Seasonal rental: the truth about seasonal rental investment

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Seasonal rental or short term rental consists of renting for short periods. It is generally a rental by night, for one or more nights and to tourists passing through.

Whether in the investor clubs I attend, or on the internet forums, investors are all interested in profitability. And they're right. I used to say that rental return is an investor's compass. The one that guides him as he seeks his way. But that doesn't mean it's the only indicator to be taken into account. 

Seasonal rentals allow you to optimise the rental yield of an operation, compared to a conventional medium or long term rental. This is a fact. Profitability in seasonal rental is higher. In any case the gross yield. But what about the net yield? What are the costs associated with operating a night rental operation? What are the impacts of a seasonal rental in terms of additional costs? What are the legal issues? In this article I will bring you my professional and investor analysis.

Seasonal rental profitability: attention to the difference between gross and net profitability

The gross rental yield is calculated from the rents received, divided by the total cost of your investment. This indicator is one of the various indicators available to the investor - along with the internal rate of return, NPV, cash flow - and is very useful. In classic furnished rentals, i.e. with a long-term lease, the gross return is quite close to the net return. It is necessary to subtract the property tax and the amount of co-ownership charges. 

Higher maintenance costs in the short term 

But short-term rentals include higher maintenance costs. The service provided is close to a hotel service. The tenant does not feel at home. He must be seen as a customer who uses a short-term service. He is in a logic of consumables. Beyond the change of sheets, soap, bottles of water ... you will have to manage a faster wear and possible damage. And he is on holiday, so potentially in a festive atmosphere. He therefore cares less about maintenance. Someone who is at home always takes better care of the property than if he is in a place of passage, it makes sense. In financial terms, plan for an impact of 5% of the annual rent for maintenance costs, small repairs and consumables.

A strong impact of rental vacancies 

Another variable that has a much greater impact in the short term is the rental vacancy parameter.
The rental vacancy depends on several things: first of all on how you manage the operation of the premises. Second, market demand and your pricing policy. Thus your rental assumptions should be based on a 60% to 65% occupancy rate. This represents between 18 and 20 overnight stays per month. Avoid the error of over-optimism by thinking that the market was just waiting for your property, and that it will be rented 30 days a month.

If we take the example of Paris, supply is saturated. Over the last 5 years, a very large number of apartments for seasonal rental have appeared on the Airbnb platform. So much so that Paris has become the world destination in which Airbnb has the most apartments for rent (more than 60,000 at the beginning of 2017).

But competition means lower prices and higher rental vacations.  

High operating costs 

Finally, management costs are significantly higher for seasonal rentals than for long-term furnished rentals. While they are generally 7% of the rent in classic rentals, they are 20% to 30% in short-term rentals. And agencies charge a check in / check out fee. Several of my clients who had chosen the short term in 2015 have come back and are now renting long term.

Comparative table by vacancy

The rental yield in seasonal rentals is therefore a priori higher, but beware of the real return on the operation. The one you get after deducting all costs and without having to manage it yourself. Difficult to build a real estate empire if you spend your life doing check in / check out at all hours.

Short-term rental: a real legal issue 

Seasonal rentals have been subject to strong regulations in recent years.
It is accused by the Paris City Council of being one of the causes of the extreme tension in the rental market, and of driving rents up. Keep in mind that if you are renting for a short period of time, you will have to pay attention to two aspects: problems linked to co-ownership and legislative and regulatory problems depending on the location.

First, you will need to reread the condominium rules and regulations. Some co-ownerships simply prohibit this type of rental. Even if it is not prohibited, expect to face the discontent of the co-owners. It makes sense, since tourist rentals cause discomfort. I remember the case of a client who was renting on the 6th floor of a building in the marsh in Paris. The co-owners (some of whom were famous) moderately appreciated having paid 15.000€/m2 and hearing tourists talking loudly and dragging their suitcases up the stairs. Understandable in a way.

Then, you should know that the ALUR law of March 26th, 2014 has framed the seasonal rentals with obligations according to the size of the agglomerations. Thus for towns of more than 200,000 inhabitants and in the departments of Hauts de Seine, Seine Saint Denis and Val de Marne, you must obtain an authorization from the town hall before any short term rental. And as far as we can say that the law has not been made for authorizations to be distributed . It is necessary to rent a business premises of at least the same surface area and located in the same district. If you rent without doing so, the risk is simple: 50.000€ fine and 1.000€ penalty per day and per m2 until the regularization. Find out more about holiday rentals in Paris on the Paris City Hall website here. Enough to discourage the most determined.

In conclusion, seasonal rentals attract investors since the gross rental yield is very high. Often more than twice the conventional long-term rental yield. But beware. When you add the impact of the occupancy rate, maintenance, management fees, check in/check out, the return can be equal or even lower than a long-term furnished rental. Not to mention the frequent problems with co-ownership, and the very restrictive regulatory aspect.

Is seasonal rental a good plan? I think it can be. But beware, if the answer was positive without hesitation in the early 2000s, today you have to make all your calculations before choosing this type of rental. I know investors who are doing very well, most often in the provinces. But they are organized and have become more professional. Personally, I prefer other types of rental for my properties. I have less management and an equivalent return.  

editor's photo
  • Manual RAVIER
  • President, Investissement-Locatif.com

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