I started off with the intention of providing property investors with a top 5 list of tips for buying staycation property, however…..I opened a can of worms! I speak to investors every day about investing in Furnished Holiday Let (FHL) property, and even the most experienced investors miss something.
As a selling agent and management company, Residential Estates act as partners for their investors through the life-cycle of the property, and are therefore ultra-cautious not to get carried away with the short-term euphoria that you will have seen in the media. Therefore, the amazing rental returns you may experience over the next few years by owning a holiday property is only one of a number of advantages of investing in this market.
As a general rule, we only manage properties that we sell.
As we normally sell multiple properties in the same development, we can cut management costs, ensure the terms of the lease allow for short-term lets, we can invest more in marketing the immediate area, and to a certain degree, we have leverage over the freeholder / site manager.
Having over 12 years of experience providing short term let property to some of the largest corporations in the UK as well as tourists, and having key partnerships with national and international tour operators and marketing platforms, you will not find a better-equipped, reliable and knowledgeable one-stop-shop for FHL and corporate short term let property in the UK.
Here is a list of 20 tips for the investor when considering purchasing a Furnished Holiday Let property. These relate primarily to properties bought to target the “Staycation Boom”, specifically targeting tourism as opposed to the corporate sector.
- Check for “out-of-season” demand – It is easy to get carried away with the big numbers you can experience in July and August, particularly with coastal property, but having a reasonably high occupancy rate out of season can be more important. Look for locations that offer outdoor recreational activities which will attract people all-year-round. This is a market that has seen dramatic growth, particularly cycling, fishing, rock-climbing and walking.
- Check for “normal” demand – Use 2019 as your reference point and base your rental expectations on pre-pandemic data. The staycation market has been significantly boosted, but it is certainly not new. More UK tourists visited the Lake District in 2019 than all other European countries put together, and it’s those locations that will yield the best-long-term returns and growth than “crisis holiday” destinations.
- Leasehold v Freehold – Although it is usually preferable when buying residential property, to own the freehold, FHL is a clear instance where a leasehold property will work better for you as a landlord. Leasehold properties usually require you to pay an annual service charge to an onsite management company to manage the communal areas such as gardens, facilities and grounds. The properties are usually collectively insured in this way too, so you have one point of contact as opposed to dealing with numerous other landlords. Just ensure that the lease is of a good length (over 100 years) and that it allows short-term lets.
- New Build v Renovation – 2020 and 2021 has seen very few new build developments due to restrictions in both labour and materials. Most developments, whether they are new build or renovation projects are seeing understandable delays, however, while renovation projects are seeing delays in the “months”, new build projects are seeing delays in the “years”, so if you are looking for an investment which will take full advantage of the short term boom, you may want to focus on renovation projects. Both build types are subject to exactly the same stringent UK building regulations.
- Areas with Restricted Planning – while many investors will focus on areas where demand is the largest, supply is equally as important and is overlooked by many. We have a list of UK locations where local planning restrictions mean that occupancy rates will always be high due to a severe lack of property. These are usually protected areas of beauty. Due to the lack of supply, nightly rates are normally higher and they, therefore, attract high-profile and loyal, returning visitors.
- Tenant Profile – As with any property investment, the profile of your tenant is one of the most important factors. They pay your mortgage / bills / profit and just are trusting them with your asset. Tenant profile is even more important with short-term lets. With the number of different tenants staying through the year, you will always get a mix.
- Validate the forecast returns – particularly if you are using an agent who is not responsible for delivering your returns themselves. Most selling agents will use a separate management company. Speak to that company directly or ask for a rental projection which they are happy to sign up for. Ask them who their target audience is and if they have similar properties in that area. If possible, ask to speak to one of their existing clients direct. If your selling agent is also managing your property, ask to speak to someone in the property management department as they will be your contact once you have invested.
- Use an FHL mortgage – Understanding how to finance these properties is extremely important. Many investors will look for the cheapest method of doing so and fall into a dangerous trap. Most standard buy-to-let mortgages will prohibit short-term lets and if caught doing so, the penalties can be very expensive. Additionally, the criteria for a buy to let mortgage is based on the forecast AST (Assured Shorthold Tenancy) returns, so many purpose-built FHL properties will not stack up financially. Be prepared to pay a higher interest rate (approximately 1 to 2% higher than a standard buy to let), and in some cases, a lower LTV may be offered (60% to 75%), although with many lenders in the UK now offering specialised FHL mortgages, better terms are now more achievable. Using an FHL mortgage will give you peace of mind and provide long-term stability to your investment.
- Alternatives to your Target Market – Although your main focus should be on the tourism market, which is where most of your bookings will come from, also look for other potential markets which may provide you with additional bookings, particularly out-of-season. Using a management company with strong corporate links can be a real asset.
- Dynamic Pricing – A good management company should have software that can automatically change the nightly rate of your property to either maximise your returns during busy periods, or increase your occupancy rate in quiet periods by increasing and decreasing the price accordingly. Without this facility, you will miss opportunities and the results can have a huge effect on your bottom line.
- Hands-off? – Those wanting a hands-off investment need to check beforehand just what this means. Some management companies only offer limited services which may lead to additional costs, or you investing more time into the property than you intended to.
- Check that the price – Really important in the current market because developers may add a premium because of the media hype, and the staycation boom. It’s quite normal for prices to have increased by up to 10% compared to 2019, for example, but you need to understand the true market value of the property and that future growth will enable you to make a reasonable return when selling on in the future. Your sales agent should be able to provide prices of comparable properties, but remember that FHL property will normally be priced differently than local residential property.
- Conservative Expectations – Over the next few years, we anticipate that most well located, high quality holiday property will attract higher prices and higher occupancy levels. We expect out-of-season tourism to increase due to affordability and availability, but it is wise to base your expectations of returns on “normal” years and see the increased activity as a bonus. Most importantly, make sure that you can easily fund the investment based on a worst case scenario.
- Use a Tax Advisor – many investors rely on their own accountant or Financial Advisor to maximise your profits through tax, however, there are so many tax advantages when investing in FHL property that the use of a specialist can pay dividends. Many of our existing clients have been shocked at the tax relief available but this usually requires a specialist in this market.
- Company v Personal Name – as the taxation on buy to let property is vastly different from FHL property, don’t assume that it is more tax-efficient and cost-effective to buy in a company name. Additionally, using a separate company for each property can also have added advantages when you come to sell the property, so seek professional advice on this.
- Don’t “Skimp” on Furniture – We have seen clear evidence that interior design can make a huge impact on your returns. And it’s not just about spending more money, it is important to match your furnishings with your target market and not just choosing what you personally like. Liaising with your management company is important here as they will know your potential tenants better than any.
- Adding to your Property – Many miss the opportunity of making cost-effective improvements or additions to their property in order to add value and increase the ADR (Average Daily Rate). Look at this as an ongoing project. Seek feedback from your tenants on how you can improve your property. In a recent study by Airbnb, visitors were asked how much extra they would pay per night for certain additions. The results showed that people would pay £68 more per night for air conditioning, £46 more for a hot tub, £28 more for a high chair, £23 for an indoor fireplace, £18 for a hair dryer, £5 for shampoo and £3 for clothes hangers in the wardrobe!
- Buy within your Budget – Important with any investment but even more when you are buying properties that tug more on the heartstrings than the purse strings! Try to control your emotions and buy with your head, not your heart. Work out how much you can comfortably afford and stick to that budget.
- Personal Use – It is important to be honest with yourself about how often you will realistically use the property yourself. Is this purchase a holiday home, or an investment? This is an area that can have a negative impact on the decision making process. I have seen many investors choosing a property that is right for themselves ahead of a property which gives a higher return. Also check with your management agent about the terms for personal use and the process for booking.
- Reviews – Management companies and owners in this market live and die by reviews. It is important that the property is only offered to the market when it is perfect. Ask all guests to complete a questionnaire, maybe in return for a discount off their next stay. If guests have a problem, they will look to voice their concerns and it's much better for you if they give you the opportunity to rectify the situation before they post a bad review online.
There are other considerations, but these are my top 20. If you would like to discuss Staycation property further, speak to our experienced team who have been providing high yielding and high growth FHL solutions to investors for well over a decade.