Hello everyone, and I hope you are having a profitable year. I am a huge proponent of service accommodation, and it is the best financial decision I have made to date. I honestly believe it is a system that can work for just about anyone willing to invest time and effort in creating a competitive service. Whether you have money in the bank or down on your luck, it remains a quick and effective way to scale up and escape the rat race if you are diligent.
I was prepositioned with a rent to rent service accommodation two-bedroom property today. The property is decent and would work as a service accommodation. I was told that the Landlord was open to a 3 to 5 years old leasehold which is great because minor investments to improve the aesthetics would pay off over the long term. The rent is decent and wasn't the major stumbling block.
However, when I did my calculations, the number did not work based on one major stumbling block. This is the basis of my decision making.
The rent for the two-bedroom house is £800 and a deposit of £900. The monthly running cost breakdown is as follows:
Rent = £800 month
Council tax = £100 month
Water, internet, gas and electricity = £250 a month
Cleaning fee = £250 a month
Total = £1400 per month
To break even and make £1400 I need to add a further 15% booking.com and Airbnb commission. so total = £1400 x 1.15 = £1610
So each month, I need to make £1610 a month, just to break even, or I will be operating at a loss.
The service accommodation income fluctuates, and it has high and low seasons. But there is a general base rate you can count on, and it is the basis that I always make my calculation. I believe service accommodation is only viable if you can turn a profit in all seasons; rain or shine. Summer and December are great, but January shouldn't leave you empty either.
At 80% occupancy on the base rate, I estimate that the property could generate £2,000, and in the high season, this could perhaps go up to between £2,500 to £2,800. The high season is good, but my decision is determined by the base rate.
This means that, at 80% occupancy and £2000 gross income, the net profit would be £390. for me, this is not sufficient for all the effort and logistics involved in running a service accommodation, and I expect each of my properties to generate over a £1000 net income. For someone new to the market, this is not a bad starting point as you can realistically expect this meagre profit to double during the peak season.
While the agent that presented the deal to me has been extremely professional, and I look forward to working with her on another deal, unfortunately, on this occasion, the fixed sourcing fee was an obstacle to any hope of an agreement.
At the sourcing fee of £3,000 and a deposit of £900. it means that with the rate of return of £390 it would take ten months for me to break even before I start getting any return on investment, and it is too long. Ultimately, the sourcing fee made the deal financially unfeasible.
I know it is long, but I wanted to offer my sincere insight into the world of service accommodation.
Kind regards
Franklin Folahan
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