Serviced accommodation has a lot of plus points. Higher rental yields, tax advantages and growing demand are making more and more investors pay attention, but is there a downside?
Due to its nature, serviced accommodation is mostly found in city centres. This is no bad thing, as great capital gains can be found centrally, but it does mean there is a higher price point for purchasing.
For investors who have made a success of investing in less fashionable areas, this begs the question, can serviced accommodation be successful outside of city centres? Can you enjoy all the benefits without the price?
In order to understand whether serviced accommodation can be successful outside of city centres, you first have to understand why it works there in the first place.
Serviced accommodation is able to generate such high rental yields because guests are willing to pay more per night on shorter stays than they would when renting normally. This is great but it means that you have a far higher turnover of guests.
Whereas in a buy-to-let property you’d likely only need one or two tenants every few years, in serviced accommodation you need dozens, if not hundreds. Therefore, your property has to be in a location with a lot of visitors.
City centres work because they typically have a strong tourist and business trade, resulting in a consistent pipeline of guests. And clearly, investing in city centres is working. In London, the number of Airbnb properties has quadrupled from 20,000 to 80,000 in four years, and the rest of the UK has seen a similar trend.
Owning serviced accommodation in a city centre also ensures you’re surrounded by organisations who can manage your property for you. This is particularly useful, as the logistics of managing serviced accommodation are far more complex than a buy-to-let property, so hiring someone else to take care of it is a smart move.
So, it’s pretty clear why serviced accommodation works in city centres, but can it be successful elsewhere?
If you want to make serviced accommodation work outside of the city centre then you have to identify a location that provides the pipeline of guests we talked about.
One obvious answer is to buy in a city, just not its centre. This way, you may be able to purchase at a lower price, but still attract some of the tourist and business trade, so long as it is near good transport links.
Just be aware that visitors, especially from other countries, are unlikely to know there way around so you may find the demand is significantly reduced in comparison to city centre accommodation. You may even find that you’re only able to let your property at specific times of the year, such as the summer holidays, when demand is very high.
Another option could be targeting large towns where there is significant investment from businesses. While these may not have the foot traffic when it comes to tourism, you may be able to benefit from the increase in demand from travelling business people. If a town has a successful hotel trade it could be a sign that there is enough demand so long as you can undercut their prices.
Otherwise, there are plenty of places in the UK that aren’t city centres and have a strong tourist trade. Popular sea-side towns spring to mind, along with heritage sites and places of natural beauty.
The difficulty with these locations, however, is that you’ll likely find very pronounced peaks and troughs when it comes to income and demand. You may be fully booked for ten weeks in summer, but low on bookings for the rest of the year. For investors unused to serviced accommodation, this can produce a huge strain.
Finally, you may consider investing in an up and coming area outside the city centre, in the hope that its growth will make serviced accommodation viable in the future. While you’re waiting, you can rent it out on a standard assured shorthold tenancy. If this appeals to you, all you need to do is ensure you don’t buy a property with a lease that restricts use as serviced accommodation in the future.
Serviced accommodation in a city centre can be a big step for investors only used to traditional buy-to-let. Investing outside the city centre is an even bigger step and not one that should be taken lightly.
Running serviced accommodation is very similar to running a business. You need to keep a careful eye on your cash flow, understand how to successfully market your property and have a strong understanding of local and industry trends.
The last of these is particularly important if you’re thinking of investing outside of a city centre. While it doesn’t take much research to identify that Liverpool has a growing business and tourist trade, the same cannot be said for that seaside town or picturesque village.
If you fail to identify the right location, you not only risk having a serviced property that fails to attract guests, but you may not even be able to finance it.
Traditional buy-to-let mortgages are not suitable for serviced accommodation, meaning you’ll most likely need a commercial mortgage.
Securing this finance requires proving not only the rental value of the property but the business as a whole. What this means is lenders will look carefully at the location of the property to determine whether, through short-term lets, you can realistically afford the mortgage.
In short, then, finding a viable location for serviced accommodation becomes far harder when you leave city centres, though, not impossible.
Of course, it is possible to successfully invest in serviced accommodation outside of the city centre. However, for any investor considering doing so, the question has to be why?
While city centre properties are more expensive, the most popular profile for serviced accommodation is one and two-bed flats. In a city like Liverpool, these don’t have to cost a fortune and you can benefit from more security and better capital growth.
It goes without saying, though, that location is just one of the factors to be taken into account when deciding whether to invest in serviced accommodation. There are too many others to talk about in one blog post, which is why we’ve put them together into our Guide to Investing in Serviced Accommodation. Download your copy now to learn more.