Investing in Serviced Accommodation: Should You be Interested?

Buy-to-let investment tends to focus on providing long-term lets for individuals or families, but those aren’t the only opportunities.

Investing in serviced accommodation is an alternative to the traditional rental market, and with the right property and importantly the right location it can deliver excellent returns on investment.

As property professionals we are always looking for opportunities for our clients, so let’s take a closer look at investing in serviced accommodation and whether it is appropriate for you.

What is serviced accommodation?

Serviced accommodation occupies an area somewhere between a traditional let and a hotel. We appreciate that’s a very broad description, so let’s narrow it down a bit!

The term ‘serviced accommodation’ covers everything from AirBnB (via holiday or business lets) to something very close to a self-catering hotel. Consequently it’s not for every investor.

TIP: For more information and a more in-depth explanation, this Friend & Grant’s article covers the serviced accommodation market and helpfully touches on some of the tax implications.

It’s also worth noting that from October 2022 landlords offering short-term lets in Scotland must apply for a licence to do so.

No such licence exists in England, however this article from Towergate Insurance may be of interest.

We realise that this is quite a lot of information to throw at you, however the serviced accommodation market is quite different when compared to the more common ‘buy a house, let a house, collect rent’ model.

Serviced accommodation: the good, the bad and the ugly

Are the upsides to investing in serviced accommodation sufficient to outweigh the downsides? What are the potential downsides? Let’s take a look.

The good…

The returns from investment in serviced accommodation can be substantially greater than that from a long-term let.

Average yields from serviced accommodation are generally at between 6 and 9%, which is more than acceptable. This is delivered through much higher rental revenue, as you’ll be letting by the night.

It’s difficult to define an average rental rate as these can vary dramatically based on a host of factors, including location, time of year, quality of the accommodation and many more.

If you assume a nightly rate of £100 as an example, that’s £3,000 for an average thirty-day month, generally well in excess of a simple residential let.

So far, so good. There is no doubting the potential benefits to the landlord, however compared to the buy-to-let market, serviced accommodation is indubitably more complicated.

The bad…

The Alan Boswell Group guide to investing in serviced accommodation covers a number of the aspects of serviced accommodation, and there are a few which you should seriously consider before diving in head first.

Your first consideration should be whether you can ensure a sufficient level of occupancy throughout the year to ensure that you cover your costs and see a return on your investment. This is known as the occupancy rate.

Then ask yourself: what level of occupancy do you need to achieve to achieve your required revenue? After that comes finance, assuming you’re not a cash buyer.

A buy-to-let mortgage is unsuitable for serviced accommodation, you’ll require a commercial mortgage. OurProperty has a guide to the two different forms of finance which might prove helpful.

In short, a buy-to-let mortgage does exactly what it says on the tin; lets you finance the purchase of a property to rent out. Commercial finance is aimed at supporting a business, and arguably serviced accommodation is more of a business proposition.

… and, the ugly

Finance aside, managing serviced accommodation can easily become a full-time job. Just think of a holiday property you’ve rented in the past, or an AirBnB you’ve used.

Did it come with bed linen? Towels? Was it cleaned between guests? Where was it listed to advertise its availability? How was the booking managed? How was payment handled?

That’s not an exhaustive list by any means. Serviced accommodation is like managing a residential let many, many times over in the space of the same year. This is one of the reasons that rental returns are higher; the service aspect.

You therefore need to be quite clear at the outset whether or not you are willing to commit to this level of involvement; work if you prefer. If the answer is no, you do have alternatives, but get your calculator ready.

Property management service

Where there’s a need, there’s a service! If investing in serviced accommodation is still shouting out to the business urge in you but you don’t want to be a chambermaid cum booking agent cum estate agent, someone else will do it for you. At a cost.

Companies like PillowPartners for example, offer to handle all aspects of managing, promoting and booking your property. Obviously they are going to charge you for this and you’ll need to work out whether or not the sums add up.

TIP: It may be that, despite the cost, such a company can deliver a higher level of occupancy thereby increasing your revenue and justifying their fees. The quality of the client-facing service will matter as well, far more than with residential lets.

We’re not suggesting that residential tenants can be abused, far from it! But, where serviced accommodation is concerned reviews and recommendations will play a greater part in your success, so your client’s experience matters.

Advice from the property pros

Investing in serviced accommodation has great potential to deliver an excellent yield through substantial revenue. It is a dynamic form of letting and can reward the bold, committed investor. You can sense the ‘but’ coming, can’t you?

But, compared to buy-to-let investment it is more involved and can carry a greater risk. For the majority of landlords the process of finding a tenant is not something that they have to go through on a weekly or monthly basis.

With serviced accommodation you’ll have to do this day-in, day-out, although you may have some longer-term occupants.

Neither type of landlord wants to see their property empty, but for the owner of serviced accommodation, who may have made substantial investments in the property beyond the cost of purchase, an empty property is a major concern.

Take advice from professionals regarding whether serviced accommodation is a viable option in the area in which you’re thinking of investing. It doesn’t work well in all locations, and getting it wrong could be very expensive.

Regular readers know that we believe strongly in seeking qualified advice before getting involved in property investments. The more challenging the investment, the more we recommend the value of knowledgeable advice.

In summary…

Thank you for reading our introduction to the serviced accommodation sector!

Serviced accommodation is a sector of the property investment market that can deliver excellent returns, however with those returns can come greater risks and complexity.

If you’re interested in whether serviced accommodation has a place in your portfolio, we’d be only too happy to arrange a meeting to talk over the pros and cons as they apply to you in detail – just pick up the phone and give us a call.

Written by Chris Wood, MD & Founder of Portolio

Get in touch on 07812 164 842 or email chris@portolio-user