Everything You Need to Know Before Buying a Holiday Home
Owning a holiday home is a dream come true for many people, but before you commit to what is likely to be one of the largest investments you’re ever going to make – there’s plenty to learn.
The good news is this guide covers everything you need to know about buying a second home. Whether it’s a holiday home just for family and friends to use or you are looking to start a holiday letting business.
Why do you want to buy a holiday home?
- If you are considering investing in a holiday home, you need to be sure you’re doing it for the right reasons. Are you buying for the rental income, capital growth, or is it a lifestyle investment to enjoy holidays with family and friends (or a mixture of all three?) Your reasons for buying will greatly impact your choice of location and property.
- To run a successful holiday let you will need to work hard. Expect to spend an average of nine hours per week marketing and managing your holiday rental, plus two hours for each changeover. The commitment is 7 days a week, your guests come first- your family, evenings, and weekends second.
- Are you a people person? If you are managing the property yourself, can you deal with the stress when something goes wrong and guests complain – like the boiler breaking down in December at midnight?
- Buying a holiday home commits you to holidaying in the same place. Do you want to return to the same spot every year?
- Who will look after the property when you aren’t there? Is there a local workforce who can clean, do changeovers and tend to the garden? You’ll also have to replace items and carry out maintenance when you are staying there (when you’re supposed to be on holiday).
- As much as you like to stay in your holiday home yourself, bear in mind the peak period is when you make the most money, so school holidays and summer will be off limits unless you are prepared to forgo the lucrative peak season rental income.
- Some people view a holiday home as a way to save on accommodation expenses that would otherwise be incurred when staying elsewhere. Weigh up the expenses involved in running a holiday home – you could take a lot of nice trips each year with this money.
- Will you feel comfortable with other people staying in your holiday cottage and mistreating it on occasions?
- What’s your end goal? Is this a long or short-term investment? Do you plan to sell it in the future, leave it to the kids or retire there?
Where is the best place to buy a holiday home?
- If you’re only going to use the holiday cottage yourself, this makes narrowing down your wish list a little easier. You won’t need to consider potential earnings, occupancy rates, the competition and what guests might enjoy. It’s about what matters to you and your family.
- If you are buying to maximise rental income, don’t fall into the trap of your heart ruling your head. Buying in an area that you have fond childhood memories about or have visited time and time again isn’t necessarily going to perform the best as a long-term investment if it’s remote and there’s nothing to do.
- Location, location, location – is one of the most important factors that contribute to the success of a holiday let and the income you can generate. Fully booked properties are usually located in the best positions, in the most popular tourist destinations (Cornwall, Devon, the Lake District, North Wales and the Cotswolds). For example, Sykes data shows that coastal properties earn on average seven per cent more.
- Properties in a popular holiday location do come with a premium, especially post-pandemic. Cornwall house prices, on average, have seen a 30% jump over the last two years. Although you’re likely to generate more income and get a better return on your investment in the long term – you’ll have to decide if the premium justifies the earning potential.
- This doesn’t mean that you can’t invest in properties off the beaten path. Remote getaways where guests can detox from city life and crowds have a market. Buyers can avoid some of the competition and potentially pick up a cheaper holiday home in these locations. However, it’ll take more marketing efforts to attract guests.
- The proximity to amenities is essential for both holidaymakers and you. Is there parking outside, can you easily get to shops, restaurants, beaches, pubs, supermarkets, country walks, tourist attractions etc. Think about what you look for when you go on holiday.
- Access is one of the most important factors when considering where to buy a second home. Is the holiday home easy to reach by car, air and train? Gridlocked roads in the peak season or limited travel services could make getting there an unpleasant start to the holiday and deter travellers.
- Visit the location at different times of the day or even year to get an idea of what the area is like – noisy, deserted, gridlocked? Why would someone want to come on holiday here?
- Is it a place where you plan to retire to? Noise, gridlocked roads, and hordes of tourists are bearable when you are on holiday, but when you live there it may all be too disruptive.
- In most cases people tend to invest in a holiday let within a couple of hours of where they live, in an area they are familiar with.
- Before buying, research the area (and competition) thoroughly. Is there demand? Is the market buoyant? Is it growing? Look at the prices and customer reviews for your competitors nearby. If the demand is seasonal, will you make enough to cover the periods where there is little income as the bills still need to be paid?
- Research any upcoming changes to regulations – many areas and councils have turned against second homes, which means laws may change which impact your holiday let.
What to look for when buying a holiday home
- Maximising your occupancy levels is all about understanding your target market and how you will get bookings. Do you want to attract families, groups or couples? Buy a holiday home with flexible accommodation. Opt for three bedrooms and two bathrooms, with the ideal scenario being each bedroom having its own en-suite, plus generous living and dining space. A ground-floor bedroom is ideal for people looking for access-friendly properties
- Making sure your property has year-round appeal will help to boost your income –a dishwasher, off-road parking for several cars, secure garden for a dog, hot tub, outdoor bar or pizza oven.
- What type of property do you want? Do you want to convert a barn or restore an old cottage with the potential to increase its resale value (but with a lot of hard work) or buy a brand-new property built to modern building and environmental standards? Be crystal clear about your intentions, goals, and non-negotiable items from the start.
- These days people love to stay in a place that is unique and “instagramable”.
- Do your homework to determine if the property is over-priced, under-priced or priced right. What are the average prices over the long/short term? Are prices on the rise? Use property search sites (such as Rightmove/Zoopla) to research sold prices for similar properties and see if the house has been reduced and how long it has been on the market. Use this data to negotiate the purchase. You can also create an alert on Rightmove and it will email each time a vendor lists a property in a specific area.
- If you are investing for the long-term, it’s more than likely you are going to see capital growth.
- Don’t get carried away with your heart. Before proceeding with the purchase obtain an independent valuation and property survey to identify any potential problems e.g. subsidence, damp, flooding and seek expert legal advice. Any findings could give you ammunition to haggle down the price.
- Ensure a fast internet connection is available at the holiday cottage, especially if it’s rural. Wi-Fi is probably one of the most requested features (especially for workcationers) and could be the deciding factor when guests are comparing cottages.
- For year-round rentals ensure the heating is sufficient. Choose a property with/or one that has the potential to add a wood burner or an open fireplace. This creates a cosy ambience that winter travellers are looking for.
- Can you legally sublet the property? If it’s a flat/apartment then running a holiday let may be against the rules within the leasehold.
- Consult the local planning authority to investigate any planned developments in your area. A new budget hotel, motorway, housing estate or train line could have a detrimental effect. On the other hand, a new local attraction or cycle trail could enhance the property.
- Although there are many good reasons for owners to sell, find out why they are selling.
- Is business declining or is there an imminent development which may spoil the view or create noise, for example?
- One visit isn’t enough. Check out the property during the day and evening, and on the weekend and weekday so you can get a sense of traffic and noise. Ask your potential neighbours what they think about the location and the property itself. If it’s currently a holiday let -can you rent it for a weekend?
- Besides the building itself, you need to know whether other assets essential to the holiday letting business are included in the asking price or would be charged as extras. Are the website and domain name, the customer database, booking management system, equipment and fittings necessary included?
Is a holiday home a good investment?
- Do the numbers add up? – would a holiday let provide higher rental yields than a buy-to-let property? Is property investment the best choice? Your capital might get a better return invested elsewhere.
- How much could you make? The average occupancy rate is around 21 weeks, generating roughly £21,000 a year. However, popular areas that attract guests year-round such as the Lake District can achieve 40+ weeks occupancy generating £30,000+ per year.
- Will the rental income cover your costs, making a profit or loss? Don’t overestimate rental income or underestimate your expenses. There are significant expenses involved in setting up and running a holiday let. You’ll need to factor in any mortgage repayments, property management fees, cleaning, maintenance, renovations, breakages, taxes, insurance, utility bills, travelling expenses (if you are not nearby) to name just a few. A good rule of thumb is to budget about 1% of the home’s purchase price for annual maintenance.
- To calculate the net rent (income minus the costs of running/maintaining the property), divide this into the value of the property and multiply by 100. So for example, if net rent is £10,000 and the property cost £200,000 the yield is 10,000/200,000 = 0.05 x 100 = 5% yield.
- Do you have any contingency savings or disposable income to support the business in leaner times? For example, during the Covid pandemic, there were many months of £0 income.
- If the property is an established holiday let, ask for the last three or four year’s accounts. Ideally, the accounts should show consistency and a steady improvement. Is there an opportunity to improve occupancy and/or raise prices? If the vendor is adding a premium for the business don’t overpay if similar bookings are easily attainable.
- How much are similar properties renting for? What is the potential occupancy? Head over to vrbo.com or Airbnb.co.uk and search for similar properties in your area. Immediately you’ll get an insight into your competitors’ prices and occupancy rates. Bear in mind that some of the blocked-off dates will be the owner/family using the property and established holiday rentals will have higher occupancy rates (due to repeat guests) than those just starting out.
- Also, speak to holiday cottage letting agents who have experience renting similar properties in your area. How much rental income and what costs can you realistically expect? Don’t rely on projected figures from the person trying to sell you the property.
- Is there a demand for another holiday rental or is the local market saturated? One consequence of market saturation is underpricing to get bookings, which means low margins. If there is no demand or profit, then the whole exercise could be doomed from the start.
- If you are buying a holiday home as a lifestyle investment (e.g. for family holidays) then it’s likely your focus will be on the property and location rather than any potential rental yields, but don’t neglect the potential for capital growth over the long term. Can you add value by developing?
- After a raft of tax and regulation changes affecting landlords, you might discount a buy-to-let investment. The good news is that holiday let landlords can take advantage of favourable furnished holiday let tax perks that are no longer available to buy-to-let landlords.
- The cost of furnishing your holiday let can be deducted from your pre-tax profits. Other allowable expenses include interest on your mortgage, insurance, allowances for utilities, products bought for the property such as welcome packs, cleaning, maintenance and advertising or letting fees.
- Council tax on holiday lets costs more than a regular property and different regions and countries set their own rates. However, your holiday let may be exempt from council tax, instead the propery is subject to business rates. You may be able to claim small business rate relief which, can be up to 100 per cent depending on where the property is situated and meeting certain criteria.
- To qualify for the furnished holiday letting tax benefits your holiday home must be available for letting to the public for at least 210 days a year and must be let for at least 105 days a year. Is this realistically achievable in your area?
- When buying a second home, you will also pay a higher rate stamp duty surcharge of 3% on top of the normal rate for each price band.
- It’s important that you have your mortgage in place (if needed) – that way you can move quickly on the purchase if needed. If you plan to rent out your holiday home, you will need a specialist holiday let mortgage. Typically, lenders for holiday let mortgages typically require a minimum of 25-35% deposit. Lenders will also expect proof that you can make a gross income of 125-130% of your mortgage payment.
- Property investment can be a great way to make money – but unexpected repairs and lack of rentals is also a quick way to lose money. It is important to consider all these costs before committing.
Will you manage the property yourself or through an agency?
Managing a holiday let comes with costs – not just financial costs, but also time costs. Are you willing to manage everything from advertising, finding and screening guests, cleaning, handling bookings, regular maintenance, repairs and attending to emergency call-outs?
Or you can hire a holiday letting agent to manage your property and bookings. You should expect to pay 20% to 30% of your rental income for property management services, but it is tax-deductible.
Always get a couple of holiday home insurance quotes before you purchase a property to ensure that suitable cover is available. This could flag up potential issues which could impact cover and premiums – such as if the property is in a flood-risk or subsidence area. The Environment Agency website is another useful resource that you should use.
If you are looking to make easy money, then letting out your holiday home is probably not the best way to go about it. However, if you enjoy meeting people and are looking to perhaps escape the ‘rat race’, then holiday letting is a way to generate an income whilst being your own boss.
Like all investments, there are risks when purchasing property, but there are also opportunities. The key is to do your research and treat a holiday let as you would any investment. Do not let your heart rule your head and don’t take risks that can end up costing you a lot of money.
A holiday home means you have your own bolt hole which you can enjoy and let out to help contribute to the running expenses. Regardless of your motives for buying, it’s a ‘lifestyle investment’ many aspire to.
Do you have any holiday property purchasing tips or pitfalls to avoid? Please share them below.
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