In the latest episode of the Progressive Property Podcast, we took a look at serviced accommodation. There are many investors out there who are generating exceptionally high returns from this strategy. Through the Progressive Community, we can see exactly how property investors and entrepreneurs are doing it.
If nothing more, we’d just like to whet your appetite and encourage you to explore serviced accommodation a bit more.
Serviced accommodation is a relatively new strategy, which we think, is very exciting. But it’s not one, which I do myself. So, I’m not pretending to be a 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 ‘guests’ rather than tenants because you’re letting the property out, usually, by the night or at least for 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. At Progressive Property we know of many people who’re involved in the serviced accommodation sector, who get excited, when a contractor comes along, and who want to take the property for 6 months.
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 the same, it’s going to generate much higher returns.
Why? Because the type of fees, which you can command per night or per short stay, will be proportionately far greater than the amount you can charge for a 6-12 month tenancy.
Example of Serviced Accommodation
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 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 monthly occupancy rate of 20% for those £80 per night to be more than the £500 per month from an 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. The amount of work that you need to do, is much more intensive. In fact, serviced accommodation is much like a little B&B, but perhaps, just without the breakfast.
An alternative name for serviced accommodation could be holiday lets. In many ways, they are very, very similar, if not identical to the whole concept of a holiday let.
You’ll probably want to set your serviced accommodation similar to a hotel. You’ll need to furnish it. Depending upon where you are in the country and depending upon your tenant profile, you may furnish your buy-to-lets anyway. But this is going to vary. For example, we know of portfolios in the Northeast of England, and none of the properties in the is let furnished. The local market doesn’t expect the properties to be let furnished.
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, towels, tea, coffee, milk and biscuits for your guests when they arrive. Just like a nice hotel.
What you need to consider with serviced accommodation
Like any hotel, you’ll need to clean the rooms and change the linens every time your guests leave. For longer stays, you could 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 a coded security box so tenants can get the keys out of that etc.
All of these things need to be thought about particularly if you’re taking bookings via booking.com or Airbnb. 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 considered.
With all of these in mind, you’re probably going to need a team in place to support you. At Progressive Property we talk about having 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 another job and not an investment.
Putting in extra work with serviced accommodation
You know the returns are good so 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 that because the amount of income that those properties are generating makes it well worth my while.
There are several models within this strategy that you could adopt:
- You could choose to have a model where you effectively have a single house that you let as a single entity. So, you let the whole property once
- Maybe, it’ll be let to a family and you could let the whole property
- You could have a single house which you could operate like a mini HMO where perhaps you let each room separately
- You could also have a house which you turn into apartments
But you need to be very clear as to how you’re going to do it. 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 to one family, which has got multiple bedrooms, then you’re looking for a different type of guest.
A lot of operators in serviced accommodation market get very excited about contractors, who could have shared the house with them. 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.
You need to consider planning
One thing you 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 means they are 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. 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.
We must remind you here, don’t go 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 cover insurance in a moment, but make sure you’ve got the right insurance. Do it properly because if something goes wrong, you’re going to be in big trouble.
If buying 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’ll probably ask for their money back which could cause numerous problems including defaulting on mortgage payments.
Local authorities ’90-Day Rule’ for serviced accommodation
Another thing you’ll need to think about are things such as security and how the properties shared facilities are going to be used. You’ll also need to consider how they’re going to be allocated between different rooms. This makes it slightly more complex than having a single-let. But that’s why you get a higher return because you’re putting in a bit more work and effort. That’s the way it should be, right?
One stumbling block, which most new investors maybe don’t appreciate, is 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 have a 90-Day Rule in place that prohibits properties from being let out for more than 90 days. You need to check in your local area and find the rules. If that’s the case, it’s going to be difficult to run a serviced accommodation business if you can only let it out for a quarter of a year.
Again, don’t be tempted to try and break the law to cut corners. Experience shows us, people who do that get caught. The smile gets wiped off their face. We don’t want that to be you.
So have a look. Find out what’s happening in your area. But it is something to consider if you’re going into serviced accommodation. What’s the rule in your area?
Serviced Accommodation Insurance
We mentioned earlier about insurance. That’s another thing. You need to make sure that you have the right insurance in place. If you have a scenario involving fire and you haven’t got the right insurance in place, then you’re going to be in big trouble. So, make sure you don’t cut corners and get the right policies in place. Tell everybody what you’re doing. Get bespoke serviced accommodation insurance.
How to find serviced accommodation property
Serviced accommodation properties could be very similar to buy-to-let properties. You’ll probably find them in the same sort of places. We don’t recommend going to an estate agent and saying “I’m looking for a property that’s suitable for serviced accommodation”. If you start looking for properties, which are suitable for buy-to-lets, we would suggest better-quality buy-to-lets. This should provide you with the kind of properties you’re looking for.
But again, you need to understand your target market and who you think is going to be your property.
- Are you buying properties in the city centre, to compete with the local budget hotels?
- Are you buying properties in an area, which is known for tourism? So, it’s going to be people looking to use your properties like a holiday let.
There’ll be different types of tenants who want different types of properties. You’ll need to understand what it is you’re trying to achieve and create. Chances are that what you’re looking for can be found at your local estate agent.
There is an argument that it’s good if your properties are like buy-to-lets. Why? Flexibility. If it turns out that serviced accommodation doesn’t work well in your chosen area, then you’ve always got the capability to turn the property back into a buy-to-let and don’t have to keep your serviced accommodation. You’ve always got a Plan B. You can use it for serviced accommodation and if that works great. If it doesn’t work, you can then use the properties for buy-to-lets.
Doing deals direct with other landlords and investors
Another way that we might find serviced accommodation properties, is, by doing deals with other landlords and investors. You buy their properties (if we can get a good price) if they’re selling due to Section 24. As a quick recap, Section 24 is the provision that George Osborne brought in 2015. He decided that going forward from 2015, the government restricted the amount of mortgage interest that you can offset against your rent when calculating income tax. One way around that is to put all of your properties into a limited company.
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. So, you’ll maybe able to buy them at a good price. If they were rental properties, which they would be and they’re selling because of Section 24, they’ll make well-serviced accommodation properties as well with a little bit of a modification.
Another way that you can find serviced accommodation properties is by renting them off from other landlords or property owners. You can then and then sublet the property as serviced accommodation.
Our final thoughts on serviced accommodation
Serviced accommodation can be a great strategy. Through the Progressive Community, we know of businesses doing very well. It’s about choosing the right property. You need to understand 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 both inside and out. The photographs that you put up on booking.com or Airbnb etc. need to make the property ‘pop’ so that you attract the right clientele. If you can do that, there’s absolutely no reason why serviced accommodation shouldn’t be a great strategy for you.
That’s our best advice for serviced accommodation. Remember, at Progressive Property we talk about 70/20/10. Don’t concentrate on just one strategy. We think it’s a good thing to actually spread income-generating avenues. You want to put a lot of emphasis into your number 1 strategy, the 70. Maybe your serviced accommodation can be your 20 or your 10, depending on how you feel about it.
Want to listen to the latest episode of the Progressive Property Podcast? You can listen to our serviced accommodation episode below.
Have a question or wish to find out more? Then simply get in touch with us today and a member of the team will be on hand to help.