control areas.

 

All in all, a short-stay let could be a great investment, if managed well.  Our advice to anyone considering this type of investment would be to make sure you know the market you are buying into, do lots of research, including online-checks to see how well other holiday lets are doing on guest booking sites such as Airbnb and Booking.com. Avoid buildings where there are multiple short-lets. As much as you may want to compete with other holiday homes, and you may well have something unique to offer, it’s very likely you’ll experience more vacant periods.

With this in mind, another important factor to think about is your ‘target market’.  Most young travellers would likely want to be in the city, or at least in easy travel distance to the centre of the city, whereas, families or older guests could be a bit more flexible and would likely consider being located on the outskirts, remote even, with the option of easy transport, or travel into the city.  Families mostly want outdoor space, more so during summer, whereas, young travellers main priority is having a great space within easy distance to local attractions, bars and restaurants.

Lastly, if you are considering using an agency, make sure they know the market and can advise you on good investment opportunities along with real-time figures from other properties that they manage.  Transparency is key in a good working relationship between you and your agent!

I hope this article has been useful to those of you who may be interested in offering a short-stay rental.  If you wish to discuss any of this further, I’d be happy to talk to you.  Please give me a call on 07892891116 or email me nykkybanks@iletonline.com

Next months article will focus on the ‘private residential market’ – how 2022 may look for both landlords and tenants.

Have a great start to 2022!

 

Nykky