In this episode, I want to look at serviced accommodation. Now, to be completely transparent and honest with you, this isn't something, that I personally doing myself. However, it's worthwhile thinking about this, because there are many investors out there, who are generating exceptionally high returns from this strategy. Being a part of the Progressive Community, I obviously get to hear what's happening. I've got a very good idea of how they're doing it.
If nothing more, I'd just like to wet your appetite, and maybe encourage you to find out a little bit more about it. But I'm just saying upfront, because I've got no problem admitting I don't know everything. I always find it very strange to be honest, when people assumed I do. Like, why should I? I'm just a normal person. I've been in property for 35 years, almost 40 years, actually. But it doesn't mean I know everything. Things are changing all the time.
Serviced accommodation is a relatively new strategy, which I think, is very exciting. But it's not one, which I do myself. So, I'm not pretending to be the great expert. So, let's start off.
What is Serviced Accommodation?
Let's have a think about what serviced accommodation actually is.
Now, unlike a single-let buy-to-let, with serviced accommodation, you essentially let a property out on a short-term basis. You let your property out to what we'll call guests rather than tenants, because you're letting the property out usually, by the night or at least on a short period of time.
So, rather than we would say a buy-to-let, where you have a 6-months tenancy or a one-year tenancy, you may be letting out your serviced accommodation literally for one night, or it could be for a weekend, or you can actually have long-term short-term lettings. I know of many people who're involved in the serviced accommodation sector, who get very excited, for example, when a contractor comes along, they want to take the property for 6 months. You can do that as well.
So, all things are possible. The thing is, it's very flexible. It's not as rigid as a buy-to-let, where you have to have a 6-month AST, assured shorthold tenancy as a minimum.
Quite often, the type of property that's used for serviced accommodation is the same sort of property that you would use for a buy-to-let or a single-let. However, when it's used as a serviced accommodation, the type of property although it's the same, it's going to generate much higher returns. Why? Because the type of fees, which we could call rent, which you can command for per night or per short stay, will be proportionately far greater than the amount you can charge for a 6-month or a year tenancy.
So, for example, it may be that, if your serviced accommodation unit is a typical sort of standard buy-to-let, you may get, £500 a month for it, depending upon where it is in the country. But you may be able to charge something like, £80 per night for it, if you're using it for serviced accommodation. Now, of course, you're not going to necessarily have it occupied every night. But you only need a fairly decent occupancy rate for those £80 per night to be more than the £500 per month, that you get on assured shorthold tenancy.
The Downsides of Serviced Accommodation
So, it all sounds pretty good, but what are the downsides?
- Well, in many ways, serviced accommodation is more of a business strategy than a property strategy, in that the amount of work that you need to do, is much more intensive. In fact, in some ways, if you think about it, serviced accommodation is much like a little B&B, but perhaps, just without the breakfast. In fact, an alternative name for serviced accommodation could be holiday lets, because in many, many ways, they are very, very similar, if not identical to the whole concept of a holiday let.
- So, you'll probably want to set your accommodation up a bit like a hotel. You'll need to furnish it. Now, depending upon where you are in the country, and depending upon what your tenant profile is, you may furnish your buy-to-lets, anyway. But this is going to vary. For example, I have a portfolio in the Northeast of England, and none of my properties in the Northeast are let-furnished. The local market doesn't expect the properties to be let-furnished.
But it could be that in your area, buy-to-lets are furnished. Regardless of that, you are going to furnish your serviced accommodation. You're going to need to provide all the furniture. You might want to put in a nice TV. You are going to be providing bedding. You're going to be providing towels, tea, coffee, milk and biscuits for your guests for when they arrive, it's a bit like a nice hotel. Just think of it, really as being a hotel, and you're providing hotel rooms, because that's the closest equivalent.
Like any hotel, you'll need to clean the rooms and change the linens every time your guests leave. Or, if they are for there for longer periods, you'll need to have a cleaner in, and change the linen on a regular basis while your long-term short-term guests are there. So, you're going to need to think about:
- Who does all the laundry?
- Who does all the cleaning?
- Who's going to do all the work for you?
- How are the guests actually going to get in?
- Are you going to have somebody to do a meet and greet?
- Are you going to have like, a little key box, where perhaps you punch in a code a bit like a safe, and they can get the keys out of that, which could be a way of doing it?
All of these things need to be thought about particularly, if you're taking bookings over, say, booking.com or Airbnb, something like that, where somebody could literally book just minutes before they turn up. If somebody books your serviced accommodation at 10 o’clock at night, how they're going to get in? All these things need to be thought about.
So, with all of these in mind, you'd probably going to need a team in place to support you. When we talk at Progressive about having a power team so you're going to definitely need a power team to help you with the serviced accommodation. Unless of course, you do it yourself, in which case, this will be highly management intensive for you. You're really creating yourself another job, and not an investment. But you know the returns are so good, you may say, well, Peter, I don't mind that, because it's just a matter of going out a couple of times a week to let somebody in. I don't mind doing that, because the amount of income that those properties are generating, makes it well worth my while.
So, there's more than one way of doing this. There are several models within this strategy, that you could adopt. For example, you could choose to have a model, where you effectively have, say, a single house that you let as a single entity. So, you let out the whole property once. Maybe, it'll be let to a family, and you could let the whole property. Or, you could have a single house, which you could almost operate like, a mini HMO, where perhaps you let each room separately. Or, perhaps you could have a house, which you turn into apartments. There are different ways of doing it.
But you want to be very clear as to how you're going to be doing it, because you're probably going to be looking for a different type of clientele. If you have just single rooms, which you're letting out, it is going to be more like a hotel. If you're letting out a house, which has got multiple bedrooms, but you're letting it to, say, one family, then you're looking for a different type of a guest.
I know as I said earlier, a lot of operators in serviced accommodation market, for example, get very excited about contractors, where you could have contractors sharing the house. They didn't really matter though, if they just want to have single rooms, and they have a room each. It's up to you really to decide how you want to provide it, and how the property is going to work best for you.
One thing, which you do need to be aware of, if you're going to get into serviced accommodation, is that you're going to need planning. Because one of the Planning Acts for this type of property, would not be considered to be a normal residential property. It's really a holiday let. For planning purposes, that's pretty much how they're going to treat it.
So, you're going to need planning consent. That's going to impact and affect other things, such as how you finance the property. So, when it comes to finance in serviced accommodation, the type of finance that you need, is going to be different from the type of finance should you use for a buy-to-let. You're going to need a commercial mortgage. And please let me just implore you here, please don't go off, and buy a property using a buy-to-let mortgage, but with the intention of using it as serviced accommodation. Don't then ignore the planners. We're going to think about insurance in a moment. But make sure you've got the right insurance. Please do it properly, because if something goes wrong, you're going to be in big trouble.
If you go off and buy yourself a property using a buy-to-let mortgage, intending to use it for serviced accommodation, and your mortgage lender finds out, they're rightly going to be quite upset with you. They’re probably going to ask for their money back, which could be rather awkward and slightly embarrassing.
Another thing you'll need to think about is things like,security and how the shared facilities of the properties are going to be used, and how they're going to be allocated between different rooms. This makes it all slightly more complex than having a single-let. But that's why we're already got a higher return, because we're putting a bit more work in and a bit more effort when making a higher return. That's the way it should be, isn't it?
One stumbling block, which I think a lot of new investors maybe don't appreciate, is that, not everybody likes serviced accommodation. Some Local Authorities are actually trying to restrict the number of serviced accommodation properties they have in their areas. So, they’ve brought in restrictions on how many days renting you can actually use a property for. Some Local Authorities I think, London, as I say I'm not an expert on this, but I seemed to remember, is it London, they’ve got a 90-Day Rule in place that prohibits properties from being let out for more than 90 days. So, you need to check in your local area, and find out what's happening there. Because obviously, if that's the case, it's going to make it rather tricky to run serviced accommodation business, if you're only going to let it out for a quarter of a year.
Again, don't be tempted to try and broke the law, and to cut corners. In experience, people who do that, they're usually sort of quite cocky about it at the beginning, and making out this sort of quite clever, but they get caught up with it, eventually. The smile gets wiped off their face. I won't want that to be you.
So, have a look. Find out what's happening in your area, and don't try and cut the corners. But it is something to consider, if you're thinking of doing serviced accommodation. What is the rule in your area?
I've mentioned earlier about insurance. That's another thing. You need to make sure that you have the right insurance in place. I mean God forbid that anything terrible happen like, the place caught fire. But, if it did, and you haven't got the right insurance in place, then you're going to be in big trouble. So, make sure again, you don't cut corners. Make sure that you got the right policies in place. Tell everybody what you're doing. Get bespoke insurance, which covers serviced accommodation.
How to find serviced accommodation properties?
I've said already that, they could be very similar to our buy-to-let properties. So, the chances, are that, we're probably going to find them in the same sort of places. Like, we'll find them at the estate agents in the normal way. I won't go into an estate agent and say, I'm looking specifically, for property which is suitable for serviced accommodation. Because they’d probably not really going to know what you want. But, if you start looking for properties, which are suitable for buy-to-lets particularly, I would suggest better quality buy-to-lets, and that's probably the kind of thing, you're looking for.
But again, you need to understand your target market, and who you think is going to be your properties.
- Are you buying properties in the city centre, for example, to compete with the local, budget hotels?
- Are you buying properties in an area, which is known to be popular with tourists? So, it's going to be people coming on holiday who are looking to use your properties almost like, a holiday let.
There'll be different types of tenants probably who want different types of properties. So, you need to understand what it is that you're trying to achieve, and what you're trying to create. But chances are, what you're looking for, your local estate agent is going to be the place to start.
There is an argument that it is a good thing, if your properties are like buy-to-lets. Why? Well, without being gloomy about it, and actually, this is a positive thing, I supposed. But, if it turns out that service accommodation actually doesn't work that well in your chosen area, then you've always got the capability, and the choice then to be able to turn the property back into a buy-to-let later, and not have to keep on with the serviced accommodation. You've always got like a Plan B. You can use it for serviced accommodation, if that works. But, if it doesn't work, you can then opt to use the properties for buy-to-lets. So, that could be pretty good as well.
Another way that we might find our serviced accommodation properties, is, by doing deals with other landlords and investors. We buy their properties especially, if we can get a good price, because they're selling, because of Section 24. As a quick recap, Section 24 is the provision that George Osborne brought in 2015, where he decided that going forward from 2015, he's going to restrict the amount of mortgage interest, that we can offset against our rent when we're calculating tax particularly, income tax.
One way around that, is obviously to put all of our properties into limited companies. I say that, I'm recording this just before the next Budget, that may change it in this Budget. If it doesn't change in this Budget, and by the way, by the time you listened into this, you will know. But, if it hasn’t change then, it may change in the future Budgets. None of these things are set in stones. Things are changing all the time. But at the time of recording, the case, is that, we can put our properties into a limited company, and that works.
But there will be landlords who are selling at the moment, who don't want to move their properties, or who can't move their properties, who are looking to sell. So, we may be able to buy them at a good price. If they were rental properties, which they would be, which is why they're selling, because of Section 24, they may make good serviced accommodation properties as well with a little bit of a modification.
By the way, while we're talking about that, I think I heard it said that Section 24 doesn't actually apply to serviced accommodation, anyway, because serviced accommodation is a commercial activity. So, you can still offset mortgage interest. But I'm not an Accountant so please check that for yourself. Also, as I say, that could change in any Budget. So, it hasn’t changed in this last Budget. It could change in a future Budget. So, just keep an eye on that.
Another way that we can find our serviced accommodation properties, is maybe, we can actually rent them off from other landlords, or rent them off from other property owners, and then sublet the properties as serviced accommodation. We're going to be looking at rent-to-rent actually in the next episode. So, I won't say too much more about that now.
Serviced accommodation can be a great strategy. I know a lot of investors in the Progressive Community who are doing very, very well. It's about choosing the right properties. It's about understanding who you're going to be letting the property to. It's about making the property attractive enough that people actually want to go and stay there. One of the key things to do, is, to make sure that it is nice, and that the photographs that you put up on booking.com or Airbnb, or wherever you advertise it, make the property looks nice so that you attract the right clientele, and you attract lots of clientele. But, if you can do that, that's absolutely no reason why serviced accommodation shouldn’t be a great strategy for you.
That's a quick through serviced accommodation, another strategy you can consider. Remember, at Progressive, we talk about 70/20/10. Don't concentrate on just one strategy. We think it's a good thing to actually sort of spread yourself a little bit. You want to put a lot of emphasis into your no. 1 strategy, the 70. But maybe your serviced accommodation can be your 20 or your 10, depending on how you feel about it, and depending on what else you want to do.