Short-term rental accommodation, also known as holiday rentals, can be very lucrative if you choose the right property and management strategy. This article by real estate journalist, Leigh Stewart from Tranio.com, explains what you need to know before you buy. Interestingly, many small budget investors never think of holiday rentals – choosing long-term lettings with low yields or high-risk commercial property instead.
- The strategy
The main difference between short-term and long-term rentals is in terms of yields, because holiday accommodation commands higher nightly rates. Landlords who achieve maximal occupancy can expect to earn upwards of 5% net yields, compared 2–3% on a flat with one long-term tenant. This investment strategy comes with the added bonus of being affordable even on a small budget because one-bedroom flats are the ideal property for this model. For example, flat prices are very affordable in Britain’s leading five cities for tourism (excluding London), ranging from £111K to £192K on average.
|Flat prices in Britain’s most popular cities for tourism
|City||Number of overnight stays* in 2015,
thousands per year
|Average flat price in March 2016,
|Source: Office for National Statistics, Land Registry, Registers of Scotland|
*at least 1 night stay
- The location
Location is the single most important decision in this process because it will determine both occupancy and revenue on the investment. Central locations and popular boroughs attract business and tourist flows that fill up the apartment throughout the year. Needless to say, a bad location is a killer. Cities like Edinburgh, Manchester, Birmingham, Glasgow and Liverpool are all vibrant cultural and business destinations.
|Popular and upcoming areas in top five British tourist cities|
|Edinburgh||Old Town, New Town, Stockbridge|
|Manchester||North Central, Northern Quarter, China Town, Salford Quays|
|Birmingham||Moseley, Egbaston, Stirchley, Cotteridge|
|Glasgow||City centre, Dennistoun|
|Liverpool||Albert Quays, “Baltic Triangle”, Sefton Park|
Just in terms of tourism, Edinburgh is the most visited city in Britain (excluding London) according to the Office for National Statistics, hosting more than 1.5 million overnight stays per year (i.e., lasting at least one night) and Manchester, over 1.1 million. Not to mention that all these cities are important academic hubs with hundreds of thousands of students, many of which come from abroad.
- The property
Small flats, like studios and one-bedroom flats (max. two-bed) are best suited to short-term rentals as they tend to have higher occupancy rates: 90% in peak season and 70% on average. They are also cheaper and can easily be converted into an attractive long-term rental if they are in a good location. The property needs to be modern, clean and equipped with modern fittings and fixtures, all of which are in working order.
- Important trends
Things to look out for include positive demographic trends (i.e., growing population, rising incomes) and rising GDP (i.e., new businesses opening, corporate headquarters, luxury property developments) and infrastructure projects (i.e., roads, railroads, public transport) that will enhance access and promote the flow of people to and from the location. Buying in the right place is the best way to protect the investment from unnecessary risk.
|Factors that will increase occupancy|
|Location & infrastructure||Attractions|
|Business areas – corporate headquarters||International sports edifices|
|Public transport access||Bars and restaurants|
|Hospitals||Historical landmarks & buildings|
|Universities||Shopping centres – pedestrian streets|
Location is paramount to surviving a downturn: homes in popular central areas will always be in demand and price growth is better. Peripheral real estate (e.g., the suburbs) however is more likely to lose value and generally a lot harder to sell if push comes to shove.
- Managing the property
Investors are recommended to hand over the day-to-day running to a competent property management company who will manage the premises, find customers, maximise occupancy, pay the bills and taxes as well as deal with the cleaning and any maintenance. The same way many people think they can buy and run a restaurant, doing so without professional experience is the riskiest decision that one could make. Remember Kitchen Nightmares with Gordon Ramsay? Furthermore, close friends and families are also liabilities that are likely to affect profit margins and customer reviews if they are not professionals in this area. Property management companies generally take 20–25% of the revenue depending on the range of services offered.
Leigh Stewart – Tranio.com
Disclaimer: Always consult a local property management specialist before making investment plans as there are specific laws pertaining to land use and zoning. New arrivals onto the short-term rental market like Airbnb, although lucrative, may still be subject to local housing rules.