If you’re hoping to purchase a holiday let, we’ve got good news for you: if you buy the right property and things are operated correctly, then they can be a fantastic financial investment with the potential to generate a very healthy profit. The key is to do your research beforehand and keep putting the work in afterwards.
Let’s run through some of the key factors around holiday let profitability ….
Ever heard of the 8%-10% rule?
Being holiday letting experts who have seen the holiday letting industry from the customer, owner, and lender perspectives, we have a unique lens on this world!
We are often asked, “What is the one thing we must get right to make holiday letting work?” Our answer is, it’s the ratio of expected gross rental income to the purchase price of the property. If you can get that number to work out at between 8% and 10%+, you are off to a great start!
The reason this is so important is that some properties attract what we call ‘postcode value’, meaning that they are expensive properties to purchase purely because people want to buy and live in them as a residential property. The rental potential of these properties does not change proportionally with purchase price; holiday makers, on the whole, just want a nice property in a pretty village and they don’t have the specific local details to know one village from another.
A good example of this is in the Cotswolds, where the village of Lower Slaughter is very desirable to live in and properties command a significant premium compared to other villages. Travel a couple of miles in any direction to another ‘normal’ village and you will find that a like-for-like property will be much cheaper. However, and this is the key part, the rental income is roughly the same.
Look at this in numbers. If you purchase a three-bedroom property in Lower Slaughter and it costs £600,000 and the rental income is £35,000 that is 5.8% ratio. Move a little further away from that village and you might find a similar three-bedroom property for £350,000 generating around £34,000 gross rental income, which is 9.7% ratio.
Key takeaway: try to find a property that falls within the golden ratio of 8% to 10%!
What should I buy?
Buying a holiday let isn’t a decision to make on a whim! Choosing the right holiday home is vital and if you make a bad business decision, your future profits will be affected.
Firstly, you need to settle on a good location: somewhere that attracts tourists, has plenty of amenities nearby, good attractions for all ages, and is easy to get to. The most beautiful house in the country won’t prove very popular if it’s hidden in the middle of nowhere and you have to drive for miles to find a shop!
Secondly, the property itself needs to be structurally sound and aesthetically pleasing, especially with so much competition out there. If you want to buy a place that’s in need of some TLC, make sure that you have the funds to cover the necessary work… and that the finished job will be worth it!
The size of the property will also affect your profits as sizeable properties can be rented out for more money. As such, you can reduce the number of guests you need to make a healthy income and minimise your maintenance costs between bookings. However, there is the downside that you might also hit the VAT threshold (£85,000) with a minimal number of bookings per annum, and as a result will have to pay VAT.
What does a typical holiday let profit and loss account look like?
Another very common question from owners and clients!
Holiday lets are unique and each one will have slightly different operating financials, but to help you plan and to make sure you are including all key costs, we have created a P&L table below, based on a real cottage that we know very well (yes, we used to own it!):
Indicative P&L for Sleeps 6, No Restrictions, Available All Year
|Category||£ per annum||Notes|
|Letting income||35,000||52 weeks availability assumed, no restrictions – based on 35 bookings|
|Agent’s letting fees||(7,000)||20% of letting income|
|VAT on letting fees||(1,400)||20% VAT|
|Net income as a % of revenue||76%|
|Insurance||(1,000)||Estimate – includes Public Liability and loss of income cover|
|Business rates||0||Estimate – nil if rateable value <£12,000|
|Utilities||(2,400)||Estimate – £200 per month|
|Housekeeping||(5,250)||Estimate – assumed 35 bookings x £150 per turnaround (inc linen)|
|Gardening||(500)||Estimate, assumes an easy garden|
|Sundry expenses||(525)||Includes expenses such as welcome gift, logs, consumables, @ £15 per booking|
|Profit before management fees||15,725|
|Profit before mgt fees as a % of revenue||45%|
|Housekeeper Management fees||(1,450)||Assume £100 per month fixed fee to be on call + some call outs|
|Profit before mgt fees as a % of revenue||41%|
The above is an example only, but it is based on a real cottage using a professional holiday letting agency for marketing, and a professional housekeeper to do the turnarounds and linen. The housekeeper was also paid to be on-call and deal with out of hours issues.
Depending on how you decide to run your holiday let, you could save on certain costs (see below), like housekeeping – if you do it yourself – but be warned, it’s a tough job!
The costs of running a holiday home
When you’re putting together a holiday let business plan, you have to consider your outgoings – and there are a lot! Holiday let properties require considerably more maintenance than buy-to-lets: a proper clean and replenishment of goods between every guest, as well as year-round marketing to generate footfall, and management to handle day-to-day tasks such as bookings.
It’s easy to underestimate the sheer amount of work it takes to run a holiday home to a high standard – and believe us when we say that standards these days are very high! You’re going to want a slick website and booking system, savvy marketing which shines against the competition, and a property that’s good-as-new for each and every guest. For this reason, we’d advise holiday let owners to go with a professional when it comes to marketing, management, and maintenance – something that should be factored into your budget.
There are plenty of ways that you can control your spending, so long as you’re careful not to cut costs so drastically that your holiday home suffers as a result. As we mentioned, keeping below the VAT threshold is a good way to lower your outgoings, and there are legitimate ways to cut your income tax, too.
The main areas in which you can save are marketing, management, and maintenance. When it comes to marketing, there’s a whole host of strategies for promoting your holiday let yourself: design a website, promote through social media, utilise platforms such as Airbnb, create and distribute leaflets. However, it has to be said that by doing the marketing yourself, you’re unlikely to get the exposure necessary to achieve nationwide, let alone international, exposure.
Moving onto maintenance, we have the same issue. You could choose to do your own housekeeping or find a friend who can undertake the job, but you should understand the risks involved with this. Unlike a professional housekeeper, a friend can easily cancel on you, which could cause havoc if there’s little notice. Even without this issue, the time and effort required to get the house ready between each guest is a sizeable undertaking, which goes far further than just cleaning and tiding. Think washing and ironing linen; making bedrooms up; replacing necessities such as toilet roll and toiletries; checking cupboards to ensure everything is in place, the list goes on… and that’s not to mention larger tasks such as cleaning windows and gardening!
With regards to management, you can save money if you go without a professional holiday letting agency. If you choose this route, you should be prepared to answer calls from your guests at any time of the day or night and be willing to sort any issues yourself. If the boiler fails during the night, you should go to fix it!
What makes a successful holiday home?
As the holiday letting industry has boomed, so have guests’ expectations – gone are the days of measly coffee sachets and a pile of generic attraction leaflets, now it’s about welcome hampers, lavish amenities, and thoughtful guides to the area. It’s also not uncommon to see deluxe features such as hot tubs, which add an extra lap of luxury for guests.
At the very least, you need to ensure that your holiday home has fully functioning facilities, reliable internet, and all of the necessary comforts such as bed linen, toiletries, and towels. Think about the little extras which could make or break a booking, such as allowing pets, and make your home accessible to the widest possible audience. It’s important not to cut corners and cheapen the experience – a top quality holiday home will give you the best chance to generate bookings, garner good reviews, and see return customers too.
Holiday let profits will vary significantly throughout the course of a year, depending on the season, national holidays, and local events. The location of your holiday home comes into play here. Coastline homes see a spike in bookings for 17-18 weeks during the summer months but face a quieter period between summer and Christmas. On the other hand, mid-England destinations such as the Cotswolds generally get bookings all year round.
That being said, with proper management and marketing, it’s possible to maintain a stable income over the course of the year. If there are specific time periods which aren’t popular, it’s time to get proactive and offer special discounts that will tempt people to book a holiday, even if it’s not prime season.
You can’t think about profits without planning a pricing structure for your holiday home. The key is to charge an amount that will allow you to benefit financially, but that isn’t extortionate so as to deter bookings. To find a good price point, it’s a good idea to do your research on the local competition to get an idea of what you should be charging. If in doubt, speak to a holiday letting agency who will be able to offer advice.
A commonly used strategy is to stipulate a minimum night stay, especially at weekends or during high season. Just beware that this has the potential to put people off booking and we wouldn’t recommend a minimum stay that’s longer than a couple of days.
How do holiday let properties compare to buy-to-lets?
In the right location, holiday lets can be more lucrative than buy-to-let properties, because you can charge a more premium price for a short-term stay than you can for a long-term rental. Imagine a popular music festival taking place close by, or a horse racing meet; guests will be willing to pay the price and you could make more money in a week (or even weekend!) than you could over an entire month with a buy-to-let tenant.
There are also tax advantages to owning a holiday let, as there is no limit on the amount of mortgage interest that you can offset against your profits, unlike buy-to-let. As well as this substantial saving, there’s also the option to split the profits for tax purposes, if you’re running your holiday home as a husband-wife team. This is a major benefit: if you imagine that one spouse earns significantly more than the other, they don’t have to declare 50% of the profits which would result in their income tax increasing even more.
And let’s not forgot the great reward of owning a holiday let: you can stay in it yourself! You’ll be able to enjoy free getaways in your very own home away from home, something that you wouldn’t be able to do if you own a buy-to-let property.
This being said, it’s important to be aware that holiday lets pose different challenges, the most obvious being that running a holiday let is effectively the same as running a business and you need to be prepared for all that is involved in that, including dealing with your guests! Also, seasonality means that your income changes throughout the year, just about covering costs during the cold months and making hay in the summer.
A flourishing market
We’ve seen a huge rise in UK staycations over the last few years, resulting in a significant increase in demand for holiday lets. Growing in popularity even before Brexit and the pandemic, the last couple of years have seen an unprecedented number of people choosing to go on holiday in this country, and we’d expect the industry to remain a popular choice for the foreseeable future. After all, we’ve discovered how much more affordable and convenient staycations can be – why would we go back?
If you’re in the position to invest in a second property, a holiday home is a lucrative business idea. It’s essential to do your research to get a realistic idea of potential revenue, as well as calculating your outgoings to ensure that, even with a healthy number of bookings, you don’t make a loss.
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The information contained in this article is accurate at the time of writing, based on our research. Rules, criteria and regulations change all the time and so please speak to one of our Consultants to confirm the most accurate up to date information. Nothing in this article constitutes financial advice. You understand that by clicking any external links on this page that you will be leaving the website of Holiday Cottage Mortgages and we cannot be held responsible for the content of this external website. Please always consult your accountant or solicitor for all financial, taxation or legal matters.