I've Changed My Mind About Investing in AirBnB Property

It’s been a while since I mentioned anything about my wish to get into property so I thought I’d give you a quick update on what’s happened.

It took me a few years to make peace with a possibility of becoming a landlady again.

I wasn’t sure about the whole hassle of property ownerships. Yes, it’s true that I can have the property managed and won’t need to do much. But before buying this house, together with my ex-partner, we owned a small flat. We didn’t need to sell that flat so it became a buy to let. And even though it was managed, sometimes we’d end up with issues like complaints from neighbours and then later on, when I wasn’t a co-owner anymore, I learnt that the tenants caused quite a lot of damage to the place. Which led to renovation costs beyond the usual wear and tear of course.

I accepted that it was a risk that I could literally calculate, meaning - I could put some funds aside and be prepared for.

Ethically, I have no interest in contributing to the housing crisis. Never had, never will. But I couldn’t see how, given today’s British housing policy, the crisis would be stopped by removing private renting as an option. I rented for years, I knew my reasons for that and no, they were not always: just because I can’t afford home ownership. To me, to become a good landlady, I needed to make sure that I would not choose profit over people, and not choose people over my own heath. And to do that, I needed to make sure I’m financially stable enough to survive not only the increasing interest rates of mortgages but also situations like evictions or bad tenants. If you ever watched Nightmare Tenants, Slum Landlords, you know what I’m talking about.

My idea was to start with fully managed serviced accommodation in the North East of England and see how it goes. I ran the numbers and started looking for a business partner. I don’t care about getting rich fast and quite frankly my idea of rich is very modest for today’s standards. I lead a simple life and my inner peace is what I value much more than, what many people would call an exciting lifestyle.

It’s not easy to find a business partner when you don’t network, go to property investing events or know people with risk tolerance as high as yours. Some of my friends were keen but didn’t have money. Ironically, the ones who did have money I wouldn’t go to business with. Finally, my boyfriend decided to give it a go. We agreed I’d do all the work - the admin so the applying calling, chasing up - as he was far too busy running his business. To make things fair, we agreed he’d cover 65% of the costs and I’d cover 35% but we will split any profits equally, 50/50.

Soon enough, I was talking to sourcing people up North who were very efficient and I think in the second week or so had an interesting property for us to take a look at. Now, taking a look at a property, when you use a sourcing agency and live hundreds of kilometers away from it means considering a PDF documents with photos, initial mini-survey of potential renovation needed and numbers to crunch. That’s all.

We wanted to spend maximum £50 thousand pounds on this, all things included, and we were finding out that even though this number seemed high, we were very likely to go over our budget. So we said no to a few properties.

Serviced accommodation is not as popular as Buy To Let properties and comes with a set of unique rules. Pretty much everything costs much more. Mortgages, when arranged through a limited company, are not your typical BTL mortgages that my mortgage broker, the one I always call when remortgaging this house, could help with. You need a commercial mortgage. Solicitors fall in the same category of a bit more specialist so also more expensive. This is the cost of doing business. And, like with anything really, the more potential profit there is to be made, the more middlemen and fees turn up to take a slice.

OK, so finally in October last year a property that ticked many boxes appeared and we made an offer. With property, they never tick all the boxes, do they. Anyway, it was a two-bedroom mid-terraced house suitable for serviced accommodation and this is what the numbers looked like.

First, the house needed some work and that was going to cost more or less 6 thousand pounds. The main thing was lack of central heating. The house had electric heaters only - not good enough for short-term lets. That was estimated to cost four and a half thousand to install. Then some necessary decoration - about 6 hundred pounds. The interior already looked modern and clean, which is also the usual rule for functional serviced accommodation. Not the glamorous, hip or designer one but the type aimed mainly at contract workers, not tourists. But all rooms need a bit of refreshing. I won’t use the expression: a lick of paint. I simply refuse to use that expression. Two more things: a fuse board and new sockets also made it to the to-do list. They’d cost 8 hundred pounds in total.

More numbers…

The purchase price was £93,000. So the required deposit, 25% percent, would be £23,250. Stamp duty at 3% came to £2,790. Then we had a broker, the already mentioned refurbishment costs, sourcing fees, for now no cost of disbursements but that was of course going to change as it’s a bit like Any Other Business on an employment contract. You know there will be more asked of you, no matter your job description, and so I knew that there would be more asked of my bank account. The last cost on this list is the onboarding cost. Twelve thousand pounds served in a very manipulative style. This and the sourcing fee are the costs that can be avoided and reduced when you look for a property and furnish it on your own. That much is obvious. I have no clue about the property market, especially in the North East of England and also no interest in spending my time buying sofas and forks so I’m happy to pay somebody for that service.

So we know the costs, let’s take a look at the potential income.

Based on 80% occupancy, that is assuming the house would be let for 80% of the days in a year, for 95 pounds per night, the income would be £2,311.67 per month. That’s an average. Like with any other business, some months would be less, some months more. But that’s the average we’re aiming for, and something other serviced accommodation properties in that area also make.

Great, so let’s see the monthly costs.

Mortgage Repayment was estimated at £348.75. That was based on a 6% interest-only mortgage with a LTV of 75%, so with a 25% deposit I talked about earlier. The management fee was 20% so £462.33, the maintenance was 5%: £115.58. Council Tax: £150, Gas and Electric: £200, Broadband: £35, Insurance: £35 and Water: £25

TOTAL: £1,366.67

So monthly cashflow was estimated at £945. Now, these figures were estimates and can change very quickly, which of course they did also in this case.

A quick chat with a broker revealed that the broker fee wouldn’t be £350 but £595. So I updated the numbers. Next came the mortgage quotes. The offer I got was for a five-year fixed rate at 6.24%. So I updated the numbers again. I also added the costs of accounting fees that would come with a limited company - at about 100 per month as that’s my current accounting fee. After that the monthly cashflow was: £830.76.

To be honest, I was aiming for £800 total so that was a good enough figure for me.

If you wonder if the initial costs would also differ… yes, they would. The estimates are just that - estimates. So I knew we would need to keep that in mind. Some small admin costs like setting up a limited company (£12) and money transfer fees (£35) were also to be considered. But the biggest difference would be in a contingency planning. Let me explain.

We were in October. Let’s say we managed to exchange contracts, being very optimistic, by the beginning of December. Having December as a month for installing central heating sounded like a lot of Christmas wishful thinking. Plus… it would take time. Onboarding, meaning furnishing the place would also take time. At least a month. So we were looking at at least 2 months of an empty property. And we would need to give it time to get the first booking. So to be on the safe side, I thought we realistically needed 6 months’ worth of the serviced accommodation monthly expenses put aside, not to stress about a bumpy beginning. That’s about £6,100 if we assume there’s no bookings so no management fee but the remaining costs still need to be paid. Realistically, we could put aside about a thousand pounds a month for half a year and we could also spread the onboarding cost - so the furnishing - and pay that £12k in instalments instead of all at once. Not a big deal.

But then… our circumstances changed. Not to dwell on the details, my boyfriend changed his mind and I was left with a choice - go on with the property purchase on my own or not. I ran the numbers again, compared them to what it would look like if I invested this money in the stock market, and decided that I still wanted to go ahead with the purchase. But I didn’t want to do it on my own. I wasn’t keen on having another mortgage on my own. The fact that the broker said the numbers for a two-year fixed mortgage simply didn’t add up and I’d have to be tied up for five years suddenly felt too risky. I would need to save up more, sell off some of my investments and be prepared to cover all expenses of the property if things didn’t go down to plan. And you know what, I felt that it wasn’t something I was prepared to do just yet. The sourcing agency were really understanding and offered to speak again in half a year or so. So, in theory, I still have time to change my mind. It’s been three months and I haven’t really changed my mind so far.

So this is where I am with the property investment palaver. Time will tell what happens next. For now, I keep on saving and if I’m ready to jump in, I will jump in.