We get a number of phone calls from people who are considering holiday letting for the first time. It can be a minefield, but if you are considering buying a property for holiday letting here are 5 questions to think about before putting the offer in.
1 – Profit or pleasure?
In our view, this is the most important factor to consider before starting to look for a property. The profit or pleasure decision should be quite easy to make, but there will most likely be an element of both. However, deciding which of the two is more important will help you with other decisions throughout the process.
Pleasure – This group of people generally want a second home / holiday home somewhere that they have always loved. They will want to use the property themselves at weekends and for holidays. The pleasure people will, of course, want to see a long-term return on their investment, but the decision to holiday let will tend to be just to help finance the project. Ideally the pleasure people wouldn’t let their prized cottage out, but without the financial assistance of holiday makers, the dream would not become a reality.
Profit – By ‘profit’ we really mean people whose primary focus is financial investment. These fall into two categories: The first category is for people who want to purchase a holiday home as a financial, long term investment. They may want to stay at the property themselves on occasion (i.e. an element of pleasure), but the main aim is for the holiday home to pay for itself or even ideally, bring in a small profit to offset mortgage payments by holiday letting. The owner then has a capital asset at the end of the process. The second category is for people who own a second property, or a number of out buildings (for example farms or estates) and want to receive regular income from their properties.
2 – Is it a good location?
This is likely to be easy for the pleasure owners if they’ve always dreamt of a cottage in Cornwall by the sea, or a stone cottage in the Cotswolds. Of course if the property that you want to holiday let is part of your farm, then location is easier still. However, if profit and investment is your main driver, then this will need careful consideration. Many seaside resorts can be very quiet in the winter season. This is a real shame as walking the dogs along a deserted wind-swept beach in January on a bright sunny winters day is truly exhilarating. Attitudes are changing, but the reality is that coastal properties can be pretty quiet out of season, so if you are considering one, think about other features that can increase winter lets e.g. wood burner, hot tub or under occupancy discounts for larger properties. Centrally located historic towns and villages often have year-round appeal especially if there are log fires, country walks, restaurants, interesting shops and village pubs on offer. If you are planning on equipping the holiday home with spa facilities such as swimming pool and hot tub, then location might be less of an issue. Most types of locations can be marketed, just make sure that you understand the options. Also, consider how close you live to the property. For example, could you drive there and back in a day to replace a broken TV, or will you need to enlist some local support?
3 – Who will it appeal to?
In today’s market, it isn’t really possible to be “all things to all people”. A young family will have different needs and expectations to a young newlywed couple, who in turn will have different requirements to a group of friends. It is a cyclical process but target market, size of property, type of property and budget need to be reviewed and re-reviewed together. In many cases budget is the deciding factor and, as 1 bedroom cottages tend to be cheaper than 8 bedroom manor houses, your decision might be made for you. If you are buying a holiday home for your own use however, then you will be looking for something that suits your own needs.
Large properties can be lucrative, especially at the luxury end. However, they will not be as attractive to couples. We own a 1 bedroom (2 person) cottage and a 2 bedroom (4 person) cottage very close to each other with a very similar offering. Our 1 bedroom cottage generates slightly more income and lets better than our 2 bedroom cottage. Obviously there are other factors to consider, but the bare facts are (in our case) that the cheaper of the two properties generates more income. Something to consider if you are looking purely for investment. Smaller properties can often be cheaper to buy, run and maintain. The ‘couples’ market also offers good letting potential as couples tend to be more spontaneous with fewer restrictions to prevent them going away, particularly at short notice.
Another factor to consider is the level of quality that you wish to provide. Presumably, if you want to use the holiday home yourself you will want to decorate and furnish it to your own tastes and standards, but be prepared to also consider practicality and robustness if you are going to let the property out. And remember that not everyone has the same idea of taste!
If you are looking at the luxury end of the market, don’t be fooled into thinking that your guests will be overwhelmed with happiness just because your property is ‘luxury’. We have found that guests paying top money for a holiday expect the very best (and rightly so) and at times, satisfying everyone’s expectations of ‘luxury’ can be challenging. At all levels, but particularly so in the middle and ‘budget’ levels, it’s down to guest’s expectations and how you manage them. Although outside the scope of this article, all guests from budget to luxury expect the cottage to be clean and tidy and expect good value for money.
Another factor for larger holiday homes is the ratio of bathrooms / toilets per guest. Whilst as a cottage owner you may be willing to share bathroom facilities with other family members, your paying guests may not. One bath/shower room per 4 people is the minimum, and a separate toilet can be useful too. You will, ideally, need space for a shower as 4 guests each having a bath before going out will take quite a lot of planning! If you are hoping to attract couples then ensuite facilities for each bedroom is a good sales feature.
Parking is another consideration to factor in. Whilst not totally essential, you will lose some bookings if off-street parking isn’t provided. In some areas, especially coastal towns, parking is not an option, but then you are on an even footing with your competition. If the property that you have set your heart on does not have parking, then just be aware that you may have 1 or 2 extra empty weeks than you would otherwise have had. Having said that we own a cottage which doesn’t have parking, but the wood burner and central location seems to make up for it, as we have a good level of bookings and repeat customers.
Think of facilities as items on a ‘scorecard’. Parking alone might not be a deal breaker but if your holiday home is also missing other features (such as a view, desirable location, period character / contemporary design, open fires, etc) it will be harder to market.
Whether to accept pets or not is outside the scope of this article. However, if you are planning to accept pets, then you may want to consider whether the property you are considering is suitable. For example, is the local area pet friendly, are the floor coverings hard wearing and is there a secure garden area.
Will the property be easy to resell? If you are entering the holiday letting market for investment purposes, then it is worth considering divestment at this early stage. Depending on your personal plans, you will most likely be selling the property at some stage. As the saying goes “you only need one buyer”, but your risk could be reduced greatly if the property has wide appeal should you need to sell quickly.
4 – Will it let?
Consider how you will market the property. For example, will the property photograph well? Are there views from a window? Are there any special features or facilities that will entice guests? Moreover guests are often willing to forego quality rating systems if they can see large bright photos of the holiday home showing each room to its full potential or photos of distant sea views or countryside.
What is the Unique Selling Point (sales people refer to a USP)? Is it the location, the views or the charm of the property? There needs to be at least one USP or it will be very hard to market.
What surrounds the property? If you have gravel pits, an airport runway or a council recycling centre next door, don’t expect much repeat business!
5 – Do the sums add up?
In its purist form, the financial viability rests on money coming in versus money going out. This is especially important if your primary aim is investment. However, you will be unlikely to make a short term profit on your holiday home if you have the capital investment to consider, think of it as a marathon not a sprint.
Setup costs – I won’t break down each cost as it will vary on a case-by-case basis. However, be realistic with the amount of work that needs to be done (and allow unds for it to go over!). You will need to be mindful of the legal obligations involved with holiday letting as there are legal considerations for ‘landlords’. For example, you will need to ensure that all electrical and gas fittings and appliances are tested. You will need to get quotes from professional tradesmen. Set up costs include everything that you will need for your first holiday let. From beds to cutlery, pictures to smoke alarms and window locks to the website, all items need to be considered and budgeted for.
Running costs – These are your ongoing costs and will include:
- Annual charges: such as gas safety check, TV licence, Health and Safety Risk Assessment (unless you self assess), chimney sweeping, Portable Appliance Testing (PAT), Insurance (specialist holiday letting insurance is available), Council Tax / Rates, Advertising fees (if renting independently), website hosting and redecoration as there is sure to be wear and tear.
- Quarterly Charges: Gas, water, electricity charges.
- Monthly Charges: Telephone / broadband, rubbish collection.
- Weekly / per stay charges: Logs (if supplied during winter), housekeeper, laundry, welcome hamper (if supplied), agency fees (unless letting independently).
- Ad-hoc – breakages and damage: such as linen and towels, crockery and cookware. Also budget for at least one major appliance to be replaced each year, carpets to be cleaned and an ad-hoc redecorate of a room to two.
Rental income – This will differ greatly depending on whether you chose to let through an agency or independently, with agents charging 15-30% depending on the agent and level of service that they provide. If you are looking to use your holiday home a lot yourself, then you will most likely prefer the flexibility of letting independently. It can be quite difficult to determine what to charge and we suggest that you start by looking at your competition and see what they charge. However, if you are considering using an agent, they will have a pretty good idea of what you can charge and the number of weeks occupancy that you can expect. You will not be 100% let and it will be difficult to predict what level of occupancy that you are likely to get. It is worth having three options based on expected occupancy such as: worst case (50%), likely case (65-70%) and best case (80+%) – however, these will vary greatly depending on the type, location and style of your holiday property. A little competitor research will go a long way!
Once you have an idea of your expenditure and likely income, it will be worth speaking to an accountant as there are tax advantages which can be considered.
Last of all, the best piece of advice that we can give you is to be honest with yourself. It’s easy to get caught up in the excitement of it all, so talk to people who are in the know. Find out if holiday letting is for you before jumping in feet first!