Something that appeals to many as an investment is the holiday let.
If you’ve heard of it but are unsure what it means, the following top tips might prove useful.
The idea is simple. You purchase a property and let it to holidaymakers for parts of the year. The income that generates helps you pay the mortgage and running costs on the property while your capital investment appreciates, hopefully.
If sensibly planned and managed, it can be a good way to invest in bricks and mortar.
To start, just like with any property purchase, you’ll have to find a property that’s suitable and affordable.
Then, you’ll also have to arrange the financing for it in the shape of a mortgage, unless you’re an outright cash buyer:
- mortgages for holiday lets are typically a different category of lending to owner-occupier or landlord ‘buy-to-let’ mortgages. That’s because the characteristics of how the property will be used will be different to the other two categories (see below).
The property and renting profiles
Typically the property you’re looking for will be in a known holiday area. Generally speaking, this means that your rental income will be seasonal. There are exceptions to this of course– for example city centre properties – but they are few.
It also means that, unlike a typical landlord, your customers will come and go having stayed usually a week or so at the most:
- select your location carefully. There’s little point finding a low-cost property if it’s somewhere that people don’t want to go on holiday. Remember, your occupancy statistics will be key to your success in income terms;
- your property will need to be of a certain minimum standard of presentation and facilities to attract holidaymakers. If it isn’t, you’ll need to budget to bring it up to scratch.
- properties in popular holiday spots can command higher prices than properties elsewhere. Be prepared for that reality.
Not all mortgage lenders welcome applications for funding for this purpose. You may need to look for a specialist provider or facilitator of mortgages for holiday lets.
Some aspects of their criteria for lending will be familiar. Typically they’ll need to see that you have regular income and that you’re looking at a sensibly priced property based upon their assessment of its market value.
In terms of your financial planning:
- you may need to find a slightly higher percentage of the purchase price as a deposit than you’re used to as an owner-occupier
- be realistic about how much of a contribution your holiday letting income will make to the running costs of the property. Most lenders will want to see a figure of 120-140% of your monthly mortgage repayment (averaged over the year) derived from your rental income.
- if you have significant equity in your own residential property, you may be able to re-mortgage and release some of that equity to be used as the deposit for the new purchase;
- budget for furnishing, repairs and maintenance
Points to avoid
There are a few elementary mistakes that some entrants into this field make and they’re worth avoiding:
- do not try and purchase a property with an owner-occupier or standard buy to let mortgage and then try to use it for holiday income generation. You’ll be in breach of your mortgage conditions and that could result in demands from the lender for an immediate and total repayment of their loan.
- think about property insurance on a similar basis. You will need holiday let property and contents cover not owner-occupier policies. A claim under the latter will result in your position being discovered and your claim may be rejected.
There are potential financial gains to be had in this domain but you will need to have done your planning carefully and in advance.
A specialist mortgage provider in the field should be able to offer you further useful advice.