The Long And Short Of It: AST’s vs. Short-Term Lets
Over the last five years, short-term lets have become increasingly popular with investors. With the pandemic no longer restricting national and international travel, increasing numbers of individuals are searching for the perfect ‘home away from home’ for their next excursion. 2022 saw the largest number of Airbnb nights booked, with 393,700,000 nights being booked – almost 100 million up from the year prior. It is evident that short-term lets are here to stay: but should investors start adding short-term lets to their property portfolio? Or should they adhere to more traditional AST’s?
What Is A Short-term Let?
Generally speaking, a short-term let is categorised as a letting agreement of 6 months or shorter. These are typically used as form of temporary accommodation, for instance holiday lets and serviced accommodation. The most common form of short-term let is offered by Airbnb, who list properties on their globally accessible portal, typically as holiday lets for preparing travellers. This type of rental is often let on a price per night basis, similar to a hotel.
What Is An AST?
The vast majority of tenancies exceeding 6 months are classified as AST’s. An assured shorthold tenancy is an agreement set out between a tenant and a landlord. Typically, fixed term AST’s last for 6 or 12 months to start with, becoming periodic or ‘rolling’ on a weekly or monthly basis after the fixed term ends. A tenancy qualifies as an AST if it is the tenant’s main residence, and it is rented from a landlord or housing association. However, a tenancy is not an AST if rent costs more than £100,000 or less than £250 per year (£1000 in London). Similarly, a tenancy is not an AST if the landlord is a local council, the property is used for business purposes, or if the unit is listed as a holiday let. As such, a short-term let and an AST are mutually exclusive.
Benefits Of Short-term Lets For Investors
19% of the UK’s housing stock has been used for short-term letting purposes, and the model is increasing in popularity. Prospective and existing investors can greatly benefit from the short-term letting model, especially since short-term contracts yield generally higher yields when compared to AST’s. Property usage can be charged on a daily or weekly basis, allowing for investors to amend their prices accordingly. Many will increase their rates on weekends, or when events such as concerts, festivals and parades are being held. As such, investors have greater opportunity to change their prices based on demand, meaning that they earn up to 30% more when compared to a regular AST.
This flexibility transcends being able to amend pricing – if you are dissatisfied with one of your tenants, you can simply refuse to let to them in the future and find a more appropriate tenant next time. You can also use your property in the interim between tenancies and let out the property when you’re not using it, giving you ultimate control.
When it comes to finding the ideal short-term tenant, buy-to-let investors advertising on platforms such as Airbnb benefit from global reach. Airbnb has more than 150 million users across the globe who have collectively arranged 1 billion stays. Medium and long-term AST tenancies are usually advertised on platforms such as Rightmove and Zoopla, which have a more limited reach aimed at national home seekers.
Drawbacks Of Short-term Lets For Investors
However, short-term lets do come with their pitfalls, namely how investors are not guaranteed to book enough lets to cover their mortgage costs and bills. This makes short-term lets far less stable and reliable than their AST counterparts due to high tenant turnover and greater chances of frequent void periods. What’s more, with bills and maintenance being the responsibility of the investor rather than the short-term tenants, it may be harder to turn a stable profit.
Short-term letting arrangements can also be more hands-on and time consuming to manage. Investors have to actively advertise their unit on portals such as Airbnb to ensure they have ample bookings, or enlist an agent to do this for them which comes at an extra cost, often more expensive than AST agency fees. Similarly, it can be difficult to stay on top of the maintenance of a short-term let – you’ll need to hire a cleaner and replenish supplies between short-term tenancies. With more tenants frequenting your property, you may also encounter increased wear and tear which could reduce your overall profits.
There can also be logistical difficulties when it comes to leasing your property on a short-term basis. Short-term lets come with additional restrictions, with some regions having zoning laws with hefty penalties. Similarly, some mortgage lenders place restrictions on short-term lets, and in London planning permission is required to qualify for short-term lets of over 90 days per calendar year. Once you know that you have the relevant permissions, you may want to invest in insurance should your home or landlord insurance not cover your short-term letting arrangements.
What To Look For In A Short-term Let
Looking to diversify your property portfolio with the perfect short-term let? Here’s what to look for:
- Double check potential restrictions and insurance requirements before purchase
- Search for a unit close to attractions and transport links to take advantage of increased demand in these areas. Focus on:
- City centres
- Arenas and stadiums
- Theme parks
- Opt for larger properties if you are looking to attract groups of holiday-goers and larger parties that will require more extensive bedrooms and facilities
- Search for properties that are simple to maintain. For example, consider a new build with greater energy efficiency to reduce your utility bills
Benefits Of AST’s For Investors
The majority of tenancies across the UK fall into the category of AST, and with good reason. This tenancy format provides investors with reliable income, and tenants with stable accommodation for six months or more. Investors can secure a fuss-free, hands-off tenancy managed by a lettings agency. AST’s also delegate any utility bills and minor repairs to the tenant as opposed to the investor unless stated as included in the rent.
Drawbacks of AST’s For Investors
However, there are still drawbacks with AST’s which stem from the permanence of the tenancy. If there are problems with your tenants, you may not be able to ask them to vacate your premises until the end of their contract. Although the Renters Reform Bill seeks to amend this by giving landlords more power to evict tenants that do not abide by their contract, there will still be time consuming procedures and perhaps even legal implications when it comes to evicting long-term tenants.
Additionally, it is harder for investors to increase rent on a long-term contract. If your mortgage repayments increase, or the market necessitates an increase in rent, you cannot simply change your listing price – you will have to alter the AST itself. Furthermore, there is no guarantee that your tenants will be willing to pay this increased price.
What To Look For In An AST
If you’ve decided that a traditional AST is the route for you, here are some aspects to consider before committing to your next investment:
- Look into parking, gardens and outdoor spaces to attract tenants
- Ensure that there are good local transport links for commuters
- Research whether there are ample business and employment opportunities to attract tenants with stable jobs
- Are there broader regeneration opportunities in the area? This will ensure that your property investment accrues in value should you wish to sell – this will also allow you to charge premium rental rates as tenants will have unrivalled access to upcoming facilities
- Tenants will want access to lifestyle amenities such as shops, parks, supermarkets, restaurants, bars, gyms etc.
Market Deep-Dive: Manchester and Birmingham
Pondering whether your next property investment should be an AST or short-term let? We’ve examined two key cities – Birmingham and Manchester – to see whether the market favours short or long-term lettings.
Birmingham’s short-term rental market is thriving, with over 4,200 active rentals being available as of June 2023. Short-term lets have an average daily rate of £124 with a 55% occupancy rate. So, if the average rental unit was occupied 55% of the time (circa. 16 days per month) at £124 each night, investors make an average of £1984 per month. This is especially impressive considering that 40% of these rentals in Birmingham are one-bedroom properties, and 33% are two beds.
According to Home.co.uk, the average property in Birmingham rents for £1580, with a one-bedroom property achieving approximately £1145 per month, and a two bedroom property achieving £1561. This clearly demonstrates that short-term lets have the capability to provide significant income. However, investors ought to consider that minor repairs, agency fees and all utility bills must be deducted from the profits made on short-term lets.
Manchester’s short-term rental market is slightly larger than Birmingham’s, with over 5,200 active rentals. The average daily rate is also slightly higher at £133, with an elevated occupancy rate of 57% (circa. 17 days per month). This means that investors make an average of £2261 per month. Similar to Birmingham, 70% of all short-term rental units are one and two bedroom properties.
When compared to the long-term rental data available on Home.co.uk, the average Manchester property is rented for £1617 per month. One-bedroom properties achieve an average of £1184, whereas two-bedroom properties achieve £1522. Once again, this pales in comparison to the £2261 per month for short-term lettings but is not representative of the overall profit achieved having deducted mortgage payments, utility bills, maintenance and cleaning services between tenancies.
Ultimately, short-term lets and AST’s each come with their own advantages and drawbacks. To truly understand which option is best for you, your property portfolio, and your growth goals, it is important that you speak to a dedicated property investment professional such as those here at Joseph Mews. With years of experience in investment consultancy, and a broad variety of units for sale across bustling UK cities and up-and-coming locations, we’re sure to have something that piques your interest and drives the investment results you desire. For more information, get in touch with our team today.