If you've ever wanted to retire by the sea then a combination of an increased trend in so-called 'staycation' breaks and rising property prices means buying a holiday home to let could be one way to realise this.
The weaker pound has pushed the cost of an overseas trip beyond the pockets of many families, so they're planning to have a holiday far closer to home this year.
A survey by Direct Line Travel Insurance found that 48% of people had booked a holiday in the UK for some time in the next 12 months: that’s 24 million people.
London was the most popular destination, but that’s followed closely by Cornwall, the Scottish Highlands, the Lake District and Devon.
This trend has created a surge in demand for holiday homes. James Morris, managing director said: “Each year bookings increase, as more and more people realise the benefits of taking a staycation in the UK.”
How much can you make?
Holiday rentals can fetch impressive sums.
A browse through Cornish cottages on holidaylettings.co.uk reveals that a two-bedroom property by the sea will rent out for an average of between £600 and £1,300 a week.
Assuming you manage to rent it for 31 weeks a year at an average of £800, that’s an income of almost £25,000.
A hunt through Rightmove.co.uk reveals that there are two-bedroom holiday cottages on the market everywhere from Truro to St Ives for £300,000 or less.
If you were to borrow £300,000 at 3% over 25 years (you would obviously need a deposit, but we'll get to that later) it would set you back around £17,000 a year.
Clearly £25,000 is far more than £17,000, but the maths isn’t quite this straightforward.
When you buy your holiday property, you will have to pay Stamp Duty, plus the additional 3% rate that former Chancellor George Osborne slapped on second homes in April.
You also have to pay tax on the rental income.
The good news is that holiday homes are taxed differently to other kinds of buy-to-let investments. Before calculating the amount you have to pay tax on, you can subtract the mortgage interest you pay.
For those with typical buy-to-let properties, the rules on this will change from 2017, cutting the mortgage interest tax relief. However, there will be no cuts to the relief for holiday lets.
In addition, running a holiday property is treated by the taxman in the same way as running any other kind of business, so losses can be carried forward and offset against future profits.
It means that while your first year may be dominated by the cost of furnishing and preparing a property for rental, any loss you make can be offset against profits in the second year, reducing your tax bill dramatically.
Other costs to consider
You will be subject to business rates, which will be decided by the Valuation Office Agency based on the property size, type, location and how many people can sleep in it.
The tax will depend on the value the agency puts on it, the prevailing business rate, and any relief currently on offer from the government. Right now in many cases, owners will be able to get small business rate relief at 100% so there’s nothing to pay.
In order to qualify for these tax reductions, you have to comply with the rules of a ‘furnished holiday letting’. You must make the property available for a commercial rent for at least 210 days a year and actually rent it out for at least 105 days of that.
Aside from the tax, there’s the cost of maintenance and repairs. In the age of social media and online reviews it only takes one person to be unimpressed with a ‘tired’ property for thousands of others to be put off.
You will therefore need to keep it in great condition, which means replacing items and redecorating far more frequently than you would in your own home.
You also need to consider the bills, which range from insurance, to the TV licence, energy bills, internet connection, and water rates.
Finally, you need to consider property management. Some people choose to do the work themselves. It means being close enough to be on call for tenants, and to clean, tidy and make any repairs after the guests have left.
For people who buy a property some distance from their home, this isn’t usually practical. In their case they may need to employ a property manager who in turn will employ cleaning staff.
The cost of these services varies, but owners can easily spend between 15% and 30% of their rental income on property management.
All of these costs can be offset against profits for tax purposes, but they are still a cost you need to factor into your calculations when working out whether you can cover the mortgage of a holiday home by renting it out.
Even when the maths stacks up, there remains the issue of financing the purchase. If you can free up the money to pay in cash, there’s no issue.
However, if you need to borrow, you may have a job on your hands.
There are a handful of specialist mortgages available, but these are few and far between.
Traditional buy-to-let lenders tend to steer clear of the market, because there’s a much higher risk of void (empty) periods than with long-term rentals, so there’s less certainty for them that you can afford to pay the mortgage.
If you are determined to borrow for a holiday property, therefore, you may need to use a broker to track down and negotiate a mortgage for you.
It is still likely to mean you need a substantial deposit often 25% and that you will have to accept a variable rate mortgage, which makes up most of the market.
Alternatively, you can remortgage your own home and free up cash to buy a holiday property – assuming you have enough equity in your property.
Finding a property
If you overcome all these obstacles, and decide a holiday home is the right investment for you, the only thing left to decide is what property to buy.
There are plenty of people who will come unstuck at this point too. The problem is that your dream home by the sea may not be an ideal holiday let.
A survey by holidaycottages.co.uk, found that people renting a property are often looking for the kinds of things that residents don’t want the hassle of.
This includes a hot tub (which increases revenue by 44%) and a swimming pool (which adds 18%).
Location can be an issue too as, while holidaymakers may jump at the chance to stay in a terraced home in St Ives, within walking distance from all the attractions of the town and the beach, when you’re retired, the idea of a noisy property with nowhere to park may be somewhat less appealing.
The kind of property you opt for can be a sticking point too.
To make the best possible return from a rental property, it makes sense to have plenty of bedroom space compared to reception space: the more people you can sleep, the more you can charge.
However, you have to ask yourself whether when you finally retire to your dream home by the sea, you’ll really want a property with a small lounge and four double bedrooms.
If you borrow to invest in a holiday home, you need to fully understand the risks you are taking.
There will be unexpected costs and there will be periods where you struggle to rent it out.
Before you take this leap you need to appreciate the chance that things won’t be straightforward, and have the resources in place to ensure that when complexities arise you can still pay your bills.
Every case is different, so before embracing or dismissing this opportunity it’s well worth doing your research to see if it would work for you.