How to convert a smallholding in Caersws, Powys trading as a holiday let into a profitable bed and breakfast...
DISCLAIMER:This business case is not to be considered in any way professional advice, but rather an academic exercise to provide a framework for anyone seeking to know where to begin in assessing such an investment.
Smallholding Investment Opportunity
The nearby Severn Valley attracts ramblers and fishing enthusiasts because of proximity to the mountains of Bwlchygarreg and lakes of Llyn Du, Llyn Tarw and Llyn Mawr.
Building and Physical Assets
The smallholding property benefits from 3 buildings:
- Coach house
- 5 bed en-suite bedrooms
- currently run as a self-catering holiday let
- 1 bed, self contained cottage/annexe building
- currently the owner's residence
- Timber chalet
- potential 3 roomed accommodation
- potential 1 bedroom
- potential 1 bathroom
- potential living room
- potential kitchen (existing plumbing)
- Large gravel car park
- Landscaped gardens with gazebo & outdoor lighting
- Vegetable garden and greenhouse
- Metal storehouse
- Boiler room
- Electricity, water and drainage
- Fire alarm, emergency lighting & intruder alarm
Services, flues and appliances have not been tested and no assurances can be given for their condition.
Council tax banding: 'F' for the coach house and 'B' for the cottage (the timber chalet is as yet unbanded, as it is in need of renovation to become operational.)
- Asking Price - £475,000
- Estimated Annual Holiday Let Revenue - £20,000
Feasibility Plan For Holiday Let To B&B Conversion
The business currently runs as a holiday let.
However, the features of the main building still carry the effects of a functioning inn such as:
- dining area,
- large galley kitchen,
- ample car park,
- large lounge/bar,
- communal sitting room and
...all within the ground floor lobby area, complete with antique furniture, fixtures and fittings throughout.
The property also has a disused timber chalet on the grounds.
Don't upset the apple cart and maintain the holiday let business, aiming for incremental growth, customer retention (repeat bookings) and cost efficiencies over time.
These internal decor features seem a little excessive if the use of the property would remain as a holiday let, but would snugly accommodate guests within a B&B business model, perhaps.
Convert that disused timber chalet into a fully functional short let accommodation.
Scenario Planning 1,2,3...
Outside of conveyancing legal fees, broker fees and other acquisition related costs, we've summarised a brief head-to-head cost comparison between continuing and growing the holiday let business vs. converting the building and running a B&B.
It isn't exhaustive by any means but we hope it might suffice a guide to helping you pull together some thoughts for switching business codes.
Scenario 1: Continue & Grow Holiday Let Business
- bring services up coach house to scratch e.g. fire safety etc.
- capital expenditure for renovation of timber chalet for short let acommodation
Scenario 2: Convert To Bed and Breakfast
One-off cost additions
- planning permission (legal, application, appeals etc.)
- capital expenditure for renovation inc.disabled access & equipment
- new licenses
- bring services up to scratch e.g. fire etc.
Monthly cost additions
- more regular cleaning
- more consumables & stock
- food and drink costs
Scenario 3: Convert The Timber Chalet Into A 1-Bed Short Let Accommodation
- planning permission (legal, application, appeals etc.)
- renovation project for making the timber coach house functional as a holiday let
Monthly cost additions
- marketing this new self-catering accommodation
Hypothetical Financial Projection - Scenario Planning
The profit loss of this current holiday let business can be seen in two main steps as illustrated below:
Some key historic metrics to set the scene...
- Advanced booking revenue recorded in the agent listing (from 2016, as of February 2016): £20,000.00
- Estimated total annual booking revenue in 2016: £31,000.00
- Number of weeks available to book: 48 weeks
- Number of available nights: 336 (48 weeks x 7 days per week)
- Average price per available night (RevPAR): £59.52
- Average room rate (ADR): £unknown.
Scenario 1 (2018-19): Continue and Grow Cash Flow
Running the business and a going concern affords some stability to your first few steps in ownership.
Taking over the controls, alongside any useful pointers from the incumbent owners on transfer should give a good headstart and like-for-like familiarity for benchmark comparison.
Capital Expense: £1800.00 (upgrading services like fire protection and boiler check-up, PAT testing etc.)
Gross operating profit: £20,216.96
- No. of week long bookings: 34
- Occupancy: 70.1%
- Average Daily Rate (ADR): £84.95
P&L - some months of off-peak losses are likely to be smoothed out by peak bookings when it counts.
Staffing - a holiday let is a business model which requires very few staffing arrangements.
Some regular cleaning, perhaps a bookkeeper and an admin clerk to keep your taxation records tidy and a few consultants on retainer, will tend to keep your operation ticking over.
Cashflow - despite a few months of negative cashflow during the off-peak winter months, the business, as-is, ends the 12 month period with a £6,052.96 positive cash balance.
Scenario 2 (2018-19): Conversion To B&B
The expense of converting the business and the property within the first year is approximately 10% of the property price.
Taking on such liability early on along with the risks of converting an established business with market footprint & share to become (effectively) a start-up needs diligent calculation.
But long term, the increased revenue and profits of the B&B model, compared with the holiday let operation, are worth the effort.
First year anticipated occupancy, is estimated to be around 25% to reflect a start-up, without reputation.
If this number grows as planned, year on year, to settle somewhere between 55-65% turnover could be somewhere in the £50,000.00 - 60,000.00 region.
At this level, the net earnings for owners could be about £25,000.00
Capital Expense - £39,800.00
- £3800.00 (upgrading services like fire protection and boiler check-up, PAT testing etc. + installing some fire doors + other conversion necessities)
- £3200.00 (converting kitchen to meet the best food hygiene standards for cooked breakfasts & re-upholstering dining furniture)
- £800.00 (business re-branding & promotional re-launch)
- £2,000.00 (kitchen and consumables stock)
- £2,000.00 (hiring staff)
- £30,000.00 (loan to cover 1st year operational expenses)
Gross Operating Profit - the distribution of profit is spread over a more fragmented set of profit centres as the B&B hires out bedroom suites individually, but the collective picture draws in higher revenue.
Laundry costs and consumables costs are higher, to reflect higher booking number compared to a holiday home let.
P&L - with debt repayment on the start-up loan to cover all necessary new business related expenses and generally increase overheads for increase in bookings turnover and operational resource (i.e. kitchen staff etc.) the P&L of B&B vs. holiday let is very different.
Staffing - a more service intensive business like a B&B will require more staff resource, which of course carries additional overhead.
The staffing figure does not include management staff, as the owners are expected within this business model to hold managerial responsibility (i.e. owner managed).
Cashflow - the cashflow position of your B&B conversion show over £24K of 1st year losses which are skewed largely to due to debt repayment, increased payroll for additional staff resources and only ~25% occupancy due to it being a new business without trade history or reputation.
Scenario 3: Timber Chalet Conversion (alone)
The timber chalet as it currently stands is in need of a renovation to make it habitable and further investment required to make it fit as a furnished holiday let.
Again, this would all be subject to necessary planning permission being granted by the local authorities.
We estimate £25,000.00 cost for converting and kitting out the timber chalet for a moderate furnished holiday let.
Rented as a 1-bedroom self-catering property, this might fetch something in the region of £350.00 per week.
At 50% occupancy, it should turnover approximately £7,000.00+ per annum.
Expected net profit cashflow would be in the region of about £2,450.00 per annum (35%)
DISCLAIMER:This business case above is not to be considered in any way professional advice, but rather an academic exercise to provide a framework of sorts for anyone seeking to know where to begin in assessing such an investment.