Serviced

Apartments
Report
Serviced Apartments Report

From: Paul Smith

A mentor of mine once told me, “Don’t wait to buy house, buy houses and wait.”

From my personal experience I can absolutely condone that statement. I purchased my first
flat in Roman Road, East Ham, London in 1982. The purchase price was wildly scary, many of
my family and friends told me the flat was over-priced. I paid almost £9,000 and I had nearly
a £7,000 mortgage. The same flat today is worth around £350,000…….

With the benefit of 35 plus years of property investing I would say “Don’t buy houses, buy
property that you can turn into serviced accommodation.”

This report is going to share with you some of the secrets of serviced accommodation.
Setting up a serviced accommodation business requires work but with the correct education
and support it is entirely possible. How do I know? Well for one I have done just that.

Secondly and rather more importantly I have personally trained in excess of 1,000 people to
set up their own serviced accommodation businesses. The most important thing to know is
that it is not as simple as listing an empty flat or house on Booking.com or AirBnB - this is
illegal. However, if done properly, setting up serviced accommodation the start of many,
many peoples journey to financial freedom.

I have no interest in having a traditional job; I worked in a job for far too many years, and
never wish to do so again. Instead, I want to own businesses. When I say ‘business’, I mean
a profitable enterprise that is fully systemised, where I do not need to do anything. For me,
the test of a true business is simple: if I can take six months or a year off and in my absence
it will continue to grow and be more profitable, then I have a business. Anything that relies
on me is a job. I don’t want a job. A business, not a job, is the route to financial freedom,
and means you will never have to work or anybody else again. As Warren Buffet said:
“If you do not find a way to make money in your sleep you will work until you die”

Myself and my wife Aniko own property businesses. Serviced apartments are a form of
property business, of which we own several.
Serviced Apartments Report

We have an office in Scotland, an office in England, and 18 wonderful members of staff

working for us. It is true to say that serviced apartments are our most important businesses,
and our primary business.

One of our companies, Diamond Serviced Apartments, takes more than £50,000 per month
from bookings made via Booking.com alone. We also take payments from repeat guests
who have stayed before, and yet more bookings through sites like AirBnB, where payment is
made directly to our bank account after the guests have arrived. Booking.com charge a 15%
fee, so it’s best not to put business through that platform unnecessarily. Direct bookings from
repeat guests are much more valuable as there is no booking fee.

If we can do it, anyone can. It is even easier now than when we started, as there are training
courses available.

To start with, you need to understand exactly what serviced accommodation is.
In a sense, serviced accommodation is ‘normal’ flats and houses; they are normal in that
they look normal, and they are normal, in a physical sense, but there is a lot of additional
paperwork and process that needs to be followed to set them up as serviced
accommodation. You need the appropriate planning permission, you need correct finance in
place and you need insurance. None of this is difficult to achieve, but it does need to be
done.

The critical point of difference between serviced accommodation and a standard buy-to- let
is that instead of renting the property out on a monthly basis using a six-month assured short-
hold tenancy (AST), you will be renting it out on a nightly, weekly or monthly basis. The best
point of comparison is hotel accommodation; serviced accommodation is a bit like an
unmanned hotel, with no staff, no bar, no restaurant.

You should never rent it to the same person for more than six months – if it becomes
classified as their main residence this creates an AST. You do not need or want a tenancy
agreement. If customers find you via Booking.com or AirBnB they will be bound by an
automatic agreement that regulates their stay. If you’re going to be taking bookings direct,
make sure you have a contract that guests sign. We have a software system that does this
for us via e-signing.

There are lots of different types of serviced accommodation, targeted at different market
segments - luxury, family, corporate, and so on. Serviced accommodation, in principle, works
everywhere, but you need to undertake some research to find out what there is a specific
demand for in a given area, and make best use of the available systems and platforms.

There is no typical serviced apartment, it could be a luxury penthouse, or a modest family

home.
It could even be a nice en-suite room in what used to be an HMO.

Serviced Apartments Report

One important thing to remember: a good quality, full size sofa bed is worth, up to £10,000 a
year to you, as it means any property can sleep an additional two people. With Booking.com
or AirBnB it is normal to charge a base rate for the apartment or room, and then an additional
fee per person, this can be an extra £20-30 per night. If a sofa bed makes you an extra £50
or so a night for the whole year, it is worth £10,000, so get a good one. It is always advisable
to buy good quality furniture.

It is also important to invest in is professional photography. Never try to advertise your

serviced apartment using iPhone photos, make sure you are using a professional photographer
and the property looks its best. This is called ‘dressing’, where you make your unit look as
attractive as possible so that people want to book - interestingly, we have found that
pineapples and muffins make particularly good photographs, and attract lots of bookings.

Flowers and strawberries are also great. (Just joking – or maybe not!).

Another good thing to do is to give your property a name, something more memorable than
‘Number 17 Rumford Road’. We give all our properties a name. We have one property in a
place called Cleethorpes, on the Yorkshire border in North Lincolnshire, we called it ‘Park
House’, because it’s near a park. Just giving it a name increases the perception of quality, and
raises people’s interest.
Serviced Apartments Report

As an example here are the figures from one of our 2 bed Serviced Apartments in Walsall.
We opened “The Regent” in October 2016. Since then we have seen consistently high
income and occupancy. Here are the figures for the Regent in January 2017 which is for
most Serviced Apartments the quietest month. “BTL” is our abbreviation for Buy to Let ie
normal rented properties with tenants:
• BTL rent £510
• BTL profit £160
• Went live 14th Oct
• Occupancy 94%
• Jan 17 Revenue £3,939
• SA Profit Jan17 @ 40% £1,970 (Benchmark for new operators)
• Our Actual Profit £2,362
• Over 14 times more profit then BTL

Our occupancy rate for this property is very high - the average occupancy for serviced
apartments across the UK is 70%, and this is the figure you should use for any breakeven
calculations and projections. Typically, you can expect to make 40% profit; this means that if
your property has a total revenue (turnover) of £10,000, you should be taking home £4,000
profit, which is massively higher than buy-to- let profit to turnover ratio’s and a life-
changing amount of money. In these circumstances, why would anyone settle for £160 a
month when they could be making fourteen times that, with no more effort, using the same
property? It is the difference between being able to live from your property business alone,
or still having to do a JOB as well. It was for me.
Serviced Apartments Report

Think about what your monthly ‘financial freedom’ figure is. This means, how much money
do you need to be able to quit your job?

Make a note of it, and now double it. Serviced apartments make a huge amount of money,
and can change your life. They just need to be set up correctly; but once everything is in
place, you’ll never have to work again.

Serviced accommodation also means that you avoid any tenant issues, which can be big
problems for landlords. The eviction process for serviced accommodation is very simple -
guests have no rights whatsoever, if you don’t want them there, they have to leave. You
also avoid any ‘bad debt’, as you’re taking payment via debit or credit card in advance of
their stay. Therefore, you have guaranteed payment in full, and no tenant issues, generating
huge returns and a healthy cash flow. There aren’t many other businesses that can
offer this.

As such, it shouldn’t surprise you that serviced accommodation is a growing industry. The
Association of Serviced Apartment providers have published a report that predicts that by
2017 the UK will benefit from 36.7 million visitors, and 42 million by 2020 – a huge increase.
Consequently, the tourism, hospitality and leisure industries are predicted to grow
significantly. Whilst serviced accommodation is not only used by tourists, this will
undoubtedly have a huge benefit for SA businesses.

Serviced Apartment News have also published a feature recently on corporate lets. In the
last six months, AirBnB took 50,000 corporate bookings. To take advantage of this, make
sure you set your AirBnB account up as “business travel ready”, as this will give you access
to thousands of companies making a high volume of typically longer-term bookings. Overall,
with regard to serviced apartments, corporate lets are up 25% in 2016, and up by 33% so far
this year.

These are impressive statistics, whether you are interested in the tourist or corporate
market segment, serviced apartments are exhibiting impressive growth.

To narrow it down by region, two areas that are predicted to show

particularly strong growth are Scotland and the Midlands. The Herald newspaper in Scotland
has reported a 144% increase in Edinburgh, Glasgow and Aberdeen versus last year.
Edinburgh is now the second most popular city in the UK for serviced apartments, behind
only London. Savills estate agents published a special report on the SA sector in 2016, stating
that it is forecast to be the UK’s fastest Serviced Apartments Report – March 2017 7 growing
hospitality segment; they also reported that Scotland was up 21% on the previous year
(2014), the Midlands was up 13%, and over the whole of the UK use of SA was expected to
grow by 122% by 2018. It is an especially great time to set up a serviced apartment if you’re
based in Scotland, the Midlands, or the north of England.

Of course, Brexit has had an impact on SA, as it has most other areas of the UK economy, but
you might be surprised to learn that it’s actually had a positive effect. BigHospitality have
reported that, post-Brexit, 45% more Brits are likely to holiday within the UK, as the drop in
the value of the pound has made it more expensive to go abroad. What is also interesting is
that most people still intend to go on holiday, and it remains the third highest spending
priority in Britain, after living and food. In addition, the cheaper pound is also attracting more
foreign visitors.

All of the above should have convinced you that SA is a great business to get into. Once you
have set up your serviced accommodation business, you need to protect it, and protect your
properties.

You should have set up a limited company and/or an LLP, this will provide certain
protections; in addition, you also register with the Property Ombudsman, as serviced
apartment operators are considered letting agents. You also need to register with the
information commissioner’s office, for data protection purposes, as you’ll be collecting
credit card details, email addresses, and home addresses. It costs around £39 to register data
protection for your company for a year; if you don’t do this, you’ll be breaking the law.

Damage is a widely discussed topic in relation to serviced apartments, particularly in relation

to platforms such as AirBnB and Booking.com. AirBnB offers complimentary insurance cover
of up to $1million, but you should get your own insurance too. The worst that we have ever
experienced is £200-300 worth of damage, but we have the customer’s credit card details so
can charge them directly if you have the appropriate contract in place. It causes very little
stress to us.

It is essential that you have both professional indemnity and property liability insurance for
your business. All property managers also need to comply with Housing, Health and Safety
Regulations, in order for your insurance to be valid. If you’re in any doubt, you can request
that your local Environmental Health officer come and inspect your property and highlight
any issues. You will also need to do a fire risk assessment (FRA), and inspect the smoke
alarms weekly or monthly depending on the type of SA you run. Your insurance company
may also require you to do a routine inspection if, for any reason, a property is empty for a
few weeks.
Serviced Apartments Report

We use a system called the DIAMOND Mine system, which help us to Discover what type of
serviced accommodation should be established where. Interrogate systems to predict
pricing, demand and key costs in advance. It also explains how to Acquire properties, how to
Market them, how to Operate, maintain and organise them, how to measure and track the
Numbers, and finally, how to Duplicate. All in all, it is a full end to end process
for a serviced apartment business. Marketing is a very important factor, the main platform is
Booking.com, where you can get lots of short stay bookings at a minimum 15% fee. You
might want to consider paying a slightly higher fee early on, as initially you won’t be at the
top of the listings; if you pay a surcharge, you’ll be bumped up the search results.

AirBnB typically generates more enquiries for longer stays, but you need to respond quickly.
In addition, traditional marketing methods, like flyers, review forums, and promotions are
also effective.

One very important thing that you need to have in place is a channel manager, which
connects all of the various booking engines, i.e. Booking.com, Expedia, LateRooms, AirBnB,
HomeAway.com etc. Our properties are listed on 38 different booking engines; if we had to
manually update 37 other sites when we received a booking, there would be a high chance
of errors being made. The channel manager - we use Kigo - is essential; it connects all of the
portals with all of the properties, takes payment, automatically sends out cleaners and guest
instructions. Another good piece of technology is Pulse, which is Booking.com's app,
which sends bookings automatically to your phone.

If you’ve got your properties advertised on the right engines, you’re using a channel
manager and you’re taking advantage of available technology and software, you can get
systems in place that enable you to control and oversee your whole business from your
phone.

One example of an extremely successful new property we’ve launched is a recent

commercial conversion, Springfield House. Originally it was an accountant’s office, in an
attractive, Victorian four-storey office building in Doncaster, which we converted to serviced
apartments. Our commercial conversion created five serviced apartment units, and we
retained the ground floor for our offices. We used joint venture investor funds to purchase
and develop the property, commercially re-financed with Lloyd’s bank, and marketed it as
serviced accommodation.
Serviced Apartments Report

The property has been live for six months; if it was being rented out as a buy-to- let, it
would be generating £2,800 a month for five flats, providing a rough profit of £1,000. We
are also benefiting from free office space on top of the additional profit from serviced
accommodation.

• First 9 months Revenue £53,601

• SA Profit @ 40% = £21,440 (New operator benchmark)
• Actual SA Profit = £23,680
• Significant direct bookings: £3,700 largest so far
• 32 night booking for one flat for £2,880

So how do YOU get started with serviced accommodation? Take a single let, discover the
Diamond System, furnish the property, install WiFi, arrange planning, insurance, finance and
business rates, advertise it, watch the bookings start to come in, and enjoy the instant
positive cash flow. It is as simple as that.

If you don’t yet have a single let, then the first step will of course be to acquire one. There
are a number of different ways to acquire property, it doesn’t have to be buy-to- let. One
option is rent-to rent, which is where you rent a property from a landlord on a monthly
basis, and then you rent it out on a nightly basis. The advantage of this option is that it
requires virtually zero investment, because you’re renting, not buying the property.

We have one rent-to- rent property in Bournemouth, Broadway House, a property

containing six flats. In August this year, for one studio flat we took £3,268 - 16% of that went
to booking fees, 2% in card fees, 3% to cleaning, the rent was £596, monthly operating
expenses (electric, gas, water etc.) were 3%. The net profit for that one studio flat in August,
a busy month at 91% occupancy, was £1,770.

Because there are six flats, they are more efficient, and cleaning is cheaper, and we
generated a profit of 54%, higher than the average of 40% The 40% figure is a rather
conservative estimate, and higher profits are common, but if you budget for 70%
occupancy, you should make 40% profit.

It is important to understand your tax entitlements and obligations. The planning

classification you need is C1, which is business use; this entitles you, as a private landlord, to
tax reliefs. You should not be paying council tax; instead, you should be paying business
rates, of which the first £12,500 is free under the small business rates relief scheme. If you
are running your SA business through a limited company, corporation tax is 20% currently,
and falling to 17%. There are also capital allowances and many other major tax benefits if
you use a limited company, which we strongly recommend.
Serviced Apartments Report

Since we started with serviced apartments, our mindset, skill set, and lives have completely
changed. Prior to serviced accommodation, in over 10 years of property investment we had
acquired 10 properties, generating £3,500 a month for us, which was good by most buy-to-
let standards. We have six children, and a grandchild; I had a job as a management
consultant and was working away from home all the time. I wanted to reach £10,000 a
month coming in from property so that I could leave my job, and expected that it was going
to take me another 20 years to achieve my ‘financial freedom’ figure.

Specifically following the serviced accommodation strategy we achieved our financial

freedom and I resigned from my job in just 6 months. If you want to discover how to do
exactly the same thing we would be delighted to work with you.

To begin your serviced accommodation journey and access more bonus resources, please go
to www.touchstoneeducation.co.uk/sa.

Paul Smith
Serviced Apartments Report
Q&A
Q: What are the benefits of serviced apartments for estate/letting agents?

A: There are four main benefits. Letting agents have to work quite hard to collect rents, deal
with rent arrears and difficult tenants. The first advantage is that serviced apartments provide
guaranteed rent, which is a huge benefit. Second, they don’t need to work for this - you’re a
good corporate client, you’ll pay on time. Third, capital allowances mean that they can offer
a significant amount of tax-free income to their clients, the landlords. Finally, there are some
properties that are very nice inside, but are difficult to let to families for some specific
reason, and are particularly well suited to serviced accommodation.

Q: What is the best advice for setting up a company for serviced apartments?

A: In light of the recent tax changes, the best advice is to establish at least one company,
potentially more and also possibly an LLP as described below. Operating via a company also
gives you greater flexibility - shareholders in a company can take small dividends per year
completely tax free, irrespective of their tax position. Dividend tax rates versus income tax
rates are very favourable up to several tens of thousands of pounds per year. There is also a
little-publicised £1,000 a year tax break for property investment or property management
companies, which was brought in with the 2016 budget. Corporation tax in 2017 is currently
only 20%, and is reducing to 17% in the coming years - this will mean a company earning
£100,000 profit whilst paying just 17% tax. Separate from the financial and tax reasons a
“Limited” Company will reduce your personal liability in many circumstances.

You should always seek the advice of an accountant to make sure this general advice applies
to your specific position. We always use a limited company and business bank account to
operate our serviced apartments.

Q: What is the difference between an LLP and a limited company when it comes to serviced
apartments?

A: First LLP is short for Limited Liability Partnership. We use an LLP to own our serviced
apartments so that we get maximum benefit from our capital allowances. Specifically we
use LLP’s to own and Limited Companies to operate our serviced apartments. This is a very
significant tax advantage for us.

Q: What is involved in turning a private residence into a serviced apartment?

A: You could consider initially using the ‘rent a room allowance’; if you’re living in a property
and rent out a room, you can earn £7,500 a year taxfree, this is a good way to try things out
first.

When your business begins to scale if you set up a limited company, then you can pay
yourself a salary - you can at the time of writing take up to £11,000 tax free - as well as your
£2,000 tax-free dividend. In terms of your mortgage, you will need to get consent to let,
which many residential mortgage providers will give. This is not the same as a buy to let
mortgage, so you need to make it clear that it will be a serviced apartment. There are an
increasing number of lenders coming to the market specifically for serviced apartment
mortgages. You will also need public liability and professional indemnity insurance, planning
permission and pay business rates not council tax. There are many other elements of good
practice.

We offer a two day Serviced Apartment Masterclass which covers in detail all aspects of not
only setting up your first serviced apartment but also a business,

Q: What planning permission is needed for change of use, and how long does the process
take?

A: In England and Wales, you will need use class C1. It normally takes six to eight weeks to
go from C3 (normal residential use) to C1. Some local authorities simply require notification
and not planning. Please start by simply contacting your planning department for advice as
you may not even need to make a planning application.

Q: What are the council tax implications?

A: You are not liable to pay council tax; you should pay business rates instead, which are
often lower than council tax. You should also be claiming ‘small business rates relief’. When
you start with just a few properties this enables you to claim 100% relief for (at the time of
writing) the first £12,500 per year.

Q: How can you check if an area is suitable for serviced apartments?

A: You can run a test advertisement on a site like AirBnB and see what volume of enquires
you receive. Not every area will be suitable for serviced accommodation, and vice versa, so
it’s important to try and understand what works where, and how to utilise the various
systems and platforms that are available. It’s not simply a case of taking a flat or house,
turning it into serviced accommodation and listing it on Booking.com, for example. There is
some groundwork to do initially, as there are different types and grades of serviced
apartments, to suit different markets; for example, there are luxury apartments, family
apartments, and apartments aimed at particular professions.

There is no one single type of serviced apartment, and you should establish what the
demand is for within a particular area. There are many other tools you can use to establish
demand.
Q: How does a JV partnership work for a serviced apartment?

A: A JV partnership is one way of setting up a serviced apartment business, and one that is
often very successful. You could formulate an agreement with a buy-to- let landlord, where
they receive what they would normally receive in Buy-To- Let rent, and then the additional
profit of the serviced apartment, minus bills and fees, is split 50:50 between the JV partners.
Rent to rent JVs offer landlords a chance to make an additional profit, with no additional
work for them. It is important to sign a rent to rent management agreement, typically a five
year agreement with automatic renewals, to protect your arrangement. You should agree
the JV as being subject to planning, before you submit the planning application.

Q: Who do I need to register my serviced apartment with?

A: The Property Ombudsman, the Information Commissioner’s Office for data protection,
comply with the Housing Health and Safety Rating System (HHSRS), and you will need
professional indemnity and public liability insurance.

Q: How many SAs can you manage without needing to employ someone to run the
business?

A: There is no right number; some people hire in admin staff and/or virtual assistants when
they reach four or five, some people can manage properties into the double figures before
they need help.

Q: Can other owners in an apartment building object to or block an SA?

A: No. Whether or not you can run an SA will depend on your lease; some leases will allow
it, and some won’t. In Scotland most flats are freehold. They can object to planning
application.

Q: What happens with maintenance and repairs, do you need to physically be there?

A: No. Everything can be run automatically, with remote entry and electronic locks, where a
unique access code is sent via text to the cleaner, tradesman, or guest.

Q: Is it too late to get started with the serviced apartment strategy?

A: No, not at all. However, if you do want to get involved, you should do so quickly. It’s
predicted that the market will have more than doubled by 2018. In 2016 Savil’s produced a
report on the serviced apartment sector, in which they predicted that it would soon be the
UK’s fastest growing hospitality segment. They stated that in Scotland, performance was up
21% on 2014, in the Midlands it was up 13%, and across the whole of the UK, the use of
serviced apartments was predicted to grow by 122% by 2018 - that’s in just two years’ time.
All this means that there is still a valuable opportunity to take advantage of, but you don’t
want to miss out on what is likely to be two years of unprecedented growth, so act quickly.
To begin your serviced accommodation journey and access more bonus resources, please go
to www.touchstoneeducation.co.uk/sa.