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How to calculate holiday let yields

An increasingly popular investment opportunity, purchasing a holiday rental property has the potential to generate significant returns for those who know where to look. As with any investment within the wider sphere of property ownership, however, it pays to put careful consideration into any decisions you make regarding your new purchase. Everything from the initial price of your property, to the average occupancy rate for its location, impacts your potential holiday let yield, and striking a comfortable balance between all elements is no simple task.

At SDL Property Auctions, we’ve developed invaluable insight into a wide range of vacation properties, and our experts are here to provide budding and experienced investors alike with advice on what to look for when making a purchase decision. In this blog, we’ll go through how to calculate a holiday let income so that you can estimate potential yields for any property, taking into account the unique considerations that need to be made for this type of investment, including occupancy rates and seasonal pricing.

How to calculate holiday let income

An essential part of deciphering which properties represent ideal investment opportunities and which should be avoided, understanding how to calculate holiday let yields is immensely valuable knowledge. It is also, fortunately, a fairly simple calculation, so you don’t need to be a mathematical whizz to work out the estimated ROI for any individual property. All you need to do is gather all of your outgoing costs, alongside average estimates for the area you’re considering, and input them into the following equation:

ROI =

Annual gain on investment – Annual cost of investment


Initial cost of investment

If you’re new to calculating ROI for any type of property investment, we cover all the steps you’ll need to know for the more basic types of investments (a standard rental property or a renovate and resell project) in our dedicated ‘What is a good return on investment for property?’ blog. This general ROI for property article gives a full introduction to the formula above, which is built upon further when applying it to the slightly more complex holiday rental calculation. Though a little complicated, stay with us as we go through each step below as the reward of making informed investment decisions is well worth the effort.

Step 1 – Work out your initial cost of investment

The easiest part of the formula to calculate, your total cost of investment constitutes any costs that are incurred during the initial process of purchasing the property. Most commonly, this will include the cost of the property (in a cash purchase, the entire cost of the property is included in this section, and in a mortgage purchase, the deposit is included here, while the monthly repayments are included in the annual cost of investment calculation). On top of this, you should also include other initial costs, such as solicitors fees, any stamp duty paid, the price of any one-off renovation works and any furniture needed to bring the property to letting condition.

Initial cost of investment example (cash buyer): 

  • The cost of the property
  • Any costs incurred while purchasing a property, including legal fees
  • The cost of any initial renovation work or furnishings needed to get the property ready for hosting guests.

Initial cost of investment example (mortgage buyer):

  • The deposit paid on the property
  • Any costs incurred while purchasing a property, including legal fees
  • The cost of any initial renovation work or furnishings needed to get the property ready for hosting guests.

Step 2 – Work out your annual cost of investment

While the ‘initial cost of investment’ section includes all costs associated with the purchase of the property and any spend required to get it ready for hosting guests, the ‘annual cost of investment’ formula is the sum total of any money spent over the course of the year to maintain the property at that standard. Things you can expect to come under this section include cleaning maintenance costs in between visitors, the replenishment of any included supplies or gifts (such as welcome baskets and toiletries), and the daily running bills of the property (such as gas, electric, water and broadband payments). On top of this, you may also want to include any costs incurred through advertising the property* to attract holiday-goers and, if you’re managing multiple properties across a wide area and need to hire a local property manager to oversee the day-to-day running of your vacation lot, their annual fee should be included in this section too. 

As mentioned in the previous step, if you’ve purchased your property by taking out a mortgage, you’ll also need to include your monthly mortgage repayments into this section too, which will need to be multiplied by 12 to ensure the entire year is accounted for.

Annual cost of investment:

  • The sum of all costs spent over the year to keep the property in good, rentable condition, including insurance costs, monthly bills, and cleaning fees
  • The sum amount of taxes paid on income earned from the property over the full course of the year
  • Any management and advertising expenses required to keep the property running and occupied
  • The sum of all mortgage repayments made over the year (if the property was purchased with a mortgage)
  • The annual commission fee paid on all income earned over the year (if the property was listed on a third-party booking site).

*As a further note on considering advertising fees, if you’ve chosen to list your property on a third-party booking site, such as Booking.com or AirBnB, your outgoing fees are likely to be paid as commission on each individual booking. As this cost figure is reliant on incoming earnings, the easiest way to calculate your overall commission payments is to check what percentage is charged by your chosen booking site and take this off your total earnings for the year. We’ve provided an example of this calculation below.

Annual commission fee =

Annual gain on investment x commission charge

£893.55 =

£29,785 x 3%

In the above example, in which we’ve assumed for illustration purposes that the annual gain on investment is £29,785, and that the commission fee is a flat service charge of 3% (this is the standard service change asked of hosts on AirBnB using a split-fee structure). When these are multiplied, you get your annual commission fee of £893.55, which should be included in your annual cost of investment calculation.

Step 3 – Work out your annual gain on investment (part 1)

By nature, vacation properties often sit unoccupied and are heavily influenced by seasonality in a way that traditional long-term rental properties are not (with the exception of student lettings which can sit empty during summer months). Because of this, working out the ‘annual gain on investment’ section requires some additional considerations beyond just your nightly asking rate multiplied by days of the year. These are occupancy rate and seasonal pricing, both of which we’ll go into further detail on to help you make your own calculations on estimated annual income more accurate. 

What is the occupancy rate?

When looking at vacation rentals, the occupancy rate is one of the most important indicators you have to display the property’s success. It is, put simply, the percentage figure for how often your property is in-use and generating income. This means that, the higher your occupancy rate percentage is, the more money your property will generate for you over the year.

How do you calculate occupancy rate?

Occupancy rate for a vacant property is calculated by taking the number of rooms occupied over any given time period, and dividing it by the total number of rooms available in the property (both occupied and unoccupied). This will give you a decimal figure which, when multiplied by 100, will give you the occupancy rate in percentage form.

Occupancy Rate =

100 x

Number of occupied rooms


Total number of rooms

To provide an example, if you’re running a bed and breakfast which has four rooms, and you have an average of three rooms occupied over the course of one week, your occupancy rate for that week is 75%, as the completed formula below shows:

75% =

100 x

3


4

This calculation can be applied to any length of time, so if you’re looking for the occupancy rate over a longer period, for example over the annual 6 weeks of school summer holidays, your occupancy rate formula for that time remains the same. 

Of course, in a longer time period you are more likely to see fluctuations in the number of rooms occupied from week to week and even day to day, so, in order to keep your calculations as accurate as possible, your ‘number of occupied rooms’ figure should be the average number over that period. You can calculate the average number of occupied rooms by adding together the number of occupied rooms each night, and dividing that number by the number of nights accounted for. An example of this is as follows:

In one week, you have three rooms booked on Monday, Tuesday, Wednesday and Thursday. On Friday and Saturday this number increases to four rooms booked, and on Sunday it drops to just one booked room. This would mean that you have three occupied rooms for four days, four occupied rooms for two days, and one occupied room for one day. Added together, this gives you 21 occupied rooms over seven nights, and 21 divided by seven is three, so your average number of occupied rooms over those seven days is three. We’ve laid out this example in formula form below for ease of replication.

Average number of occupied rooms =

£9,600 – £7,532.04


£25,000

3 =

3 + 3 + 3 + 3 + 4 + 4 + 1


7

How do you calculate occupancy rate for a single property?

While the example detailed above considers how to calculate the occupancy rate on a hotel or bed and breakfast that has multiple rooms available for rent, if you have a holiday home with only one rentable entity, the formula changes slightly. In this instance, rather than dividing the number of rented rooms by the total number of rooms available, you simply need to use the following formula:

Occupancy Rate =

100 x

Number of nights the property is booked for


Total number of nights

To provide an example to this, if you have a cottage which can be booked as a single property, and you want to know the occupancy rate for it over a 2 week period, you need to divide the number of nights it’s been booked for, by the number of nights in that time period (which in this case would be 14 nights). If, in this example, we assume that the cottage has been booked for nine nights of the available 14, the equation would be as follows:

64.3% =

100 x

9


14

What is seasonal pricing?

While traditional rented properties typically charge the same rent from month to month with no fluctuations across the year, holiday rentals rarely follow the same static pricing pattern. Instead, holiday rental fees increase and decrease throughout the year, changing in line with seasonal demand. This is done to remain competitive and attract holiday goers during off-peak periods, and to increase profit margins when demand for the property increases. 

Because of its ever-flexible nature, it’s exceptionally difficult to predict a vacation rental’s annual income but, without this calculation, you can’t estimate your annual gain on investment. In order to get as accurate an estimate as possible, we recommend factoring in your average nightly charge during off-season and peak season, and using these to generate a total annual income.

The calculation behind your average off and on-peak season nightly charges is the same as that for working out your average number of occupied rooms, with a few figures switched out, as you can see below.

Average seasonal price (per week) =

Sum of prices per week over the season


Length of season in weeks

£745 =

(3 x £700) + (2 x £820) + (1 x £730)


6

In the example above, the average weekly cost of a room for this 6-week season is £745. This is working on the assumption that, for three weeks of the season the room is priced at £700, then it is raised for the next two weeks to £820, then lowered again for the last week of the peak season to £730. When these are all added together and divided by the total number of weeks in the season (which in this case was six) you come to the average weekly price of £745. 

Step 4 – Work out your annual gain on investment (part 2)

Now that you’re familiar with what occupancy rate and seasonal pricing is for holiday lets, and know how to calculate them based on your own estimates or actual income figures, the next step in working out your annual gain on investment is to put them together. The formula for this is as follows:

Annual gain on investment =

Off-peak season length in weeks (off-peak season cost per week x off-peak season occupancy rate)

+

On-peak season length in weeks (on-peak season cost per week x on-peak season occupancy rate)

Annual gain on investment =

38 (£745 x 70%)

+

14 (£890 x 80%)

£24,360 =

£15,960

+

£8,400

In the example above, we’ve made the assumption that the off-peak season is 38 weeks long, has an average cost per week of £600, and has an occupancy rate of 70%. This means that the on-peak season lasts 14 weeks, and in this instance the average cost per week is higher at £750, and the occupancy rate has also increased to 80%. With seasonality and occupancy considered, this brings the estimated annual gain on investment to £24,360.

Step 5 – Input your initial cost, annual cost and annual gain into the ROI calculation

Once you’ve calculated the initial cost of your investment, the annual maintenance and management costs of running your property, and the annual income you’d earn (taking into account occupancy rates and seasonal pricing), your last step in working out your potential ROI is to input it into the main formula.

ROI =

Annual gain on investment – Annual cost of investment


Initial cost of investment

This should give you your property’s potential holiday let yield and, if you complete the same calculation for all of the properties you’re considering investing in (working out the average outgoing and incoming for each one’s specific location) you can decide which property from your consideration list is most likely to provide the highest return.

Holiday let income calculation – full working example

To make it easier to replicate the calculations covered in this blog, we’ve broken down the steps into an imagined example below. The figures included in this example are illustrative only, and are not representative of any market average in the UK or abroad.

Initial cost of investment – figures

  • The initial cost of your property was £100,000
  • When first purchasing the property, legal fees came to £2000
  • Renovations and furnishings for the property came to £3000

Annual cost of investment – figures

  • Monthly expenditures (insurance, taxes and bills) came to £200
  • Monthly maintenance (cleaning, supply replenishment, etc.) came to £200
  • Monthly advertising and management costs for the property came to £100
  • Commission fees for the year came to £893.55

Annual gain on investment – figures

  • The on-peak season for your property lasts 14 weeks
  • The average weekly charge for your property during on-peak season is £890
  • Your average occupancy rate during on-peak season is 80%
  • The off-peak season for your property lasts 38 weeks
  • The average weekly charge for your property during off-peak season is £745
  • Your average occupancy rate during off-peak season is 70%

These figures bring your estimated annual gain on investment to £29,785

Annual gain on investment =

Off-peak season length in weeks (off-peak season cost per week x off-peak season occupancy rate)

+

On-peak season length in weeks (on-peak season cost per week x on-peak season occupancy rate)

Annual gain on investment =

38 (£745 x 70%)

+

14 (£890 x 80%)

£29,785 =

£19,817

+

On-peak season length in £9,968

ROI =

£29,785 – (12 x (£200 + £200 + £100) + £893.55)


£100,000 + £2000 + £3000

ROI =

£29,785 – £6,893.55


£105,000

This means that the ROI for this vacation rental would be 21.8% for the year.

Invest in holiday rental property at SDL Property Auctions

Buying a holiday rental property is, undeniably, a challenging investment for any property manager to undertake, regardless of experience. However, they can be equally rewarding, provided sound decisions are made at every stage of the process – starting from the very beginning; purchasing the property.

At SDL Property Auctions, we are committed to connecting buyers of all backgrounds with their perfect property. So, if you’re looking for a small residential apartment which can be converted into a holiday let, or a large property which can become a popular B&B, you’ll find it in our online auctions. 

To start your search, simply head over to our Property Finder and filter by location, type, size and price to find your next holiday let investment. Additionally, if you’d like any advice or help from our experienced property auctioneers, get in touch and we’ll answer any questions you have about the process of buying by auction.