Our Investments Director, Jake Wright, has shared some interesting insights with us, regarding the conversion to holiday homes. His involvement in the fieldwork within the Holiday Homes sector has brought out plenty of new information for someone who might be looking into short-term rentals as a source of income.
If you are considering converting your existing residential unit into a short-term let/Holiday Home (HH), there are a number of things you should assess and consider before taking on the task.
LicenseAll Holiday Home units must be authorised by the Department of Tourism Commerce and Marketing (DTCM). DTCM has a set line of rules and guidelines that must be followed for units to operate in a legal manner.
If you wish to instruct a third-party to manage the unit, the said company needs to have the requisite Trade Licence and be authorized by DTCM to manage HH (HH Operator).LocationAs with any property or business investment, location is key. Conduct a thorough analysis of the local area and potential demand drivers for the unit. Is it prime or secondary, luxury or affordable, leisure or business and compare that to other offerings in the area, both hotels and Holiday Homes?
The structure of Holiday Homes
There are 3 common types of structures:
- Lease Model: A Holiday Home Operator will lease the property, at or below residential market rates, providing secured income from a corporate entity. Service charge is still payable by the landlord but all other costs are usually the responsibility of the HH Operator. The cost and installation of furniture, fixtures and equipment (FF&E) can be the responsibility of either party and will be subject to contract.
Worth noting, if the HH Operator has brand standards to adhere to, the FF&E cost may be substantially higher than market rates.
- Management Agreement: A Holiday Home Operator will agree to manage your unit for an agreed percentage of Gross Income, typically between 15% – 20%. This structure has the potential to generate greater net income to you as the landlord but there is also greater risk and income is not guaranteed as with a lease. Annual income is derived from the average daily rate (ADR) and occupancy, also known in hotel terms as the revenue per available room (RevPAR). When identifying a HH Operator, it is key to understand the number of units they manage, their past performance, roles and responsibilities, (setup, furnishing, cleaning, toiletries etc), the channels they use to generate bookings (Airbnb, online travel agencies, they’re own platform) and so on. Keep in mind that online travel agent fees are in addition to the HH Operator’s fee and range between 3% to 25% of gross income.
- Self Manage: Fees are still payable if online travel agencies are used, with Airbnb typically charging 3%. While this has the potential to generate greater income than the former two structures, a considerable amount of time and money will need to be spent converting the unit. This can include but is not limited to, replacing old units, maintenance, painting, shopping for FF&E, furnishing, cleaning, ensuring the unit meets DTCM requirements, setting up a profile, managing the profile, check-ins, check-outs, disputes, cleaning again…
FinancialsGreater income is the main driver behind converting to a HH. If considering a Management Agreement or Self Managed structure, conduct a financial analysis, using market/third party assumptions, ensuring to factor in all day 1 and operating costs. If at a conservative RevPAR, net return projections are still attractive, then it may be worth the calculated risk.But before you do any of the above…Get an understanding of the required approvals from building management to conduct maintenance in the unit, any payments or deposits required to operate as a HH and the check-in process with building security…
That’s if the building management allows HH to operate in their building of course…
Earn a secondary source of income!
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