Last year, the short term rental industry generated £3.5 billion for the UK economy. This money was influential in helping small businesses flourish, as well as helping existing companies reach new audiences. For people traveling to and within the UK, flexibility, authentic experiences, and reliability are becoming key factors when deciding on a vacation rental. As the short-term rental market continues to grow, many investors are wondering if this strategy makes sense for them.
Short Term Rentals In The UK
There are short-term rentals all across the UK, from penthouse suites in London to cottages in rural villages. According to AirBnB, there are 220,200 active short term listings across the UK. And this is just data from one short term rental platform. When you combine private short term rental properties with other online platforms, it’s clear the UK plays a significant role in this rapidly growing industry.
58% of UK investors rent an entire property out to travelers, while others rent out a single room in their private residence. A case study done on short-term rentals reported that the typical host earns anywhere from £2500 and £3800 annually from a single short-term rental in places like Scotland, Northern Ireland, and East Midlands.
Benefits of Short Term Rentals In The UK
Because the UK is such a popular travel destination, it makes sense for investors to purchase this type of property and take advantage of the passive income that it generates. Some of the reasons many experienced investors are turning to short-term rentals include higher returns, the ability to use the property when it is vacant, and because it is another way to diversify their investment portfolio.
In many cases, short-term rentals will generate more income than long-term rentals. This is because instead of getting one flat rate a month from a long-term tenant, you are seeing multiple tenants within the same time period who are paying more per night. Short-term rentals may require more fees in terms of maintenance and management, but even with these costs factored in, in the right market, UK investors who focus on short term rentals vs. long term rentals are often able to maximise their ROI more effectively.
The average rent in the UK varies depending on where you live. A one-bedroom flat can averages £650 (~ £1000) per month if you’re in the city. When it comes to short term tenants and vacation travelers, many tenants will pay close to that for just a week in a similar property. Landlords have reported earning 30% more in returns when renting the same property out to short term tenants vs. long term tenants.
Property investment is one of the few investment strategies that allow you to use the investment for your personal use. When there aren’t any tenants staying in the short term rental, the investor has access to use it as he/she wishes. The benefit of investing in short-term rentals is that it allows you to have a second home while generating income at the same time.
Many investors believe that short-term rentals are less risky because the tenants are diversified. You constantly have an influx of tenants coming in and paying different rental rates based on the season. With a long-term tenant, if they stop paying their rent, you immediately stop earning income. Then there is the costly process of eviction and paying for any damages they may have caused to the home. With short-term rentals, investors see a constant flow of income because there is a continuous flow of new tenants.
Risks Of Short Term Rentals
While the potential for significantly higher returns can be a draw for investors looking to invest in short-term rental properties, there are two major risks that are unique to this type of investment. The first is wear and tear and the second is voids
Wear and Tear
Because a property is seeing a constant rotation of tenants throughout the year, the property experiences a different kind of wear and tear than a normal permanent residence. The systems in your house that usually have a long-term lifespan, like refrigerators and dishwashers, will need to be replaced much more frequently in a short term property than in a long term property. Investors will need to factor in frequent repairs and replacements into their short term rental budget. Other features of the home, such as blinds, paint, and flooring will also see a higher traffic volume and in turn need to be upgraded and replaced more often.
While short term properties offer higher returns, the risk is that they also have the potential for long term voids. Short term rentals see high and low seasons, which could significantly impact the income your investment can make. During the holidays and peak seasons, investors can charge higher nightly rates and will almost always find tenants to pay these prices. During the slower seasons, investors can have a hard time finding quality tenants, and usually end up lowering their nightly rates and making less money. Investors should factor void periods into their budget so they do not find themselves in a financial emergency during these slower times.
Understanding Short Term Rental Regulations
In some places, the local government is making it more and more difficult for investors to manage short-term rental properties. In big cities like Las Vegas and Los Angeles in the US, It can be almost impossible to successfully manage a short-term rental in an industry that is run by hotels. Luckily though, the UK’s rules and regulations for short-term rentals seems to be a little more relaxed. Just recently, the mayor of London called for improved regulations for short term rentals in the city. While the rules and guidelines vary depending on where you are in the UK, London’s short term rental regulations state that:
- You can rent out your entire home for 90 calendar days without needing a permit
- If you are renting your home out for more than 90 days, you have to receive a planning permit.
- If you are living at home while you rent it out to travelers, there is no limit to the number of days you can rent it out.
- Even those who are exempt or have a council tax discount are required to pay council tax in full for short-term renting.
Thankfully for property investors, most counties in the UK have flexible guidelines when it comes to short-term rentals. This makes it easy to invest without dealing with strict lodging compliance or taxing laws.
High demand, flexible regulations, and the opportunity for higher returns all make short-term rentals in the UK region a very popular investment strategy. While there is no crystal ball that will allow us to see into the future of short-term property investments, it is safe to say that this rapidly-growing industry could very likely be the future of property investment.