A Guide to Short-Term Let Property Investment

Introduction

Short-term lettings have become a popular and profitable buy-to-let investment strategy. This guide aims to provide investors with a comprehensive understanding of short-term let properties, their benefits, and the essential factors to consider before investing. By managing and marketing your property correctly, you can maximize your returns in this thriving market.

What is a Short-Term Let?

A short-term let is a rental arrangement that typically lasts from a single night to a month. It offers the potential for higher earnings compared to long-term buy-to-let properties. The demand for short-stay accommodation is increasing in the UK, thanks to platforms like Airbnb, booking.com, and Spare Room, which make it easier to advertise properties online. However, it is crucial to be aware of the rules and regulations governing short-term rentals. This guide will walk you through everything you need to know about this excellent buy-to-let investment opportunity.

Understanding Serviced Apartments

A serviced apartment is a fully-furnished property that provides a homely and independent experience, blending the advantages of long-term rentals and hotel accommodations. These apartments usually have 1-2 bedrooms, a bathroom, a kitchen, a living area, and parking spaces. Modern serviced apartments offer additional amenities like internet access, TVs, and appliances such as washing machines. Many serviced apartments are part of larger residential buildings that provide facilities like swimming pools, gyms, and spas. These properties are in high demand and can generate substantial income for investors.

Investing in Serviced Accommodation

Serviced apartments have attracted significant interest from buy-to-let investors due to their popularity and accessibility. However, there are important differences compared to traditional long-term rentals. Short-term serviced apartments have higher tenant turnover, which is beneficial for maximizing rental returns. While managing such properties can be demanding, the potential returns are substantial. Here is a summary of the pros and cons of investing in serviced apartments:

Benefits of Serviced Apartment Investments

• Higher rental income: Short-term rentals allow you to charge significantly more per night compared to long-term rentals, resulting in higher returns. 
• Increased rental yields: Serviced apartments often provide higher rental yields, averaging between 6.5% and 9% in popular locations.
• Greater flexibility: Short-term rentals offer flexibility in terms of the duration of stays, allowing guests to book for as little as one night or extend their stay easily.
• Adjusting rates: Rates can be adjusted based on seasonality or local events, offering the opportunity to maximize profits.
• Higher occupancy rates: With growing demand for short-term lets, properties in good locations are less likely to experience extended void periods.
• Growing market: The serviced accommodation market is expanding rapidly, with platforms like Airbnb reporting significant profit increases.

Drawbacks of Serviced Apartment Investments

• Higher costs: Serviced apartments often involve additional expenses such as housekeeping, furnishing, and providing extra services like Wi-Fi.
• Risk of property damage: Group bookings for events can increase the risk of property damage.
• Marketing and advertising efforts: Promoting and attracting guests to short-term serviced apartments can require time and additional costs.
• Financing challenges: Securing a short-term or holiday let mortgage can be challenging and may require a larger deposit than a residential mortgage.
• Effort and management: The success of a serviced apartment investment depends on effective marketing, management, and maintenance.

Potential Returns from Short-Term Lets

The potential returns from short-term lets heavily rely on the property's location, quality, and occupancy rate, similar to other investment properties. While long-term rentals offer stable and guaranteed income, short-term rental properties have the potential for higher returns if managed effectively. The income generated from long-term tenants remains fixed each month due to the agreed-upon rental rate. In contrast, owners of short-term serviced apartments can adjust their rental prices based on demand, providing greater flexibility. According to Homelet's recent rental index, the average monthly rent in the UK stands at £1,184, resulting in an annual income of £14,208 for landlords with long-term tenants.

Short-term lets offer even higher earning potential, particularly in lucrative buy-to-let areas like Liverpool and Manchester. Consider the example of Airbnb, the leading platform for short-term bookings. Currently, the average nightly rate for properties on Airbnb is £92, as reported by Google Analytics. 

Surprisingly, a property rented out at this rate would only need to be occupied for 13 nights per month to achieve the same return as an average UK buy-to-let property. Furthermore, renting out the property for a minimum of 20 nights per month over a year would generate an annual rental income of £22,080, not accounting for peak season rates or events like concerts or sports events nearby. However, as with any investment, there are risks involved. 

The main risk associated with short-term lets is periods of low demand when it becomes challenging to fill the property. To mitigate this risk, thorough market research, prioritizing location selection, and seeking expert advice are crucial before making an investment. Fortunately, if you have reached this point in the guide, you are on the right track!

How to Invest in Short-Term Serviced Property

Investing in a short-term serviced property follows a process similar to traditional buy-to-let investments, making it familiar to seasoned investors looking to expand and diversify their portfolios.

As always, location plays a crucial role and becomes even more significant when investing in a property specifically designed for short-term lets. The range of locations that can yield high rental income is vast. Whether it's a centrally located city apartment or a peaceful seaside retreat, both can be equally profitable investments. Selecting a location that ensures consistent demand for your property throughout the year is a key component of a successful investment strategy. The property acquisition process itself closely resembles that of a traditional buy-to-let property. However, purchasing a short-term serviced property presents a major challenge. Securing a short-term or holiday let mortgage can be difficult, often requiring engagement with smaller or niche lenders. Additionally, the deposit required for these mortgages is significantly higher, typically ranging from 25% to 30% of the property's total value.

After acquiring the property, further time and financial investments may be necessary to effectively manage, maintain, and maximize returns. These investments can include:

• Ensuring the upkeep of furnishings in the property, such as bedding, cooking appliances, and cutlery, by conducting regular maintenance and replacing items as needed.
• Performing cleaning and housekeeping duties to maintain a high standard of cleanliness and guest satisfaction.
• Allocating funds for advertising fees, depending on the chosen marketing strategies to promote the property.
• Acquiring specialist home insurance that permits short-term lets to ensure adequate coverage.
• Hiring a property management company to handle day-to-day landlord responsibilities, providing efficient property management services.

By considering these factors and making the necessary investments, you can optimize the performance of your short-term serviced property and enhance your potential returns.

Property Management Companies

Many investors in short-term serviced properties opt for the services of professional property management companies to handle the day-to-day responsibilities typically required of landlords. This choice is particularly appealing to individuals who lack the time or availability to oversee the property's upkeep and efficiently manage tenant turnover. Given that the smooth operation of the property and guest satisfaction are vital for garnering positive reviews and high ratings on booking platforms, which directly influence demand and returns, engaging a reputable property management company becomes a valuable consideration.

Market Demand for Short-Term Lets

Fortunately, the demand for short-term lets is steadily increasing throughout the UK, making serviced apartments a highly profitable investment option. The potential audience for these apartments is vast, providing property owners with a broad target market for marketing their properties. Business travelers, especially those traveling in groups, often have their employers book serviced accommodation for them due to the lower rates compared to hotels and the convenience of having a private space for work and relaxation. Satisfied guests are also more likely to return for future last-minute trips, knowing the quality and experience they can expect. Identifying the potential tenant base for your property is crucial as it sets the foundation for a successful investment.

In addition to business travelers, common short-stay residents in popular cities include individuals on stag and hen weekends, concert-goers, and sports event attendees, such as football matches. Investing in a city with a vibrant nightlife scene and a prominent football club ensures a consistent year-round demand for your property. The rise of remote work and flexible lifestyles has further boosted bookings on platforms like Airbnb, as people now have the freedom to travel while working. The potential guest pool for short-term serviced properties is diverse and continuously expanding. According to recent data from Sykes Holiday Cottages, short-term let bookings across the UK increased by 33% in 2022 compared to the previous year.

When it comes to listing your property and launching your short-term letting business, online booking platforms play a crucial role. Several reputable platforms are available, with Airbnb, Booking.com, Vrbo, and Expedia being the most notable and widely used. Airbnb is currently the most popular and fastest-growing platform, offering maximum exposure for your listing. It also provides benefits and protections for hosts, including guest identity verification, reservation screening, a 24-hour safety line, and a $1 million insurance policy for property damage. Airbnb charges a flat reservation fee of at least 3%.

Booking.com is another excellent option as it covers various aspects of travel, and it may recommend your property to potential guests when they book flights to the area. However, it comes with a significant fee of around 15% per booking. Vrbo, a slightly lesser-known platform, specializes in advertising family-friendly properties, making it ideal if your property offers self-catering or home-like facilities appealing to young families on holiday. Vrbo charges a minimum of 5% per booking but also offers an annual subscription option for $499/year, which can be cost-effective for properties with a steady flow of bookings.

Expedia, one of the world's leading online booking platforms, offers accommodation, flights, car rentals, and comprehensive holiday packages. Booking fees on Expedia can range from 10% to 30%, but the increased exposure for your property may justify the relatively small cost. While there are numerous other booking platforms available, these options are among the best to start your short-term letting business. It's important to conduct thorough research and select a platform that aligns with your property type, location, and the fees you are willing to pay per booking.