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Seeking holiday let revenue vs expenses guidance

Posted: Mon Jan 13, 2020 12:52 pm
by somersetcottageowners

My husband and I are in the process of purchasing a 3-bed cottage in Somerset to run as a holiday let, that we can also enjoy on occasion.

I am seeking some advice about revenue vs expenses figures we should be aiming for. Another member here previously told me 50% (before agency fees) was normal, and this was sounding in line with what we were expecting, until we received the actual revenue figures from the owners. The actual amount it has been generating is actually half what they told us originally, and now we are considering not proceeding with the purchase as we are likely to be making a loss.

The cottage has been operating as holiday let on airbnb for the past 3 years and when negotiating the purchase price, the owners they told us that the cottage earns 'a solid £10k per 6 months without pushing it', however we received the actual revenue figures from them last week and it has historically never earned much over £12k in a year! We had offered the purchase price (£370k) based on it earning at least £20k per year, but with these new figures, we are likely to be making a loss. We calculate the mortgage interest + bills are likely to be £12k annually (and that's not accounting for any cleaning/housekeeping fees).

What's more, I have consulted a local professional holiday let agency and without divulging the actual rental figures, the lady told me she would estimate the property earning between £12-14k annually (after their agency fee), so pretty much in line with the actual figures so still meaning we would make a loss. Another point she raised is that the modest open-plan living space is not really big enough for 6 guests and the fact there is only one bathroom is not ideal either. One of the bedrooms is off the kitchen, and I had suspected that this room should really be a study/snug, possibly with a daybed.

It seems to me that the problem lies in the fact the owners 'mistakenly' remembered the rental figures being double what they actually are and used this to inflate the property price during marketing and our negotiations with them, and also the fact that the property is really a 2-bed not a 3-bed, which again has been used to inflate the price. I believe the owners have been trying to sell it for a couple years, obviously it is not biggest enough for those looking for a 3-bed property, and too expensive for those after a 2-bed property.. The agent told us it was priced according to the business potential, but now having seen the actual figures this isn't stacking up! I think probably the owners and agent have also had a reality check, but we want to get our thoughts straight and have a realistic purchase price in mind before going back to them.

Sorry that's a long message. Looking forward to hearing your thoughts. Thank you so much :)

Posted: Mon Jan 13, 2020 3:52 pm
by zebedee
This is very disappointing for you,and I am sorry.

You need to consider the price of the property as just a house price unless it has been purpose built or has a covenant as a holiday let. Treat the purchase as such as well, so if you would normally put in an offer below the asking price in the local market, then do the same for your holiday let.

(Income from property is declared as unearned income, and not necessarily considered as a business by the taxman. That should be your first clue!)

On a more positive note, whatever the owners have achieved from it as a holiday let is not necessarily what can be achieved. Take a look at the Visit England guidance re self catering properties and test out the guidance with what you see in your prospective purchase. If you don’t buy this one, then it will seriously inform you for your ultimate choice.

For example, VE would require a second bathroom for a sleep 6 if you were to go for a decent star rating. Could the smaller room be converted to an en-suite or shower/toilet room? That would make it a much more attractive prospect for potential guests.

To what extent have the owners promoted the property imaginatively and fully? Have they just become tired together with the property? Would you have the vision and energy to do more than they do?

With regard to the agent, agent fees are 20-25%, but then they are subject to vat, so the real impact on your residual income can be nearer 30%. The agent probably (if they had anything about them) Googled your property before they met you and saw what it was achieving price wise - they would not want to promise you more and risk your wrath if you have a quiet year!

That does not mean the property can not achieve more with a smarter approach, marketing an nd presentation.

How attractive is it inside? Is it energy efficient? How old are appliances, bedding etc ? Is there an extensive range of good quality kitchen equipment that will last you years and impress your guests?

I am a remote owner with a Visit England 4* in an area attracting guests all year round (although January has been rubbish for a few years now). In winter, people will book weekends, but then don’t want to pay a lot and costs are much higher because of heating etc. The idea that you will have the same income over the winter as the summer is strange to me, and I wonder if that was something that perhaps was misheard either in the question or answer, unless you are local to a major all year round attraction.

My cleaning and changeover costs are a high proportion of my outgoings; I decorate frequently and promptly replace any linen or equipment that is not pristine. Every year money is also invested back into the property to improve it or the guest experience.

I had thought about replying to Greenbarn’s post as I don’t achieve the 50:50 outgoings he does with his purpose built 5*, but markets vary greatly in the holiday letting business.

We don’t know much about your prospective property, is it in an attractive area? Is it near a good sporting venue? Look at your local competitors and see if you can offer a property that is different (better) which will attract higher rates.

You can stay in your property and make little effort with it, but you won’t make anything of a noticeable surplus and with a mortgage you may well even make something of a loss.

If waiting for people to book is going to make you lose sleep because of the financial strain, then go for a different property with less financial strain.

Holiday letting is very rewarding when you read / hear the feedback from guests. But when you first start out, I would not want to be depending on any income from it, as there are uncertainties which mean you may be waiting a long time.

I hope this helps, and do let us know how you get on.

Posted: Mon Jan 13, 2020 5:03 pm
by ianh100
We operate a 2 bed and a 3 bed in West Dorset. We are inland which means the summer is a little harder to sell but actually means we get some reasonable income from commercial bookings via and air B&B in the low season.

In our area I would expect a good 2 bed to gross £16-£19k. Our property has a holiday use only restriction which mean it was a great deal less to buy then the property you are looking at but your location is critical to that.

We find our 3 bed 2 bathroom is much easier to sell as there is less competition, the 2 bed market is busy. I would try looking for similar accommodation across all of the booking sites to get a feel for rates, where you can look at availability and see how booked they are.

You can't just use one agency, we get an increasing number of bookings on, some via Airbnb, TA, OD and quite a lot direct via facebook. Different sites work at different times. We are also lucky at times to get a few longer bookings in the winter for a few weeks (people having building work done or visiting relatives from abroad).

I am not sure my 2 bed would make sense if we had paid over £300k for the property! We make about net 50% before tax but don't have a huge mortgage.

Posted: Mon Jan 13, 2020 5:47 pm
by Joanna
There are so many variables that it's very hard to predict. It sounds like it's realistically a 2 bedroom property. Even if you spent the money on adding another bathroom, you still need to have enough space for 6 people to sit in the lounge and at the dining table.

We have a 2 bed in East Devon and I agree with IanH100 that it just wouldn't work if we'd paid over £300k. To give you an idea, our cottage cost £165k plus we spent well over £30k rennovating it. Now it has a 4 star rating from the AA and it just about breaks even (Our overheads include a mortgage).

Note that if it's in the right kind of place you could extend your season by taking dogs, but you'll need to make sure you set up with that in mind - secure outdoor area, hard floors downstairs and so on.