The Long and the Short of Short Lets as an Investment
I recently met with a property owner who was struggling with the decision between letting their investment property as a long-term or short-term rental. It’s a question I am often asked by investors, looking to enter a niche market that has grabbed so many headlines in recent years.
In broad terms, from my time at Rettie Short Lets (formerly Edinburgh Festival Rentals), I’ve found if you have a well-presented flat in a popular area, your net income is likely to exceed its long-let equivalent. However, this may not last much longer.
The density of listings on Airbnb in Edinburgh now exceeds other popular tourist destinations such as Barcelona, Berlin, and London, and local sentiment has built towards capping short lets in the city. After a recent Edinburgh Council consultation on this matter, we expect legislation to be introduced to regulate short lets in the capital. This may result in short let licensing or planning requirements, with rental returns subsequently adjusting to align more with long lets. We welcome such regulation and look forward to the recommendations of the Council.
Whilst we wait the outcome of the Council consultation, I thought I’d list a few key pros and cons to short lets.
- Higher income (for now!) – Provided your flat is achieving good occupancy levels and is well priced per night, your net income will likely exceed what it would achieve on a long let basis. Though this may soon change! (See disadvantages).
- Flexibility – Many of our short-let landlords want to let their flat out whilst they travel or work abroad. Short term letting gives them the opportunity to pick and choose when they use their homes.
- Certain tax breaks & deductions – Whilst I can’t give tax advice, it is possible to offset furnishing costs against your pre-tax profits as ‘allowable expenses’ and you should be able to claim certain Capital Gains Tax reliefs. Always speak to your accountant for exact details, restrictions, exemptions, and guidance.
- Less consistent occupancy – Our long lets average around 97%+ occupancy. Short lets, due to their seasonality, can average (broadly speaking) around 70% over the course of the year.
- More costs & maintenance – You, and not the tenants, pay all the bills on your property. You also may find with more popular short lets that the property is prone to more frequent accidents and breakages, which will mean spending a bit more ensuring that your property and its furnishings are kept in tip top shape.
- Requires a lot more effort to run – Unless, of course, you use a reputable good short let management firm, like Edinburgh Festival Rentals, who can handle all day-to-day change-overs, maintenance, bills, and cleaning for you.
- Growing competition – As more people look to capitalize on short lets, this can have the inverse effect of saturating areas, driving down occupancy and nightly rates.
- Incoming regulation – This will likely reduce the profitability and ‘ease’ of short lets from its current state.
Ultimately, I think much of the decision-making process is driven by personality. Short lets may feel like a bit more of a gamble: higher stakes, higher risks, and a bit more rock n’ roll. This edgy feel can be tempered by the mundanity of organising cleaning after each stay, and having to pay close attention to lightbulbs, bathmats, and cutlery counts, if you decide not to use a management firm!
To quote our Director of Research, Dr John Boyle’s recent commentary on the topic, short lets have seen lucrative returns in the past but “investors in the sector will need to be careful. Regulation is inevitable and, once introduced, short-term letting will likely no longer be as profitable or easy.”