This week marked a memorable milestone on the SA journey for Chris and I – we handed back our first three Rent-to-Rent flats!
In June 2016, after a few months of our heads were swelling with the ideas of several different exciting property strategies, we committed to focusing on Serviced Accommodation. A few weeks later, after multiple phone calls, viewings and rejections, we finally thought we had a tiger by the tail – our first R2R secured in the West End of Edinburgh.
This is the flat that marked the beginning of our SA journey. The unit we cut our teeth setting up for serviced accommodation – we managed to take what felt like an excessive number of hours to kit out the property (even though it came partly furnished), we had the place redecorated, we shopped around for living room items and we even bought and ironed new curtains. Photo evidence of the curtain ironing included.
At this point we hadn’t yet done a course (that came a couple of months later), but we were committed to taking action so jumped in. We thought we couldn’t go wrong with Edinburgh, our fine capital that brims with tourism in the summer months and still has a steady year round visitor and business travel trade. How could we possibly go wrong?
Without writing war and peace, here are a few of our key learnings that we hope can help serve those getting started in serviced accommodation:
- One bedroom city centre properties are one of the hardest types of SA unit to make profitable, Why you ask? The location and the size means the typical audience these properties serve are couples or friends on 2-3 night breaks. And for that market there are loads of options and competition from cheap hotel rooms to cheap one bed SA units run by the owner on a very lean model.
- The nature of multiple 2-3 night stays means more cleaning and linen costs per week (ie 2 or 3 changeovers vs 1 per week from a booking of 7 nights plus).
- August was amazing, but any wannabe can make money in Edinburgh in August. What happened in Oct, Nov, Jan and Feb wasn’t pretty, but we remained optimistic.
- As we scaled up to 4 R2R units within a few months, we soon realised that the booking revenue quickly exceeded the VAT threshold, meaning hello to an immediate 9.5% additional cost (at the point of breaching £85K, 9.5% is the rate on the flat rate VAT scheme for the first year)
- When you rely on booking.com to fill your beds, it gets pretty expensive to handover 15% of the booking revenue. Particularly when you know you have to also absorb 9.5-10.5% for VAT (which you SHOULD set aside each month in order to have ready to pay the VAT bill each quarter, or you face a large and unexpected bill).
- The nature of these one time city visiting guests meant we were capturing little to no repeat business and therefore direct bookings (and the associated savings) were going missed.
- We jumped in before fully understanding the legislation ie flats require planning for SA in Edinburgh and although it is somewhat of a grey area at the moment in regards to how it will be enforced, we just didn’t want to sit on wrong side of planning.
Reading the above may be enough to turn off those thinking about getting started in SA. That is absolutely not the intention. We have absolutely no regrets, this is the experience that got us started, from which came the lessons that led us to pivot and grow. I think it was Bill Gates who said that,
‘Early success is a lousy teacher”.
Had we been a run away success out of the gates, we probably would have over-invested into a location and model that was not sustainable. But of course we didn’t know that until physically testing it. [Quick caveat – our experience in the location mentioned doesn’t mean all one bedroom city centre SA units across the UK don’t work. I’m sure there are many locations where it does work, when you know the audience you serve and how to serve them.]
We have a huge amount of gratitude for our SA management agent who helped us get things set up in the early days and patiently taught us lots of operational insights that helped us set up in the out of town areas that we later pivoted into.
The days of seeking to quickly add vast numbers of SA units has been tempered in favour of quality growth. Our portfolio is now smaller, but as a whole far more profitable. This is where the old adage of ‘Revenue is vanity, profit is sanity’ really rings true.