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The Pros & Cons of Serviced Accommodation / Short Term Lets as Investments

Man searching for Airbnb serviced accommodation on macbook

Serviced accommodation refers to fully furnished properties available for short-term let. It’s a term popular with property investors, and can be used interchangeably with short-term lets.

Short term lets range from holiday cottages, home stays and self-catering apartments and houses. They cater for the needs of tourists, those travelling for work, or people needing overnight accommodation. Since the advent of Airbnb and other online platforms, guests have increasingly used them for short stays as an alternative to hotels and B&Bs.

In this article, I explain how serviced accommodation works, and its pros and cons for the owner compared to the traditional long-term single lets. I do this from the perspective of someone who was an Airbnb Superhost, and is currently a landlord. I also explain how the sector is likely to face increased regulation in the near term.

The key difference between short term lets and assured shorthold tenancies, is that short term lets are not the guest’s only or main residence.

The Department for Levelling Up published a consultation on 12 April 2023 changes to planning law for short term lets. The definition proposed in that paper for short term lets is:

“use of a dwellinghouse that is not a sole or main residence for temporary sleeping accommodation for the purpose of holiday, leisure, recreation, business or other travel”.

DLUHC Consultation

How do short term lets work?

Guests pay to stay in the property, which is fully furnished and inclusive of amenities, housekeeping, and other services. They typically book on third party platforms, such as Airbnb and booking.com, as well as more local holiday lets providers. The provider pays all of the fees associated with this, although often the guest will pay an additional amount to cover cleaning.

This means that the serviced accommodation provider pays for all utility bills, wifi, linen and cleaning.

In contrast to assured shorthold tenancies, serviced accommodation and short-term lets are usually excluded from the Housing Act 1988 as the property is not the guest’s principal home. The guest typically stays between one night and a couple of weeks, as holiday makers or business travellers.

Serviced accommodation requires a lot of management, with guests constantly coming and going. The units need cleaning in between guests, and linen replacing. Due to this high amount of work, providers often use a specialist management company. An example is CambHost, a specialist short-term let management company in Cambridge, which I personally used when I let a flat on Airbnb in 2019.

The money earned is taxable income in the UK if you host as an individual.

It is also a popular strategy for those providing accommodation on a rent to rent basis.

Pros and cons of serviced accommodation in the UK

Pros of serviced accommodation

1. Tax

One big advantage of serviced accommodation in the UK are tax advantages it has over single lets, provided the property is let as furnished holiday accommodation. This means the property must be available for at least 210 days in the year, and actually let for at least 105.

If it qualifies as furnished holiday accommodation and the owner is an individual, the Section 24 interest relief restriction will not apply. This means they will be able to set off the full mortgage interest payments against profits (see my explanation on Section 24 here).

As with all tax rules, this may change. The Office of Tax Simplification published a recommendation on 25 October 2022 to treat mortgage interest for furnished holiday lettings the same as residential lettings.

2. Little regulation

Furnished holiday accommodation in England is also not currently subject to the same regulations as the private rented sector, as they are not assured shorthold tenancies. They are not the guests’ primary residence, so the Housing Act doesn’t apply.

If anything, the regulation comes from the feedback given by guests on Airbnb, booking.com and TripAdvisor, where a negative score, whether fair or not, can have a drastic impact on future bookings. Therefore standards of repair and decor are often higher in serviced accommodation than in rental accommodation.

3. Higher income (theoretically)

Another big advantage is that it is often possible to charge more for serviced accommodation than single lets under a tenancy agreement. It is a way of potentially increasing the yield on a property in areas where there is more demand than supply, and rents are comparatively low.

4. Flexibility

It is useful if the owner still needs to use the property, as a way of obtaining an income from the property when it is empty. This is how Airbnb originally developed, before individuals putting their properties on Airbnb for short periods became increasingly replaced by professional providers of serviced accommodation.

Cons of serviced accommodation

guest stayiing in airbnb serviced accommodation
Serviced accommodation is part of the wider tourism industry, and with that comes different pressures

There are certainly some disadvantages of serviced accommodation, and I speak from experience here as a former Airbnb SuperHost.

1. Upfront costs

Unless you are putting a property you already own and live in onto Airbnb, the upfront costs are high. The property will need to be furnished to a high standard, including the kitchen equipment and soft furnishings. This is expensive.

2. Ongoing bills

Bills are high in serviced accommodation. Although short-term self-catered lettings usually qualify for business rates, and not council tax, all bills are payable by the provider.

I found with my flat that guests would have the heating on high, and use a lot of water. They had no incentive not to use it, unlike tenants who usually pay their own bills (apart from HM0s). I had a Google Nest thermostat, which meant I could turn down the heating remotely, but the bills were high.

There is also the cost of wifi and TV subscriptions to Netflix or Sky, if you want to offer that service.

The cost of the cleaning paid by the guests was not enough to retain “sparkling clean” status, so I subsidised this.

I found there was considerably higher wear and tear on my flat and all the furnishings, than with tenants. Anyone considering SA needs to factor this into the ongoing operating costs.

Finally, there’s the cost of the extras, like soap, hot drinks, shampoo and loo roll. It does all add up.

3. No guarantees

Whereas once you have a tenant in a single let, you know they are likely to stay on average for around 4 years, there are no guarantees with serviced accommodation.

It remains vulnerable to changes in demand, particularly at a time when people are cutting back on discretionary income for travel. After a few years of “staycations” being popular, it remains to be seen if this will continue. Especially as we’re in the midst of a cost of living crisis, with inflation increasing more than wages.

Is now the time to be placing all your chips on a precarious form of income?

4. Voids

Serviced accommodation is vulnerable to voids, even the loveliest properties at the best of times. For instance, if someone books for a long weekend, it mean the property won’t then be available for someone who wanted it for a week, or a month.

It can therefore be hard to get high and efficient occupancy, without moving to weekly lets. However, the problem with weekly lets is that people do often only want to stay for the weekend. It depends on the demand where you’re located.

The Future: Increased regulation

Regulations and compliance on paper on top of accounts

Finally, serviced accommodation / short term lets remain vulnerable to changes in the law. For instance, during the Covid lockdowns, the serviced accommodation industry in the UK effectively closed due to restrictions on travel. By contrast, tenants continued to rent. Although landlords were subject to some restrictions during lockdown, most landlords continued to receive the same income as before.

There have been calls from a range of organisations, commentators and politicians for greater regulation of the sector. This is because they perceive detrimental effects on the local availability of housing for renters and first time buyers. This is a risk for the sector.

Restrictions are already in place in London where those who wish to use residential properties for short-term accommodation for more than 90 nights a calendar year need planning permission. Many other local authorities in the UK have been considering limiting serviced accommodation.

The spot-light has been turned on serviced accommodation on a national level across England (and separately in Wales and Scotland). Many have been calling for it to be subject to the same rules as the private rented sector.

There are two pending consultations for increased regulation of short term lets:

1. Consultation new C5 Class for short term lets

The Department for Levelling Up published a consultation paper on 12 April 2023 on introducing new use class for short term lets (C5) and associated permitted development rights.

This would work on similar basis to Article 4 Directions for HMOs. Existing properties would automatically fall into class C5, assuming they meet the definition.

Here is the link to contribute to the DLUHC consultation, which will close on 7 June 2023.

2. Consultation on new registration scheme

On the same day, the Department for Culture, Media & Sport issued a consultation on a registration scheme for short term lets. This had been mooted in the Anti-social Behaviour Action Plan published in March.

This is the link to participate in the DCMS consultation, which also closes on 7 June.

Final thoughts

Short-term letting has been booming, with a 40% increase in the number of holiday lets in England since 2018. It’s become big business.

Serviced accommodation has many benefits. However, it is considerably more stressful to operate than single lets, with the constant anxiety about the next review. This is true, even when professional agency manages the property.

Apart from corporate lets, serviced accommodation is part of the wider tourism industry. This brings with it all of the demands of dealing with a demanding public.

If relations deteriorate with a tenant, there’s no lasting impact. However, a few bad reviews can have a disproportionate impact on future bookings.

Finally, more regulation is a question of when, not if, for short term lets / serviced accommodation. Investors should take this into account when appraising future projects.

Photo of double bed in nicely presented serviced accommodation short term let
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