Costs of Running a Holiday Let
Is the cost of running a holiday let low enough to justify the investment? Find out in this article by finance experts at Rangewell and get started today.
Here at Rangewell, we’re experts in holiday let finance. Our team can identify the right lenders and help you tailor your application to maximise the value of your loans. Getting better value from the loan means your overall profitability can be higher – which is a critical element of a competitive industry.
Table of Contents
If you’re considering buying a holiday let property to run as a business, you need to understand the costs involved before making any decisions. Not only will you have to pay for the initial purchase of the property, but you’ll also need to consider:
- Property listing and management costs
- Advertising and marketing
- Maintenance and cleaning
- Business rates and tax
However, due to being classed as a business, FHL (furnished holiday lets) allow you to apply for business loans and special holiday let mortgages. These finance options may be ideal for you and help your business get off to a better start – but only if you negotiate the right agreement with favourable terms.
Read on to learn more about the costs of running a let, or get in touch with our team now to talk about your plans and see how we can help.
Are holiday lets a good investment?
Deciding on whether to buy a holiday let and start operating one as a business (or outsourcing to a management company) is a case of understanding the difference between holiday lets and other property investments.
Holiday lets are, by nature, a less secure investment than traditional buy-to-let property. Since you have to attract many guests to book short stays each year to fulfil FHL criteria, it’s a less reliable form of income when compared to a long-stay tenant in a buy-to-let.
However, holiday property can easily outearn a traditional residential buy-to-let by significant margins due to high weekly rates. This means that if you can guarantee reasonable bookings during peak holiday seasons, you’ll see greater yields than buy-to-lets.
To compare the two, let’s take a look at some price data from the short-stay analytics business AirDNA and market rent summary data from Home.co.uk. Here are some of the UK’s most popular tourist destinations and their average short-stay price for one night.
- Avg nightly price: £133
- Avg monthly rent: £1098
- Booked nights per month required to outearn rent: 10
- Avg nightly price: £146
- Avg monthly rent: £1459
- Booked nights per month required to outearn rent: 10
- Avg nightly price: £124
- Avg monthly rent: £1086
- Booked nights per month required to outearn rent: 9
- Avg nightly price: £134
- Avg monthly rent: £923
- Booked nights per month required to outearn rent: 7
- Avg nightly price: £120
- Avg monthly rent: £1382
- Booked nights per month required to outearn rent: 12
Taking the above values into account, you can see how lucrative a popular let may be. However, there are lots of variables in how much value a holiday let property can have, including:
- Location: some areas are more popular with tourists than others, meaning you’ll have an easier time finding bookings. The downside is that these areas usually command higher rental and overall property prices too, so initial investments may be more expensive, and competition can be high. In some cases, less popular areas with cheaper property that you’re confident you can still secure bookings in are more favourable investments.
- Property price: the asking price for a property isn’t the only cost you’ll pay when setting up a holiday home, so think carefully about refurbishment and furnishings when you’re calculating the price. Some types of property, such as apartments, are cheaper than full homes but command roughly the same price when let as a holiday property, so it may represent a better investment.
- Running costs: due to high guest turnover, holiday lets are more labour-intensive than a buy-to-let with a stable tenant. This means you’ll pay more not only for cleaning and maintenance but also for insurance. You can reduce the cost by performing some of this activity yourself, but if you’re trying to scale the business, you’ll need to outsource.
- Management costs: if you do outsource the management of your property, you’ll need to pay an agent’s fee and any additional costs for advertising etc
How to value a holiday let business
Holiday let properties are a somewhat tricky proposition when it comes to valuation. There are two ways to purchase holiday property – either purchasing a proven, pre-existing holiday let, typically through a holiday home specialist, or more commonly by purchasing a standard residential property and converting it into an FHL.
The first option tends to favour more casual buyers looking to own a holiday home for personal use that can be rented out on the side. Caravan parks, for example, often sell new or used lodges and caravans to owners as buy-to-let opportunities. They may explicitly forbid the type of letting activity you need to allow to qualify as an FHL, for example, by limiting how many guests you can allow each year.
To qualify as an FHL, a home must be adequately furnished and available for at least 210 days each year. Adequate furnishings vary, but if you’re looking to be competitive in the market, you can’t choose the cheapest options as you’ll need to consider guest impressions.
Essentially, valuing an FHL is a question of the following:
- The overall price for the property - this is derived from the general property market and is no different to a residential value.
- Area - the tourism potential in the area will impact the listing’s value. If it’s in a proven tourism hotspot, its value will be higher than a more expensive property in a less popular area.
- Letting history - does the property have documented history as a holiday let? What kind
- Furnishings - what is the value of the existing furnishings in the property? If it’s empty, you need to account for the cost of furnishing it.
How business rates are calculated on your FHL
When you’re planning a holiday let business, you need to understand how tax will impact your activity, so you can see the true value of the investment. If you’re buying a property to use as a holiday home for your own family and friends, where any commercial letting is less than 20 weeks per year, you’ll pay holiday home council tax. If you’re aiming to establish an FHL business, you must let for longer than that and will therefore fall under business rates.
Holiday let business rates are similar in concept to council tax in that they help pay for local services. Unlike the flat charge of council tax, however, rates are more variable and come with tax implications.
So, how do you calculate the business rate you’ll pay for a holiday let when you’re trying to value the investment? The local Valuation Office Agency will set a rateable value on your property, which is based on the standard rental value of the property rather than on any holiday let projections. This value is then subjected to a business multiplier set by the government. Use this online tool to work it out for you, provided your let is located in England or Wales.
Paying business rates may seem like a negative, but there are various rate reliefs and tax incentives available to help you maximise your income and make owning a holiday let more appealing.
Is holiday home investment right for you?
This is a subjective question, but one that gets asked so widely on the internet that we want to try and add our opinion too. Holiday lets are a growing industry and a new source of income for people looking to enter the property market or for existing landlords to pivot into.
Unlike buy-to-let property, holiday lets have more volatility in terms of income and earning potential. If you’re attracting regular bookings, you can easily outearn a standard buy-to-let – but to be competitive, you’re likely looking at paying more for maintenance, management and cleaning.
Additionally, securing the right finance to support the purchase isn’t as straightforward as a buy-to-let because the industry is not as well understood by lenders. This often leads to poor decisions when accepting loan offers, resulting in a restrictive finance arrangement that hamstrings your ability to grow your holiday let business.
If you can’t operate the business and enjoy a profit, it’s not a good investment – making the choice of lender and loan absolutely crucial to success.
Get a better loan offer for your holiday let property
Rangewell can help you ensure you get the maximum value you can out of any finance agreement you need for your holiday let. We’re specialists in the sector and have great relationships with both mainstream and challenger lenders, from high-street banks to independents.
However, our responsibilities ultimately lie with you – it’s our job to help you maximise your chances of getting a holiday let mortgage that positions you for success. We’ll walk you through the lending market, identify the best lenders for your needs and situation and then work to tailor your application. We’ll then negotiate on your behalf and secure the funds you need at the best rates and terms we can find for you.
In such a competitive, growing market, every advantage you can find is a benefit. Choose Rangewell to secure finance for your holiday let business, and we’ll help you either get started with your first holiday home, or expand your growing property portfolio. Get in touch with our team today.