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Short-term rentals are shorter and more flexible than a 12-month contract. The typical landlord-and-tenant agreement is seen and treated more as the host-guest relationship.
Tourist hotspots like London and Bath see an influx of short-term lets as furnished holiday rentals. The most iconic example is Airbnb. Since its launch in 2008, Airbnb has grown excessively. With over 9 million worldwide users and 5 million properties in the UK alone, ‘self-contained’ or ‘peer-to-peer’ accommodation has become the preferred means of holidaying over the likes of hotels.
Long-term lets are your typical buy-to-let properties. Lease lengths offer a minimum of 6 months for tenants. Landlords may have one property or an investment portfolio that generates passive rental income flows from their tenancies. Rental payments from tenants are monthly and do not include bills. Apart from the occasional maintenance, investors need not do much other than receive passive income.
Following the pandemic and the surge of ‘staycations’, short-term lets quickly became the preferred means of holidaying. Unable to travel internationally, many looked within the UK for their holiday destinations. The ‘staycation’ boom saw landlords and homeowners taking advantage of this and proceeded to let out suitable properties to fill that ever-growing demand.
Storm-term rental houses are often more affordable than hotels. A total of 25% of UK holidaymakers have experienced a staycation holiday within the past 3 years. Almost half of the families (47% to be exact) are interested in renting a cottage or villa rather than a hotel for future trips.
The same is to be said for tourist areas. Rather than looking for villas or cottages to stay, people visiting a city for an event would look for a short-term house for rent, somewhere close to the centre. In the lead-up to such events, demand for short-term accommodation is high. This was recently seen in Liverpool for the Eurovision Song Contest.
Remote working has heightened the demand, too. If working from home is looking more permanent, short-term rental houses provide that flexibility to work from anywhere. Tenants can combine work and travel, exploring a new area while continuing to work.
Short-term lets have been so popular that the past year was forecast to hit the 2019 level of sales, reaching £2.1 billion in 2022 instead. Demand for short-term rentals in Europe last year surpassed 2019 and 2020’s numbers. In 2022, a total of 512 million nights were registered. This massive 7% growth from 2019’s figures reflects the resurgence of the ever-growing short-term let demand.
Short-Term Lets vs Long-Term Lets
What is the difference between short-term and long-term? While long-term rental landlords would look to the best buy-to-let areas where people want to live, short-term rental landlords would instead look to tourist hotspots, where people want to visit.
But it is not just the tenancy length or location that sets them apart. Despite the ongoing rise of short-term lets, only 1.5% of landlords are holiday let owners. Why is this? From upkeep and ongoing costs to the tenants and the property market itself, there are a few differences that can sway an investor either way. The short-term rental market is new, which investors can see as exciting or risky. So, what factors should buyers consider before making their decision?
Short-term rentals are more flexible than long-term holiday accommodation, which gives landlords more freedom. However, more work is needed to avoid potential void periods. Seeing as the property may sit empty between finding tenants, there will not be any capital appreciation during this time. Long-term buy-to-lets are far more consistent with cash flow, so are seen as the safer and easier option. But, if the landlord is prepared, this will not be an issue.
In total, costs make up 43% of a short-term let’s rental income compared to 31% of a typical buy-to-let’s. Even the costs usually covered by tenants in long-term accommodation are instead paid by the short-term landlord. This includes utility bills, council tax, and TV licence. Even with this, though, it is important to note that holiday rentals have still been generating a higher income and greater returns.
Using a short-term rental as a furnished holiday let can heavily rely on the tourist season, meaning the potential of longer and more frequent void periods. Tourism is a key part of short-term lets. However, they do not need to be limited to certain times of the year.
Location is key. Look to city centres or areas near the likes of sports stadiums or hospitals. These areas will see constant attraction for short-term accommodation without relying on times of the year, whether for students or visitors. Seeing where hotels or other forms of short-stay accommodation are is also recommended, as this is a sign of a tourist hotspot. Finding a profitable location will create a flow of passive income much like traditional long-term buy-to-lets.
With the furnished holiday let industry recently generating greater profits than traditional buy-to-let properties, short-term rentals are opportunities no investor should turn down before learning more. In the 2020-21 tax year, according to HMRC, short-term lets generated £15,600 while long-term lets made £13,400. As these types of BTLs grow in popularity and demand, and mortgage rates remain high, we expect short-term rentals to continue in their trajectory.
In some cases, depending on the length of stay, rent can be paid immediately upon booking. What is more, with the quick turnaround of short-term lets, potential void periods do not last as long due to their ever-growing demand.
The better the location and the quality of the holiday let, the higher the demand and rental prices for the property.
After investing in a buy-to-let property, the owner can offer it as furnished or unfurnished. As for short-term lets, the landlord provides a place for a guest to stay rather than a place to live. Due to this, short-term rentals are expected to be fully furnished and equipped with essentials, from crockery and cutlery to bedding and toilet paper.
There are higher standards in short-term lets than in regular buy-to-lets. Due to vast competition, landlords would need to keep up with changes to keep their property desirable to potential tenants. With the constant coming and going of guests, too, the general wear and tear is expected more frequently than in a long-term rental. The previously stated 43% of rental income includes this work in the total costs. When compared to the 31% predicted in long-term rentals, the extra costs to maintain and stock a short-term let are not as high as expected – especially when both rentals result in similar profits.
Time and additional work are required for landlords to maintain the property in-between tenants, with regular cleaning and re-stocking, in an effort to turn their property investment into a home. However, it is this work that makes a short-term rental successful. The more invested in its upkeep and décor, the higher its desirability, the chance of returning guests and, consequently, its rental income.
One reason that keeps investors from short-term lets is the ability to screen tenants. With most registered stays being prepaid, landlords do not need proof of a tenant’s payment reliability. However, concern about big groups, like stag and hen weekends, would put any landlord off. From short-term rentals increasing in popularity and demand, agencies are introducing property management services often seen in their regular BTL homes.
In most cases, too, the landlord does not need to meet the tenants. With property management in place, tenants can be met on the landlord’s behalf. This way, their reason for staying can be confirmed (so no stag groups sneak through!) before providing keys and showing them around the property. With property management, investors do not need to do a thing.
The Property Market
Short-term lets played a major role in recovering the UK housing market after the pandemic. And, with fluctuating mortgage rates now as high as 5%, more investors will be opting for smaller cash buys to use as short-term lets. As the short-term trend grows, long-term rentals will be less available for those who want them. Due to this, rent prices will continue to increase for those tenants.
The already stretched housing supply will see a significant impact if the rise of short-term lets continues. Landlords with an existing portfolio of properties are more likely to follow the trend and replace their long-term model with a short-term one, especially as demand and mortgage rates grow.
With the market constantly evolving, investors should be best prepared when it comes to their first or even their fifth property.
If new to property investment and wanting to gain capital over time by either renting a room or whole property, there are many aspects aspiring landlords should first consider. Equally, if current long-term investors are considering the switch to letting out short-term accommodation, research is still paramount.
The key to success for short-term house rentals is knowing what drives the demand. To keep both tenants and the consequent cash flow consistent, the landlord should keep a target tenant in mind to ensure that the property caters to their needs. Investors must look to tourist hotspots rather than investment hotspots. If an investor wants to grow their portfolio, following demand and adding short-term rentals can be an exciting next step.
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