Easy maths to assess how good a holiday let investment is
As a holiday let property investor, your objectives will be to make enough profit to fund your investment and create the lifestyle you desire. Your first financial hurdle will be to hit breakeven – the point at which your rental income is enough to pay all your costs of ownership. When we discuss the buy-to-let investment with investors, we discuss how important it is to make an accurate cash flow projection. The same principle applies when you invest in a holiday let.
The objective of breakeven
Breakeven is essential as a first goal. It’s where your investment ceases to cost you money and starts making you real profits. Every pound of income above this point builds your profit. Every pound short is a pound you need to subsidise from other sources.
When assessing a property for its potential as a holiday let, you’ll need to do your research and buy in the best area and location. You’ll also need to buy a property that is attractive to visitors, whether they be singletons, couples or families. All this work could be wasted if you don’t carry out a cash flow projection.
The chances are you’ll need to finance your investment, and if you don’t earn sufficient income to cover your mortgage and other costs, you won’t make the profit you should.
Calculating breakeven not only helps decide whether the property is viable as a holiday let, it also gives you a good starting point to formulate strategies to boost year-round income and maximise profit potential.
How many weeks do you need to rent your holiday let?
The first thing to figure out when calculating your holiday let’s breakeven point is how many weeks you must rent it to cover your mortgage costs. Remember that, unlike buy-to-let investment, you deduct mortgage interest before being taxed on profits – one of the key benefits of how holiday let properties are taxed.
To work out your mortgage breakeven, you need to work out how many weeks you need to let your property to cover the mortgage interest payments.
For example, if your mortgage costs are, say, £500 per month, you need to collect £6,000 in rental income to cover this. If your holiday let rents for £500 per week in the peak season, you’ll need it to be fully occupied for 12 weeks to cover the mortgage interest payments.
Of course, your mortgage payments are not the only costs of owning a holiday let. You’ll also need to consider costs that include:
- Utility bills
- Property management costs
- Advertising and marketing
Let’s say that these total £5,000. Now your total costs are £11,000. If you can rent your property out for £500 per week for another 10 weeks, these extra costs will be covered: 22 weeks of holiday rental – or an occupancy rate of 42%. If your rental price for off-peak weeks is, say, £400, you’ll need to let the property out for another 12.5 weeks – a total occupancy rate of 47%.
Now you’re ready to boost profits from your holiday let
This breakeven calculation enables you to assess whether investing in the opportunity is viable. You’ll need to consider average occupancy rates of holiday let properties nearby. You may need to consider increasing the deposit you pay to reduce mortgage costs.
If this breakeven works out as obtainable – in our example above, let’s say that average occupancy rates are 50% – then you can start to plan strategies to increase occupancy rates and boost profits. Remember, every week over breakeven is a week of pure profit (minus commissions payable to letting agencies).
As a holiday let property owner, you have an incredible amount of control over profitability – especially as, with every satisfied guest, you have another contact to market directly to and cut your costs of letting. Therefore, as your holiday let business matures, it should become easier to rent out and boost your profitability.
Your investment objectives really could be achievable through holiday let investment. To learn more and discuss how to build the best letting strategy for you and your property, contact Gladfish today on +44 207 923 6100. We’ll be happy to discuss how a holiday let investment might fit in with an existing portfolio or be the investment to help you achieve your lifestyle goals.
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