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The London rental property market is an effective way to grow your portfolio. Reports reveal that the average rent in the UK is at £1,223 per month and continues to increase as demand rises. With London being one of the most popular and progressive cities in the world, it will always be densely populated - leading to a consistently high demand for rental properties.
This brings a huge opportunity for multi-property owners. If you have multiple property investments, you can take advantage of London’s popularity by renting them out. There are several letting strategies that you can use to maximise the earning potential of your portfolio.
Two of the most common options are long-term and short-term letting. Both letting strategies involve renting a property for a price. The difference lies in the rental period. Long-term letting involves a lease contract of 6 months or more. Anything less than that falls under short-term letting.
In this article, you’ll learn more about these 2 letting strategies including the pros and cons. You’ll also get tips on choosing the best option to help your portfolio achieve significant growth.
Long-term Letting: Stability with Less Flexibility
Long-term letting is a type of rental arrangement between a property owner/landlord and tenant/resident. Most of these contracts are between 6 to 12 months long.
Because of the length of the rental agreement, this letting approach offers stability to multi-property owners. It’s easier to predict the rental income of the property yearly. But there are also a couple of trade-offs if you choose to use this option.
Pros:
One of the primary advantages of long-term letting is the steady and reliable income it brings. For multi-property owners who used the buy-to-let mortgage to acquire rental properties, this is good news. The income stability means you can enjoy consistent cash flow to fund mortgage payments, tax payments, etc.
Another benefit is the lower vacancy period and turnover rate. If the contract is 1 year, you won’t have to worry about the property being vacant for the next 12 months. This will boost the occupancy rate of your property and lower your marketing expenses. You don’t have to advertise your property or conduct viewings and tenant screenings. The lower cost will increase your rental income significantly.
Long-term rental properties also require less maintenance. Usually, the resident takes care of cleaning and minor maintenance works like fixing leaky faucets or replacing light bulbs. It’s part of long-term lease agreements. Unless it involves structural damage or a major system that has to be fixed, the resident takes charge of repairs. This will alleviate the workload on multi-property owners and they won’t have to intervene too much.
Cons:
Although there’s stability in long-term letting, the rate per night is lower compared to the shorter alternative. Think of it as a perk that the resident will get for letting a property over a longer period. They get lower rental rates in exchange for the security of a steady rental income.
You’ll also find that long-term lease agreements are more rigid. Even if you’re the property owner, you can’t change the rental rates or terminate the lease as you please. You’re bound by what’s stipulated in the signed contract. The rental rates can only be renegotiated after the existing lease agreement expires. If the resident wants to extend their contract, you can choose to raise the rates.
Long-term leases are also more prone to delays in rental payments. The stability that it promises is reliant on the tenant’s ability to meet the due date. If the resident goes through unfortunate circumstances like a job loss or medical emergency, they won’t be able to meet some financial responsibilities. This is unavoidable so it’s best if you have a contingency plan so these events won’t affect your monthly cash flow.
Short-term Letting: Higher Income and Turnover Rate
Short-term letting is a type of temporary rental arrangement that can cover a few days, weeks or months at a time. Most wouldn’t last for more than 3 months - in which case the letting agreement will probably be considered a mid-term letting (3-6 months).
A great example of this type of letting includes Airbnb, VRBO, Booking.com, etc. Short lets offer a higher income potential - but it could also mean a higher turnover rate for properties.
Pros:
The higher profit potential is the main reason why a lot of landlords are choosing short-term letting over the long-term option. Short-lets enjoy a higher nightly rate compared to long-term rentals. If a property is in a tourist hotspot or near a popular landmark, this will command premium rates. It will even be higher during special events or peak holiday seasons.
Since guests only stay over a short period, you have the flexibility to adjust the rental rates depending on the current market trends and demands. The next guest wouldn’t know how much the previous one paid anyway. Besides, Airbnb platforms have dynamic pricing algorithms that change rates automatically. This will help you maximise the rental income of short lets. You can also offer discounts to encourage longer stays and higher booking fees during off-peak seasons.
The flexibility of the booking schedule also means short lets allow multi-property owners to stay in the property for personal use. This would be harder to do with long-term rentals because the property is occupied for months or even a year at a time. With short-term letting, owners can choose dates between bookings to stay in their property.
Another benefit of short-term letting is the maintenance of the property. Cleaning and maintenance happen in between bookings. This ensures that the property can maintain its good condition and premium quality. The need to present the property in its best condition for the next guest will help preserve the value of the short let. If there are issues, they can be identified and dealt with immediately.
Cons:
The benefit of short-term letting is also its downfall. The high turnover rate may open more chances for property maintenance - but it will also cost more. Unlike long-term letting, the guest won’t be as concerned about leaving the property clean. You’ll have to pay for the cleaning of the property in between bookings. While the cleaning fee can be added to the booking rate, it will still leave you with additional work. You must monitor the cleaning schedules and coordinate them with the appropriate service provider. This means keeping track of check-ins and check-outs.
The administrative work will also increase with short lets. You must deal with guest inquiries and keep communication channels open for requests or issues. The effort to manage guest arrivals and departures will increase in frequency and without the right help, it can be time-consuming. This does not even include the effort needed to manage bookings and market the property.
The high turnover rate also means your income won’t be as stable as long-term letting strategies. The property’s performance will be affected by seasonal fluctuations and market trends. It will also change based on travel patterns, economic conditions and even local events. It’s important to anticipate these factors so you can implement pricing strategies that will maximise the earning potential of the properties.
Finally, short-term rentals are strictly regulated in the UK. In London, you can only rent out short lets for a total of 90 days per year. You can only exceed this limit if you get planning permission. Make sure you understand the rules and regulations surrounding short lets so you don’t get in trouble with the local council and it won’t compromise your property’s earning potential.
4 Factors to Consider When Choosing a Letting Strategy
Both long-term and short-term letting strategies can help your properties earn a sizable rental income. But there’s a letting strategy that suits your investment goals and portfolio’s unique situation. You have to identify which one can maximise the earning potential of your property.
Here are 4 factors that you should consider when choosing the letting strategy to use.
Property location and demand
Analyse the market trends and demands in the area where your properties are located. If you’re near tourist hotspots, business centres or entertainment hubs, the demand for short lets may be higher. If your property is in a suburban or residential neighbourhood, people would be looking for longer lease agreements.
Property type and features
You should also consider the property type, size and features that you offer. A long-term tenant would prefer a spacious flat so they’re more comfortable living there. You don’t have to furnish it as some long-term tenants bring their furniture and personal things. Short-term guests would need a fully furnished property because they usually just have their clothes with them. This means short lets should come with a complete set of furniture and amenities.
Financial needs
Assess your rental income expectations to pick the right letting strategy. If you’re looking for income stability, you’d want to stick to long-term letting. But if you want to get a higher income per night, choose short-term letting. Of course, you’ll also have to consider other financial aspects like the operational costs, tax implications, permits (e.g. planning permission) and your overall financial goals. For instance, the operations cost of short lets is significantly higher than long lets. Balance that with your rental return expectations.
Personal preferences
Your lifestyle and personal preferences will also come into play. Do you consider the property purely an investment option or do you want to use it as a vacation home from time to time? If you want the freedom to use your property when you want to, the flexibility of short-term letting will make that happen. You can easily insert your stay between bookings. But if you have no plans of doing that and you like the convenience of having an additional source of income, go for long-term letting.
You should also consider the property management style that you’ll use. Short lets are more tedious so it’s better to work with a reputable property management company.
Flexible Letting: The Best of Both Strategies
Flexible letting offers a dynamic approach that will give you the best of both long-term and short-term letting strategies. You don’t have to choose between the two. You also don’t have to apply for planning permission. You can use both strategies to maximise your rental income potential and occupancy rates.
Through flexible letting, you can enjoy the income stability offered by long lets and the high earning potential of short lets. You don’t have to apply for planning permission because even if you reach the 90-day limit for short lets, you can switch to long-term letting. You can schedule this around the times when you want to use the property for personal use.
Of course, flexible letting has a few requirements for it to work successfully. First, you need to work with a property management company. They can help manage the property and take care of guest expectations. You can benefit from their expertise and network connections. They can help with cleaning and maintenance schedules. They can also market the property and make the transition from one letting strategy to another smoother.
It’s best to work with property experts who use a smart property management platform to automate tasks so they’re implemented more efficiently. The same technology can be used to facilitate flexible letting arrangements. It will minimise booking issues and can process payments conveniently.
Flexible letting also becomes more rewarding through dynamic pricing strategies and adaptable rental agreements. This requires real-time data to gauge current market trends and demands. Use technology to gather data that’ll maximise the income potential of multiple properties and ensure compliance with the latest rules and regulations.
With the right platform, multi-property owners will have an easier time monitoring their property’s performance.
Work with the Right Property Expert
Choosing the right letting strategy is necessary if you want to maximise the earning potential of your properties. While both long-term and short-term letting are effective, they will lead you down different paths towards your portfolio goals.
With long-term letting, you’ll enjoy the income stability but you’ll have to compromise flexibility. With short-term letting, you’ll get a high income potential but the frequent turnover requires more work.
If you want to enjoy the benefits of both letting strategies, you should choose flexible letting. It combines the best of both strategies - a higher income potential and occupancy rates.
As you choose the letting strategy, don’t forget to consider how you’ll manage multiple properties. You can partner with a property management company that’ll take care of everything - from the marketing to the maintenance of the property to guest communications and payment collection.
With Opago, you’ll enjoy a complete package of services including in-house cleaning and maintenance. We use smart technology to automate tasks and streamline operations. This leads to a smooth guest experience with high satisfaction levels.
If you want to discover what letting strategy is ideal for your specific portfolio goals, contact us. We can discuss your properties so you can decide how to maximise the potential of your portfolio.