When looking at holiday let investment properties, it is essential to work out your expected costs before purchase to ensure your investment will be profitable. The expenses of running a holiday let can be greater than that of Buy-to-Lets (BTLs) as a holiday let, though the income potential and tax benefits both are higher.

At some point in time, you must have wondered if running a holiday rental is worth it. Below, we will explain the income and expenses elements of a holiday let ownership and how you can make your business as efficient and profitable as possible.

Income

Income = Available days x Average Daily Rent  (ADR) x Occupancy 

– Available days – This is the number of days your property is available to rent to holidaymakers in a year.

– ADR – The Average Daily Rent is how much your property can charge for one night’s stay. For example, a 2-bed property in central Bath has an ADR of £169. If you compare like for like, you should compare only the nightly stay (not cleaning fees etc.).

– Occupancy – This is the average number of nights that your property will rent in your area. For example, if your property was available to the public for 300 days a year and you had a 60% occupancy rate, then your occupancy on average would be 180 nights.

What are the costs of running a holiday let?

– Marketing Costs – These are the costs paid to booking platforms such as Airbnb and VRBO to bring guests to your property.

– Business Rates – Business rates would be payable when your property is counted as a furnished holiday let and rented out for more than 105 days of 210 days. Another question would be whether holiday lets are exempt from council tax? You may be eligible for a discounted rate if you are a small business with a rateable value under £15,000/year. You will be liable for council tax if you don’t qualify as a furnished holiday let.

– Insurance – the cost of holiday let insurance will vary depending on the house size, type and location, but it is a cost which should be included in your P&L

– Electrical, Gas and Safety testing – This cost is an annual fee to cover testing and certification of electrical, gas and safety equipment in the home, and ensure that health and safety standards stay up to date. 

– Cleaning and linen expenses – Cleaning and linen expenses are usually paid to property management companies to ensure that the property is ready for the next guests. These costs can be a large part of your overall expenses, especially for those with properties in high occupancy areas. Also, most property managers will charge a flat fee on top of their management fees to take care of the work here.

– Utilities – (Water, Wifi, Gas and Electricity expenses). Wifi is usually a set fee which can be as low as £20-30 a month to cover a whole house. Water and energy are typically pay-as-you-go amounts but can sometimes be slightly cheaper if you pay via direct debit.

– Property Management – This is a monthly cost you pay to an agent to manage the property for you and deal with holidaymakers. These costs vary depending on location and property size, but on average, you should be looking to pay between 10% – 20% of your monthly profit for property management. 

– Your day-to-day property management costs don’t cover repairs and maintenance expenses. If, for example, you had a blocked drain or a broken sofa, then you would need to factor these costs into your P&L. We recommend building a small reserve budget for these expenses to cover them on an as-and-when basis. 

– VAT – You must register for VAT if your business earns over £80,000 (currently at 20%). If your company does not make this, you are VAT exempt, and this cost won’t apply to you.

– Mortgage Interest – If you have a mortgage on your property, then factor in any interest relevant to your holiday let, as this is a cost directly linked with your business. 

How much profit does a holiday let make?

Profit = Income – Costs. 

Profit for a holiday let usually ranges between 50-60%. The profit ratio may be lower than BTLs but, on an absolute basis, should be much higher.

Factors that drive profitability and make the investment more interesting:

– You create a more premium product on the same cost structure. Omah can help with financing and refurbishing the property. Speak to our team to learn more.

– You can drive higher occupancy with either better marketing or by ensuring utilisation of the property during the low season via long lets.

You must factor in all of the incomings mentioned above and outgoings to enable you to work out if your potential investment is worthwhile and profitable. It is worth stress testing your numbers based on income earned by properties on an average in the area and then income earned by top quartile properties on average. If in doubt, you can reach us, and we can provide you with a free analysis on the property you are considering.