Are Short-Term Lets a Good Investment?
Short-term lets are a growing part of the UK property market. They offer a great opportunity for landlords to make more money from their properties and for tenants to find flexible accommodation. However, there are some things that both landlords and tenants should be aware of before taking on a short-term let.
When it comes to investing in property, are short-term lets a good investment? How do they compare with long-term rental properties? In this article we take a deeper look at the benefits and drawbacks of short-term lets. And also what you need to know before investing in a short-term let.
What is a Short-Term Let?
A short-term let is a property that is rented on a daily, weekly or monthly basis. A holiday rental home, renting out an extra bedroom or a rental property with a monthly lease are all examples of short-term lets. Short-term lettings are often located in busy tourist areas where demand for short-term accommodation is high. They are also popular with business travellers who need short-term accommodation while on assignment.
In contrast, a long-term rental is one where a tenant typically seeks to live in a rental property for six months to a year or longer. Short-term lets are usually only available to renters for periods of less than six months. Short-term lets can provide an excellent source of income for landlords, as they can often charge higher rates than long-term rentals.
Why are Short-Term Lets on the Rise?
In the UK, 16% of landlords say they solely focus on short-term tenancies and 7% of UK landlords offer short and long-term lets. Short-term rentals are on the rise due to a few key factors:
- Changing Work Trends
With more people receiving the chance to work from home or work remotely, visitors are staying longer in locations. Many people are taking their work with them to the countryside, cities or further afield abroad. This is so as to combine work and travel which boosts demand for short-term accommodation.
- Market Shifts
The travel and property sectors have experienced significant shifts due to popular websites such as Airbnb. Property owners and landlords are taking an increasing share of the market from hotels and resorts in terms of hosting guests.
- Travel Trends
The rise of short-term rentals has also been fuelled by the increasing popularity of city breaks and weekend getaways, especially among young adults. Short-term rental properties are perfect for those looking for a quick, affordable break in a new location. They offer convenience and flexibility that traditional hotels cannot match.
Who Uses Short-Term Lets?
Those opting for a short-term let can be doing so for a number of reasons. Some prefer short-term lets rather than committing to a location or property for a longer period of time. Others may be in an area for a short time due to work commitments, or need a place to stay as a stop-gap between moving properties.
Tourism also plays a major role in the short-term let market. Those visiting an area for longer than a week are often financially better off using a short-term let over a hotel. This can be especially true for groups or families travelling together, as the cost of renting a property can often be less than the cost of multiple hotel rooms.
Short-term lets can also offer a more flexible lifestyle. For those who travel frequently, short-term lets provide a home away from home. They can be used to explore different areas or locations and offer the opportunity to experience new cultures and environments.
What are the Benefits of Short-Term Rentals?
Short-term rentals come with a number of benefits over long-term let:
Short-term lets are a flexible method for homeowners to make money from properties or spare rooms at any point throughout the year. Hosts have total control over their calendar and can decide when to make their short-term let available.
They can also set their own prices and have the ability to adjust them over time to ensure they are making the most of their rental market.
This flexibility also extends to the length of stay for guests. Guests can decide if they would like to stay for a few days, weeks or even months depending on their needs and budget. This makes short-term lets an attractive option for both hosts and guests alike.
- Higher Income
Properties in a desirable location that are well-marketed offer more in terms of profitability than long-term rentals. While you need to be sure there is rental demand, generally holiday rentals generate more income than standard yearly leases and hosts typically earn up to 30% more in revenue.
The key to success in short-term rental is to ensure that the property is priced correctly. This means researching the local market and understanding the competition.
- Easier Maintenance
Short-term lets make it easier to manage your investment and keep it in good condition. Shorter stays mean the property is being cleaned more frequently and because it’s likely you are in and out of the property more often, it’s easier to detect maintenance problems before they become too serious. Many vacation rentals charge a cleaning fee to cover this cost.
In addition, you can also save on the cost of maintenance because you can schedule it in between guests more easily. This means that any repairs or maintenance work won’t cause a disruption to the rental income.
- More Control
Hosts of short-term lets have the ability to change pricing as they see appropriate. This gives owners the ability to maximize their earning potential and have more control over their pricing. Owners can put up rates in high seasons or lower rates to make pricing more competitive in slower seasons. If visitors want to stay for a full month, owners can enable them to do so for a competitive rate. This can be a great way to make extra income from a home that would otherwise remain vacant.
With the added flexibility, owners can easily adjust rates when necessary and ensure they are getting a fair return for renting out their space.
- Capital Gains Appreciation
In addition to rental income, it’s likely that the value of your property will increase year after year. Usually the longer you keep your property, the more it will increase in value when you choose to sell it.
Capital gains appreciation can also help to offset any losses you may experience due to fluctuations in the market or other factors. It helps to ensure that your investment remains profitable in the long term.
- Tax Relief
Owners of short-term rentals will be able to claim for certain things like furnishings, appliances and fittings alongside loss in revenue which can be offset against next year’s tax liability.
Owners that register a property as a business and ensure it is available for rent at least 140 days each year are also not liable for council tax. Council tax does not apply to commercial property and will already be applied to the property that the landlord uses as their main residence.
Are There any Drawbacks to Short-Term Rentals?
With any property investment, some drawbacks come along with benefits. When it comes to property for short-term rental, here are some things to consider before you make an investment:
- Void periods
While short-term lets bring more flexibility, that also comes with uncertainty. Void periods can be more common and frequent with short-term lets and there could be periods of time where the property brings in zero income over certain periods if there is no demand.
- Furnishings and Wear and Tear
Tenants renting out a property on a short-term basis expect the property to be fully furnished with everything from bedding to cutlery. Damage and wear and tear may be more significant in a short-term let due to higher guest turn-over.
- More Work
Preparing for a flow of changing guests can be hard work. From deep cleaning to supplying new linen and towels, renting a holiday home or short-term let can demand a lot of your time.
Those with a new short-term let may not be able to make money from the property right away. You’ll need to put in a lot of initial effort to market the property, remodel it and list it online as well as manage bookings.
Hosts of a holiday let will need to cover certain items that are usually covered by tenants. Utility bills, internet, TV licences and other miscellaneous costs will all need to be borne by the landlord. The same may go for short-term lets depending on the length of the tenancy.
- Guest Issues
As a host you may not be able to get to know a tenant or conduct a full background check on who is coming into the property. This may mean you have to deal with more problem tenants. At the same time you’re responsible for making sure that guests are kept happy, and that any problems are swiftly dealt with.
- Lack of Rental Properties
From a tenant’s point of view, short-term renting and the increase in short-term lets can have a negative impact on the private rented sector due to the fall in the number of properties available for long-term rent. A shortage in long-term rental properties means more competition, making rent increases inevitable.
What are Some Short-Term Rental Tips?
Short-term rental investing can be rewarding if you understand the ins and outs and get a few key things right:
- Invest in the right location
Not every location will be lucrative for a short-term rental property. You’ll need to ensure your property is in a desirable location and in a neighbourhood where people want to stay. Investors will need to conduct thorough due diligence before making any decisions. Researching the local area is the best way to determine if a location is suitable for a short-term rental property. Consider factors such as transport links, amenities, schools, and local attractions.
- Be organised
It’s likely that in the beginning you will be running the rental investment yourself. You’ll need to deal with screening guests, cleaning the property, ensuring proper maintenance and more. Welcoming new guests several times a week can be overwhelming.
To ensure that you manage all of this effectively, it’s important to be organised. You’ll need to create a system for tracking bookings, responding to inquiries and keeping up with maintenance. Invest in a property management software or a task management app. That will allow you to easily manage everything and ensure that it’s all running smoothly.
- Screen Guests
If you own a UK short-term investment, before accepting a booking you’ll want to look into your guests to make sure both sides have a pleasant experience during the stay and ensure that guests follow any house rules.
- Marketing your Property
It’s important to market your property in the off-season to ensure you can keep getting bookings in low periods. While it might be relatively easy to get bookings in the high season, you might need to be more creative and consistent with marketing in the off-season. Perhaps in the off-season you market to remote workers who want to stay put for a longer period, while in the high season you make the most of the tourist market.
How to Get Around Short-Term Rental Restrictions
Councils and cities may have different regulations when it comes to short-term rentals. Some may have an additional tax and some areas may even prohibit platforms like Airbnb. Before you invest in short-term rentals, be clear on what jurisdiction it is in and what rules apply.
Properties in London are restricted by a 90-day rule. This means landlords cannot rent the property out for more than 90 days per year. To get around this restriction many landlords combine a long-term tenancy (for example, 6 months) with multiple short-term tenancies.
While landlords will always need to find one longer-term tenancy and may make less in this period, it does mean they can get around the 90-day limit. Overall having this structure is probably more lucrative than one long-term tenancy.
Are Rental Homes a Good Investment?
With ongoing monthly income, capital gains upon sale and being a relatively safe and stable place to put your money, rental homes are still considered a good investment. The UK rental market is on the rise and private rents paid by tenants in the last 12 months rose by 2.7%. (If you’re wondering if buy-to-let is still worth it in 2022, take a look at the pros and cons in this article.)
This means that investing in a short-term rental home could potentially be a wise decision. Furthermore, the UK has a strong tourism industry and an ever-growing population. This ensures that there is always a high demand for rental homes in popular areas, especially during peak seasons. As a result, investors can potentially benefit from high occupancy rates and increased rental income.
How Profitable are Short-Term Rentals?
With short-term lets growing in popularity across the UK, they’re becoming a good investment. In some areas landlords boast rental yields of 30%, much higher than figures seen across the private rental sector, making profitability more likely.
If comparing similar properties in the same location, a short-term rental or short stay apartment will generally be two to three times the rental income of a normal residential let. Holiday rentals provide more opportunities to update rental costs. This is based on demand which can help shield landlords from inflation and rising interest rates. You can read more about the impact of interest rates on the UK property market here.
Are Holiday Lets a Good Investment?
With more people taking staycations as a result of changing work, travel and post-pandemic trends, more rental property owners are seeking to gain sources of income through holiday lets. Purchasing a property in a popular tourist area can deliver high profits for the right properties in the right locations.
However, there are some considerations to make before investing in a holiday let. It is important to find an area with a high demand for rental properties and an attractive location that will entice visitors. It is also necessary to consider the costs associated with purchasing and maintaining the property. With all these factors taken into consideration, holiday lets can be a great way to generate income if done properly.
How do you Calculate Short-Term Rental Demand?
Not every location will be suitable for a short-term rental investment or be as lucrative as others. Landlords will need to thoroughly research neighbourhoods, supply and demand and competition. And also be aware of the regulations that apply to the property.
One way to gain an insight into rental demand is to check the number of listings in an area and how long they have been on the market. It’s important to find out if an area has too many properties. This may mean it’s better to choose a different location for your short-term rental.
It’s also important to consider the type of guest you are likely to attract. Different types of accommodation will attract different guests. For instance, a luxury apartment in the city centre is likely to appeal to business travellers and couples, whereas a beach house is more likely to be attractive for families and groups. Knowing who your target market is can help you in this calculation as well.
What Regulations Apply to Holiday Lets?
If you have a property to rent out as a holiday home, you need to be aware of short-term holiday let regulations that apply.
- Fire Safety: Landlords have to carry out a fire risk assessment and improve fire safety measures if necessary. Regulations mean landlords and hosts are responsible for taking steps to improve fire safety measures on the premises.
- Gas Safety: Each year a landlord needs to get their property inspected by a certified-gas engineer and obtain the relevant gas safety certificate.
- Furniture and Electrics: Any furniture and fittings made after 1950 need to have a manufacturer’s label which should be non-detachable. Electrics and wiring should be safe to operate.
- Mortgage Restrictions: Would-be landlords need to check with their mortgage lender to ensure that their policy allows for short-term lets. They should also ensure that the insurance policy for the building and contents covers short-term lettings.
- Freehold Properties: Those that are not the freeholder of the property will need to check the terms of their leasehold. Some leaseholds don’t permit subletting so you should check the terms to see if subletting is a possibility.
- Local Authorities: Some local authorities may require you to have a licence before being able to rent your property on a short-term basis. Other cities may have laws that restrict your ability to host paying short-term guests.
- Tax: Profit from any rental income is subject to tax. You should check what tax you are liable for and talk to an accountant about deductions that may apply.
If you are considering a property for a short-term let, there’s certainly profit to be made. Especially, with many short-term properties charging rates 30% higher than long-term residential properties. While there are plenty of benefits, drawbacks exist, such as void periods, wear and tear and changing regulations. Whether you’re looking into a holiday let, or considering a short-term let in the city or countryside our experts can help you get to grips with the market and what you need to understand before investing in any short-term let property. Get in touch with us today to find out more.