| For many people a property is more than a place to | | | | around half the weeks in the year, making things |
| live. It is the start of a whole new lifestyle and | | | | difficult for anyone seeking a regular income. |
| better quality of life. What could be better than all of | | | | Jonathan Smith, of major holiday property agency |
| this being financed out of the rent paid by somebody | | | | English Country Cottages, says the average |
| else? | | | | occupancy rate for their 2,800 cottages is around 21 |
| For most landlords a place to retire to is likely to be | | | | and a half weeks. "Some areas of the country, such |
| located on or near to the coast or in one of the | | | | as Norfolk, are more popular, however, and average |
| 'honey pot' locations: the peaks, the lakes, the | | | | around 23 to 24 weeks occupancy," he says. |
| Cotswolds, the highlands, the Norfolk Broads. | | | | In areas with year-round appeal, like the Cotswolds, |
| I set out to find out how practical it might be for | | | | or big tourist cities such as Edinburgh, Bath or |
| landlords to consider buying and renting out a | | | | Stratford-upon-Avon, occupancy rates are likely to |
| property with the view that one day they would be | | | | be higher (see case study below.) However, |
| able to retire and live in it. | | | | properties near beach resorts may attract very high |
| Options | | | | prices during the summer, but stand empty for much |
| The good news for a landlord considering investing in | | | | of the rest of the year. |
| a retirement property is that popular retirement | | | | Financing your retirement home |
| locations are often places that are also popular with | | | | This high-risk image can make it much more difficult |
| holiday-makers. This means that there are several | | | | for a landlord to get a mortgage on a holiday let than |
| options open to a landlord in renting out a residential | | | | on a traditional buy-to-let property. |
| property. | | | | David Hollingworth of Bath-based mortgage broker |
| Renting their property | | | | London & Country says borrowers can generally |
| Landlords could choose to rent out their property as | | | | not get a buy-to-let mortgage on a holiday property |
| a traditional buy-to-let property. This means letting | | | | because lenders tend to insist on assured shorthold |
| the residential investment property under an assured | | | | tenancies (the traditional six-month type.) |
| shorthold tenancy. The advantages for a landlord of | | | | "A lot of borrowers wanting to buy a holiday cottage |
| doing this is that the property should be let year | | | | or flat to rent out will have to finance the deal by |
| round and therefore a landlord will have a monthly | | | | remortgaging their own home," says Hollingworth. |
| income with which to pay off their buy-to-let | | | | "Most lenders will want to see that you can afford |
| mortgage. | | | | the increased mortgage payments without any rental |
| The likelihood is that a landlord will need to employ a | | | | income on the second home." |
| letting agent to manage their property. A landlord | | | | Building societies agreeing to lend on holiday let rental |
| should budget on between 8-15% of the rent to | | | | income are fairly rare and have strict lending criteria. |
| cover these charges. | | | | Are you prepared for the extra hassle? |
| There are a number of potential problems with | | | | Holiday lets also come with a higher hassle factor |
| buying and letting out an investment property within | | | | than residential buy-to- lets. Ordinary tenants don't |
| these locations: | | | | generally expect the landlord to provide them with |
| * Acquisition costs can be high, as the properties are | | | | fresh linen, cleaning and gardening services each |
| often in popular & expensive parts of the UK | | | | week. |
| * As a consequence of the above and the fact that | | | | This higher spec is demanded by holiday guests. In |
| the local population may not be highly paid and | | | | comparison buy-to-let properties are frequently |
| therefore are unable to afford high rents; is that a | | | | provided unfurnished. Turnover of guests is far |
| landlord may only be able to achieve a low yield. | | | | greater for a holiday let where guests can stay for |
| * The results of a low rental yield on the property | | | | just a couple of days. Therefore, a landlord is likely to |
| for the landlord is that they may only be able to | | | | want to employ a letting agent to carry out the |
| borrow a relatively low loan to value because of the | | | | bookings and marketing of their holiday investment |
| limitation on rental cover placed on lending by many | | | | property. The costs of this is likely to amount to |
| buy-to-let mortgage companies. | | | | around 20% of a holiday home owners rental income, |
| A landlord should therefore also consider the | | | | with the possibility that VAT has to be charged on |
| alternative to buying an investment property let on a | | | | top of this increasing the effective rate to 23%. This |
| permanent contract such as an assured shorthold | | | | charge does not include employing a house keeper to |
| tenancy agreement. Instead they could consider | | | | carry out all the day to day cleaning and maintenance |
| buying an investment property as a holiday let. In | | | | work. |
| some parts of the country, holiday lets can be a | | | | Long term rewards |
| more lucrative proposition, with cottages in popular | | | | Despite all these difficulties a landlord that buys a |
| locations pulling in as much over the six week school | | | | potential retirement property whether this is a |
| summer holiday period as a traditional rental property | | | | Cornish cottage, or Scottish Manor house could well |
| would pull in over six months. | | | | acquire themselves a future lifestyle paid for by their |
| Typical long-term rental charges for a two to three | | | | tenants or guests, few others could afford. |
| bedroom house in the Norfolk Broads are around | | | | My advice is to carry out thorough research of the |
| £550 to £600 a calendar month, for | | | | area before buying. Any property investor will need |
| example. But the holiday cottages sleeping four to | | | | to carry out a careful investment evaluation of |
| five in that area can cost that amount for a week in | | | | whether the holiday let or traditional assured |
| the high season. Christmas, Easter and half-term | | | | shorthold tenancy is the most suitable route by which |
| holidays are also busy times, but in low season | | | | the investment property should be bought and let. |
| rentals on such properties can fall to £200 a | | | | CASE STUDY |
| week. | | | | Rosemary Alexander turned to holiday letting five |
| Tax advantages | | | | years ago after her two children left home. "I did not |
| The other advantage for residential investor buying a | | | | want to go back to my career as a solicitor, and |
| property as a holiday let as a posed to buy-to-let is | | | | holiday letting seemed the obvious solution to fill the |
| that if a property was sold as a buy-to-let | | | | gap," she says. |
| investment then the investment could be subject to | | | | Rosemary and husband Ian already let out a cottage |
| significant capital gains taxes. | | | | attached to their family home in the Cotswolds, but |
| Therefore a holiday let investor may also be | | | | Rosemary has now turned holiday letting into a |
| attracted by the capital gains tax-breaks not available | | | | lucrative business by buying another cottage in |
| to traditional buy-to-let investors. As long as the | | | | nearby Winchcombe. The Alexanders remortgaged |
| property is furnished, available to let for at least 140 | | | | their own home, borrowing £100,000 on an |
| days of the year, actually let for at least 70 days, | | | | interest-only loan to buy the new property and do it |
| and for seven months of the year is not normally | | | | up. "I was a bit concerned about whether rental |
| occupied by the same person for more than 31 | | | | income would cover the mortgage, but that's never |
| consecutive days, the taxman treats the residential | | | | been a problem," says Rosemary. Two years ago |
| property as a business asset. | | | | she bought her third cottage, and now grosses up to |
| This means that if landlord was to sell, the property | | | | £43,000 a year on the three properties. "My |
| qualifies for business asset taper relief on any capital | | | | outgoings are at least 50% of that, what with |
| gain. As long as the landlord has owned their holiday | | | | maintenance, business rates, mortgage and other |
| let for two or more years they will only pay a | | | | costs," she says. "I use some of my profits to try |
| quarter of the normal capital gains tax. The majority | | | | and pay off the mortgage, as my main aim is capital |
| of taxpayers, for example, would pay 10% instead | | | | gain." |
| of 40% on any gains over their annual exemption | | | | Initially, she used holiday cottage agencies, but |
| amount (£8,800 tax year 06/07). | | | | thought their commissions made her prices too |
| By comparison, ordinary residential lets qualify for the | | | | expensive. Now she markets the cottages herself |
| less generous non-business taper relief, with gains | | | | and advertises on websites, as well as through the |
| fully taxed on properties owned for three years or | | | | local tourist board. "My marketing costs are |
| less, and tax cut by just two-fifths after ten years | | | | £1,000 a year, but I have pretty full |
| (from 40 to 24% for higher-rate taxpayers.) | | | | occupancy - 48 weeks in two of the cottages - so |
| Holiday lets' treatment as business assets also means | | | | it's worth it," she says. Two of her cottages sleep |
| these residential investment properties can be passed | | | | four to five people, and cost between £195 |
| on to a landlords heirs with substantial inheritance tax | | | | and £495 a week, depending on the time of |
| advantages. | | | | year. For the third, one-bedroom Michaelmas Daisy |
| Holiday let - downside | | | | cottage, she charges between £195 and |
| But despite the tax gains and potential for high rents, | | | | £320. "It's hard work, and you have to follow |
| running holiday lets is not for the faint-hearted. It's | | | | up inquiries quickly, but I am building up a property |
| not unusual for rural properties to stand empty for | | | | portfolio. |