Starting Up - finances
Does it make financial sense?
This is the part that no-one likes to have to address! It’s easy to be tempted by the thought of a lovely holiday cottage that you can escape to during your holidays and weekends, and which will bring you an income, but you need to be sure that it makes financial sense.
Of course, everyone’s financial situation is different. Some may have plenty of spare capital or income and be willing to take the risk, especially if they want to use the cottage mainly for themselves. For most of us, the margin for error is much smaller.
But don’t be put off! There are lots of people out there making it work and you can too, and this HowToHolidayCottage website can help you with the required preparation and research.
To see if the holiday cottage makes financial sense you need to look at two sets of costs, namely the start-up costs and the running costs.
Estimating startup costs
When thinking about starting your own holiday cottage, you will need to consider any costs associated with getting the cottage ready for renting.
This will vary from property to property. For some properties it may involve a full renovation. For others it may simply mean minor changes.
For that reason it is not possible to provide a full list of startup costs here, but here is a list to get you started:
- decoration
- furnishing (see our sample inventory and our decor and furnishing pages)
- renovation/repairs
- architects and planning fees
- legal fees (e.g. for purchasing property)
- stamp duty
- travel costs (to and from your property or to buy goods)
- insurance on your home while repairs are being done
- loss of rental income due to the renovation
- reduced income until the cottage becomes established
- mortgage costs until rental income starts
- council tax costs until rental income starts
- heating, lighting costs until rental income starts.
To help you begin to estimate these costs we have provided a very simple spreadsheet where you can begin to enter costs. We have included the above list to which you can add your own. Select the link below to download the sheet.
Startup costs spreadsheet
Remember, as with all estimates, it is definitely worth adding in some contingency.
You will be able to treat some of these costs as allowable expenses. You will also be able to treat many of your purchases as capital items and therefore reduce your tax bill. Given the savings to be made, it is important to keep a record of all expenditure. For more detail see our sections on bookkeeping.
If you should need to borrow to cover these costs, then don’t forget to include the cost of borrowing.
Estimating income and expenditure
The next stage in working out how to make your holiday cottage a financial success is to compare your likely income against your likely running costs in order to determine any pre-tax profit. If you take a good look at this early on then you will have a much more realistic idea of how to make your cottage a success.
At this stage it is worth asking yourself what financial goals you have in mind regarding your holiday cottage. For example, would you be happy just for the cottage to pay for itself with no real profit? This might be the case for example if you want to use the cottage mainly for yourself, or if the cottage is principally a long term capital investment. On the other hand, you may really need to make a good profit because you are looking for an additional income.
Profit and loss sheet
A good place to start is to use a simple profit and loss spreadsheet where you can enter your potential costs and income and see the resulting pre-tax profit. To help you do this we have provided an example sheet which you are free to use. To access it, select the image below. The sheet includes some notes on how to use it.
Startup profit and loss spreadsheet
Note: the above sheet does not include any start up or significant capital costs. All profits are pre-tax.
For more information on estimating income and expenditure, read on...
Expenditure
Your normal running costs are broken down into two main types, overheads and direct costs.
Overheads are costs associated with running the cottage irrespective of whether there are guests staying or not. Examples include the mortgage and insurance.
Direct costs are incurred are associated with a rental period, i.e. when you have guests staying. Examples are cleaning, and a welcome pack. Direct costs will therefore depend on how many weeks the property is let. However, the distinction between overheads and direct costs can be a bit blurred sometimes as things like heating may fit into both categories.
When estimating running costs it is useful to think about how much of the work you can undertake yourself. Could you for example take care of the changeovers thus saving on cleaning and laundry costs? Do you need to be prepared to pay someone to look after the cottage if it is not close to where you live or when you are away from home?
Income
To keep the initial sales estimates simple, you can break the rental income down into three seasons, high, middle and low, and assume that the price is the same for the whole of a season. This is what we have done in the above profit and loss sheet.
To get some ideas for assessing the rental prices you can charge, have a look at our page on pricing.
You may also want to consider ‘friends and family rates’. Also, if you intend to use the cottage yourself you will need to take that into account when you estimate the likely occupancy rates.
It can be difficult to estimate costs and income. One way to overcome this is to consider different scenarios. For example, once you have estimated likely costs and entered them into your spreadsheet, you can then create a copy of the sheet and put in more pessimistic values. If you can still make things work with pessimistic numbers then you can have more confidence that your venture will be a financial success!
