BUY TO RETIRE LANDLORDS
For many people a property is more than a place to live. It is the start of a whole new lifestyle and better quality of life. What could be better than all of this being financed out of the rent paid by somebody else?
For most landlords a place to retire to is likely to be located on or near to the coast or in one of the ‘honey pot’ locations: the peaks, the lakes, the Cotswolds, the highlands, the Norfolk Broads. Property Hawk set out to find out how practical it might be for landlords to consider buying and renting out a property with the view that one day they would be able to retire and live in it.
The good news for a landlord considering investing in a retirement property is that popular retirement locations are often places that are also popular with holiday makers. This means that there are several options open to a landlord in renting out a residential property.
Renting their property
Landlords could choose to rent out their property as a traditional buy-to-let property. This means letting the residential investment property under an assured shorthold tenancy. The advantages for a landlord of doing this is that the property should be let year round and therefore a landlord will have a monthly income with which to pay off their buy-to-let mortgage.
The likelihood is that a landlord will need to employ a letting agent to manage their property. A landlord should budget on between 8-15% of the rent to cover these charges.
There are a number of potential problems with buying and letting out an investment property within these locations:
- Acquisition costs can be high, as the properties are often in popular & expensive parts of the UK
- As a consequence of the above and the fact that the local population may not be highly paid and therefore are unable to afford high rents; is that a landlord may only be able to achieve a low yield.
- The results of a low rental yield on the property for the landlord is that they may only be able to borrow a relatively low loan to value because of the limitation on rental cover placed on lending by many buy-to-let mortgage companies.
A landlord should therefore also consider the alternative to buying an investment property let on a permanent contract such as an assured shorthold tenancy agreement. Instead they could consider buying an investment property as a holiday let. In some parts of the country, holiday lets can be a more lucrative proposition, with cottages in popular locations pulling in as much over the six week school summer holiday period as a traditional rental property would pull in over six months.
Typical long-term rental charges for a two to three bedroom house in the Norfolk Broads are around £550 to £600 a calendar month, for example. But holiday cottages sleeping four to five in that area can cost that amount a week in the high season. Christmas, Easter and half-term holidays are also busy times, but in low season rentals on such properties can fall to £200 a week.
The other advantage for residential investor buying a property as a holiday let as a posed to buy-to-let is that if a property was sold as a buy-to-let investment then the investment could be subject to significant capital gains taxes.
Therefore a holiday let investor may also be attracted by the capital gains tax-breaks not available to traditional buy-to-let investors. As long as the property is furnished, available to let for at least 140 days of the year, actually let for at least 70 days, and for seven months of the year is not normally occupied by the same person for more than 31 consecutive days, the taxman treats the residential property as a business asset.
This means that if landlord was to sell, the property qualifies for business asset taper relief on any capital gain. As long as the landlord has owned their holiday let for two or more years they will only pay a quarter of the normal capital gains tax. The majority of taxpayers, for example, would pay 10% instead of 40% on any gains over their annual exemption amount (£8,800 tax year 06/07).
By comparison, ordinary residential lets qualify for the less generous non-business taper relief, with gains fully taxed on properties owned for three years or less, and tax cut by just two-fifths after ten years (from 40 to 24% for higher-rate taxpayers.)
Holiday lets’ treatment as business assets also means these residential investment properties can be passed on to a landlords heirs with substantial inheritance tax advantages.
Holiday let – downside
But despite the tax gains and potential for high rents, running holiday lets is not for the faint-hearted. It’s not unusual for rural properties to stand empty for around half the weeks in the year, making things difficult for anyone seeking a regular income.
Jonathan Smith, of major holiday property agency English Country Cottages, says the average occupancy rate for their 2,800 cottages is around 21 and a half weeks. "Some areas of the country, such as Norfolk, are more popular, however, and average around 23 to 24 weeks occupancy," he says.
In areas with year-round appeal, like the Cotswolds, or big tourist cities such as Edinburgh, Bath or Stratford-upon-Avon, occupancy rates are likely to be higher (see case study below.) However, properties near beach resorts may attract very high prices during the summer, but stand empty for much of the rest of the year.
Financing your retirement home
This high-risk image can make it much more difficult for a landlord to get a mortgage on a holiday let than on a traditional buy-to-let property.
David Hollingworth of Bath-based mortgage broker London & Country says borrowers can generally not get a buy-to-let mortgage on a holiday property because lenders tend to insist on assured shorthold tenancies (the traditional six-month type.)
"A lot of borrowers wanting to buy a holiday cottage or flat to rent out will have to finance the deal by remortgaging their own home," says Hollingworth. "Most lenders will want to see that you can afford the increased mortgage payments without any rental income on the second home."
Stroud & Swindon and Scarborough building societies are fairly unique in agreeing to lend on holiday let rental income, but to get a loan from Stroud & Swindon you will need to show that your potential income will be at least 130% of mortgage interest based on its buy-to-let standard variable rate. Scarborough has similar terms.
Are you prepared for the extra hassle?
Holiday lets also come with a higher hassle factor than residential buy-to- lets. Ordinary tenants don’t generally expect the landlord to provide them with fresh linen, cleaning and gardening services each week.
This higher spec is demanded by holiday guests. In comparison buy-to-let properties are frequently provided unfurnished. Turnover of guests is far greater for a holiday let where guests can stay for just a couple of days. Therefore, a landlord is likely to want to employ a letting agent to carry out the bookings and marketing of their holiday investment property. The costs of this is likely to amount to around 20% of a holiday home owners rental income, with the possibility that VAT has to be charged on top of this increasing the effective rate to 23%. This charge does not include employing a house keeper to carry out all the day to day cleaning and maintenance work.
Long term rewards
Despite all these difficulties a landlord that buys a potential retirement property whether this is a Cornish cottage, or Scottish Manor house could well acquire themselves a future lifestyle paid for by their tenants or guests, few others could afford.
Property Hawk advises it’s users to carry out thorough research of the area before buying. Any investor will need to carry out a careful investment evaluation of whether the holiday let or traditional assured shorthold tenancy is the most suitable route by which the investment property should be bought and let.
For more information on buying and letting a holiday home have a look at Allison Lee’s book; “Buy and let a holiday cottage” £12.99 how to books.
Rosemary Alexander turned to holiday letting five years ago after her two children left home. "I did not want to go back to my career as a solicitor, and holiday letting seemed the obvious solution to fill the gap," she says.
Rosemary and husband Ian already let out a cottage attached to their family home in the Cotswolds, but Rosemary has now turned holiday letting into a lucrative business by buying another cottage in nearby Winchcombe. The Alexanders remortgaged their own home, borrowing £100,000 on an interest-only loan to buy the new property and do it up. "I was a bit concerned about whether rental income would cover the mortgage, but that’s never been a problem," says Rosemary. Two years ago she bought her third cottage, and now grosses up to £43,000 a year on the three properties. "My outgoings are at least 50% of that, what with maintenance, business rates, mortgage and other costs," she says. "I use some of my profits to try and pay off the mortgage, as my main aim is capital gain."
Initially, she used holiday cottage agencies, but thought their commissions made her prices too expensive. Now she markets the cottages herself (www.rosemaryscottages.co.uk) and advertises on other websites, as well as through the local tourist board. "My marketing costs are £1,000 a year, but I have pretty full occupancy – 48 weeks in two of the cottages – so it’s worth it," she says. Two of her cottages sleep four to five people, and cost between £195 and £495 a week, depending on the time of year. For the third, one-bedroom Michaelmas Daisy cottage, she charges between £195 and £320. "It’s hard work, and you have to follow up inquiries quickly, but I am building up a property portfolio."