Thinking of joining the booming short term rental / Airbnb market in the UK? The yield or return on investment on holiday lets can make it a very successful decision indeed. And while you plug in the numbers on your Airbnb and holiday let income calculator to compare yields on properties that catch your eye, it's worth being aware of the detailed costs when running a short term rental to make your next investment decision as accurate as possible.
In this guide, we'll break down the main expenses for you to consider when running the property as a holiday home. This should help you understand the likely return you will get on your money and how profitable your STR/SA business will be.
It may also show where you can make the crucial savings for how you to decide to run the business, and ultimately take home more net profit at the end of the day. For example, deciding not to outsource to a management company, or maybe capping the amount of debt financing you take out to minimise the interest costs. Perhaps you will need to be the host, the manager and the cleaner to keep those purse strings tight (!) - each STR/SA/Airbnb journey is unique but at least now you can go into each purchase decision with a more realistic idea of your outgoings.
Airbnb operating costs for hosts We've visualised the breakdown of the major costs into the pie chart below. Now let's dig into each of the key areas to see what it's comprised of and how you can manipulate it to your advantage - and ultimately increase that dark green profit slice.
Booking platform fees / OTA fees Let's begin with one of your biggest outgoings - it's effectively your marketing budget. To list your home on platforms such as Airbnb, Booking.com and Sykes Cottages to attract guests, you will have to pay a fee. Platform fees vary from 18-25% depending on the OTA (online travel agency) you use. As a result, it will be up there as one of your largest cost bases. We wrote an article comparing the different OTA platforms for UK holiday homes here so give that a read to get a sense of the landscape. What many established STR/SA companies do to reduce this cost is to double down on their direct booking marketing activity and attract repeat customers - but for newcomers, it's wise to forecast this OTA expense.
Service charge and ground rent If you buy an apartment or flat, you'll typically be buying a long leasehold (usually around 100-150 years). While these can make excellent STR/SA purchases, there will be a service charge payable (for keeping common areas of the building clean etc) as well as a ground rent payable to the building freeholder. The service charge and ground rent can typically both be spread out into monthly payments or you may choose to make lump sump payments e.g. twice per year. Note the better quality the building (read: more expensive) and the more amenities, the higher the service charge. Ground rents average from £100-£300 per annum but it's service charges to watch out for - they can range from £1000 to £2500+ per year depending on the building.
Mortgage interest for short term lets Similar to Buy to Let properties, you can take out interest-only mortgages for your purchase so you only have to service or pay the interest each month. That said, you may prefer a repayment mortgage so you pay down the capital borrowed and the interest in each payment. The interest rate you can achieve will vary depending on factors such as your deposit, term of loan and if you take a fixed or variable rate. From a quick scan of the market right now, rates could range from 4.5-6%+. You should seek proper advice from your mortgage advisor about what is right for your situation. And crucially when considering any property, think about its estimated earning potential relative to the required mortage to buy it - as a guide, your expected earnings have to generate between 125-145% of the interest cost. On each property listing on Airbuy and Sell you will get an estimated Airbnb revenue which tells you the likely annual income to help you.
Airbnb property management costs This will be a crucial area for you to consider because the costs can fluctuate dramatically depending on how you decide to run the business. Property management companies for STR/Airbnbs can deal with literally the whole process of letting out the home to guests, or you can pick and choose what service you require. Their services include everything from dealing with guest queries, sorting the check in and check out, looking after the cleaners, inspecting for damages and much more. Some companies will charge a fixed fee or you may choose to part with a % of your monthly revenue - there are pros and cons to both but the commission based structure does keep the management company aligned with the goal of generating higher income from the property. For a good proxy if you do utilise a management company, this cost could range from 15-20% of your revenue.
Software for Airbnb hosts There is amazing technology out there to help you optimise your Airbnb business. From utilising dynamic pricing tools on OTA plaforms to installing smart appliances for efficiency and guest experience, these are just some of the ways you can use tech to gain an advantage. Though it may not exactly break the bank, if you employ lots of software on a monthly subscription basis, it can quickly add up. Check out the tech tools to use in 2023 for your Airbnb for inspiration.
Utilities Get figures for the costs of the water, electricity, council tax, internet, and TV/streaming services to get the monthly/quarterly outgoing. Buying existing Airbnbs and holiday lets means you can get exact expenses from the previous owners.
Taxes Fewer things are more certain in life and it's no different in the world of STR/SA. You will need to keep aside cash for your quarterly VAT payment on items you purchase as well as (hopefully) for Corporation tax which is payable on your profit once a year (currently 19%). Seek professional advice here to check what your particular situation could mean with regards to which taxes you are liable for and the amount - you may be liable only for income and council tax if you are living in the property and renting out a portion, and operating as a sole trader. One tip here could be to check if you can register your property for business rates rather than council tax and, subsequently, claim small business rates relief. And another tip is to speak to your accountant about the VAT flat rate scheme - this could make a tangible difference for your business if eligible.
Restocking consumables for guests. The main items here are typically toiletries, kitchen supplies, and cleaning products. Furthermore, it can be good practice to store food for guests too (ideally with long shelf lives) so add this into your expenses too. Check out our guide on the best practices for Airbnb inventory management to get some further tips in this area to keep costs down.
Insurance for Airbnb hosts. This is mandatory for short term rentals in the UK. Airbnb offers its own insurance product, Aircover, which is pretty comprehensive however you should still get separate insurance if you list on other platforms and take direct bookings. Better to be safe than sorry. You can get an estimated cost of property insurance that includes contents and buildings insurance from the major online comparison sites, and you may also choose to add liability coverage in case another visitor is injured on the site, flood insurance, and even loss of booking income insurance in the event that you are unable to run the holiday let due to unforeseen circumstances.
Miscellaneous costs. Here you can include items such as extra linen and towels, and general maintenance of the property. And add a contingency to your budget for unforeseen expenses, repairs you didn't anticipate and even guest refunds for when things go wrong beyond your control (unfortunately, it does happen!). 10- 15% should be a sufficient amount of your budget to set aside here.
While this may seem a lot, the net result at the end of the day should make it all worth it. And hopefully the exercise demonstrates much of the expenditure is in your control and you can keep certain costs lower than others as required.
And if you're a first time buyer, you may prefer to buy an existing Airbnb property because you can obtain the actual costs of running the specific property when dealing with the seller. Simply filter for Active Airbnbs on the Airbuy and Sell Marketplace in the location you desire when searching.
If you liked this article about the breakdown of expenses for an Airbnb business, why not check out these other tips to help you succeed with your next purchase:
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