Even if you own other residential or non residential real estate, short-term rentals or holiday rentals represent a completely different market and can help you diversify your overall portfolio as well as insulate you from market volatility. And if real estate is not currently a part of your investment portfolio, short-term rentals can be a great way to get into this area.

The unique characteristics of short term rentals that make it interesting are –

Exposure to residential properties

Short term rentals are primarily residential properties – either freehold houses or long leasehold flats / apartments that are furnished with all amenities required by a guest. These properties have a relatively lower entry price, and offer higher liquidity at exit when compared to other types of real estate in this sector such as hotels, guesthouses, etc. The nature of these assets also make it easier to find a mortgage.

Exposure to the high growth travel sector

These assets track the travel market instead of the housing rental market or the office market. As per Statista, the UK hotels and vacation rental market is projected to reach $20 billion in 2022 and is expected to grow annually at 11% to reach $31.1 billion by 2026.

Exposure to a high growth category within travel

Travellers are not only becoming increasingly comfortable with the idea of staying in a residential property while they’re on vacation or even on a business trip, but prefer short-term vacation rentals over traditional hotels. STRs are often more affordable, especially for groups. The research, by Mintel, showed that almost half (47%) of families looking at holidays were interested in a cottage or villa for future trips, rather than a hotel. Many people find they enjoy the practical comfort of a real residence over a commercial hotel, and STRs allow travellers to discover aspects of their destination they would never encounter at a hotel.

Exposure to cities with long term sustainable outlook

These properties are located in premium tourist destinations and the yields on these properties depend on whether these cities will retain their scenic beauty, weather appeal or historical importance. The local councils, government and local people are all incentivised to not only protect but also grow the travel economy in these cities.

Higher income potential

There is no doubt that short term rentals can potentially bring in more income than the long term rentals when the assets are operated under the right conditions. Yes, there are plenty of variables to consider such as occupancy rates, wear and tear, guest response, market seasonality and other factors that can affect the business. But, once the asset operations are set and online profiles are established, the asset continues to draw customers automatically and deliver higher income. Moreover, it’s possible to even generate recurring revenue. Many vacationers who enjoy their stay will consider returning the following year.

Tax advantages

Many landlords may find that a short term rental property, also called a furnished Holiday Let (FHL), is a more tax efficient alternative to buy-to-let properties. A furnished holiday let property is a separate category of buildings from residential or commercial as HMRC regards FHL as a trade. The tax benefits include capital allowances that can be claimed against furnishing the property, capital gain tax relief on sale by using schemes such as Entrepreneur relief or hold over relief, flexible profit sharing between spouses and most importantly, mortgage interest relief.

A strong supporting ecosystem 

Marketplaces like Airbnb and VRBO make it easier for owners to find renters and professional managers such as Sykes, Interhomes, and local management companies have made it easier for owners to get their properties managed and cleaned. Both together have enabled long term sustainability of the income on these assets

Long term capital gain opportunity

With adequate history of rentals, one can potentially sell the high cap rate Furnished Holiday-let or STR property operating at the market average gross yields, thus making a profit on sale. t.

Proven resilience

The STR asset class has also proven that it is resilient and can bounce back after catastrophic events such as Covid-19 pandemic. The below chart showcases the revenues of leading vacation rental players, hotel players, and revenue clocked by vacation rentals in the top 20 UK districts (as per Airdna) relative to 2019

These are just some of the reasons you might want to invest in a short-term rental or a furnished holiday-let properties, and create a portfolio of them