Why holiday homes don’t make profitable property investments
Can’t resist the idea of owning that holiday home you’ve always dreamed of? Have you convinced your other half that you’re not only buying a place in the sun, but you’re also investing in your future?
For every 10 good reasons to invest in a holiday let, there are 10 more reasons shouting stop! Before you sign on the dotted line, make sure you’ve weighed up whether the pros actually outweigh the cons.
Fully booked? You should be so lucky
If you’re in it to make money, then be prepared to work hard and be in it for the long-term, especially if you have a mortgage on the property. Holiday rental owners spend an average of nine hours per week marketing and managing their properties. Do you have the motivation to work evenings and weekends – in addition to a 9-5 job?
Depending on where your property is located, and the region’s short-term rental rates, you will be lucky to cover the cost of your mortgage, let alone enjoy a profit at the end of the first, even second year.
To maximise your bookings, you’ll need to do some testing of what marketing channels work best for you. You may find in the beginning you struggle to fill your calendar. But the more efficiently you run your business, the more return you’ll see and your bookings should be increasing year-on-year, as you get more proficient at marketing and communicating with potential guests. Plus you’ll ideally working on getting repeat guests.
Rule of thumb: Ideally you should be working towards covering your 12 months of mortgage within the 12 weeks of summer peak season i.e. one week’s rent pays one month’s mortgage.
A double thud of bills on your doorstep
If hearing the slap of bills hitting your doormat each month already sends you into hibernation, then be prepared when you own a holiday rental. Not only will you receive double the utility bills, you’ll also be receiving bills for laundry, cleaning, maintenance, gardening, property management, pool cleaning, community fees, advertising, and everything else in between.
You’ll need to keep an even tighter control on your holiday rental bills because you don’t want anything getting switched off while you have guests staying. Your utility bills are also harder to control because guests tend to use excessive amounts of water and energy. They stay in the shower for an hour, leave the air con on all day (even when they’re not there) and fill the fridge up to bursting.
It’s a good idea to display your holiday rental rules somewhere in your home to remind guests not to overuse energy and water, as it won’t only hurt your bank balance, it will also hurt the environment.
Don’t scoff at marketing and management costs
Then of course there are marketing and management costs to take into consideration, both of which can take hefty chunk of your rental income. Your marketing costs are an essential part of your holiday let expenditure. In the beginning you’ll be using advertising portals, such as HomeAway or Holiday Lettings to promote your holiday home. But as you get more proficient at running your business, you should start to look at niche and local sites, and even your own website and social media channels.
And if you’re not living close to your holiday home, then paying a property manager is also a must. Expect to pay anything between 10-20% of your income. Yikes! A necessary evil I’m afraid, if you want to have peace of mind that everything is running smoothly while your tenants are (hopefully) enjoying their holiday.
Once you get to know the locality, and importantly, the locals. You may find it more cost effective to pay an individual to be on hand to welcome guests and be on call should anything happen during the stay. This could even be the cleaner.
And then there’s the tax
So, there’s the mortgage, the maintenance bills, the cleaning costs, the marketing and management fees. Then on top of that, you have to pay tax on your income! Like any income you earn, you have to pay tax on your holiday let income, so you’ll need to factor this into your rental rates and make sure you put it aside for the day the taxman comes a-knocking.
A summer holiday – forget it
Perhaps you already have a holiday home and the idea of renting it out is a way to cover some costs? Great! But if you want to earn any ‘real’ income, forget ever visiting your summer retreat again… in the summer.
Indeed all your peak season weeks, whatever the season, should always be left free for bookings as this is when you can charge the most. Any unfilled weeks should be promoted with a discount as last minute bookings. After all these are the weeks that will go towards paying off those 12 monthly mortgage payments.
A holiday is never a holiday, when…
And of course when you do finally get to visit your beloved holiday home, you’ll spend the first week fixing, repairing and buying yet more linen and towels. And the second week, you’ll sit there thinking it doesn’t feel like your home-away-from-home anymore. It will feel decidedly more lived-in, to say the least!
Be prepared to take a step back and distance yourself from what was once your holiday retreat. It’s now a business and open to the public, and together with the extra income you’ll enjoy, you’ll also have to accept the stained towels, broken cups, plates and door handles, and the lovely drawing that little Johnny left on your living room wall.
Warning! Unruly guests
Holiday rental owners get used to constant repairs, sofa cleans and buying in new kitchenware. It’s part and parcel of owning a holiday let.
But there is always a risk that guests could go above and beyond all expectations and leave you wishing you had never had the bright idea of renting your home out in the first place.
It’s super important to vet your guests before you confirm bookings. Don’t be afraid to say no. For example: do you want five 18 year olds staying the weekend in your holiday home in Devon? That depends on what type of home you have, just be aware that not all guests treat holiday accommodation with the respect it deserves, so the more effectively you vet bookings, the easier you can breathe during each stay.
Holiday home insurance is vitally important to ensure that you are covered, not just for breakages, but also for any serious issues you have with unruly guests, and also for any accidents that may occur when they are staying in your home.
You can’t cut through the red tape
Depending on where your holiday let is located, you may find that you will have to register your property with local authorities, and obtain a licence that states your home meets with minimum quality and safety standards. You’ll need to do your location research before your buy, to check what’s expected of you.
Standards vary, including within the same country. Spain is one such country, where quality requirements vary by region. Some expect all properties to have wheelchair access, others just air con. But in most tourist regions you must register your property. Failing to do so, could leave you with a very hefty fine and no profit for the next 100 years!
Is it worth it?
You can have a lot of luxury holidays for what it costs to run holiday home each year, plus avoid the stress and long hours managing bookings.
However, for many the draw of having an idyllic bolt hole to escape to makes it all worthwhile. If you have weighed everything up and have decided the pros actually outweigh the cons read our tips on buying a holiday home.