What's the best way to fund a holiday home purchase?

madmax76

Hi all,
I'm looking for some advice on how best to purchase a holiday home which we will also be intending to let out.
The full purchase price will be around £130'000, the two options we're considering are:
Do we remorgage our own home? We have around £150'000 equity in it?
Or: Do we take out a holiday let mortgage, which seems to be a very niche market, they are few and far between. It is not permitted to use a buy to let mortgage as there are various stipulations which prevent holiday letting.
Our current mortgage is on a fixed term (1yr left) with First Direct at 2.4% with 15yrs remaining, if we took out the equity we'd increase the term to probably 25yrs to make it more affordable. We'd also do the same if we took out a separate mortgage on the holiday home.
We've done our sums, similar holiday homes are bringing in around £25'000 per annum at 50% let throughout the year. I'm very good at marketing and hospitality and would be pushing to get it more closer to at least 75% let.
The holiday lodge is based in the UK, in a holiday park, open 12 months per year and ground/maintenance fees are £4000 per annum. No council tax or water rates to pay.
Also we have around £10'000 deposit but could get access to more if needed (25%).
Can anyone advise? Your input would be grately appreciated. TIA

VfM4meplse

Congratulations on paying off your mortgage ahead of plan!

My advice is A) its the wrong board, try The House Buying, Renting & Selling Board;

If you are a novice to property investment (and buying your own home is not that) I suggest you read the rules carefully. The heyday of this as a passive income route - if it ever existed - is over, and IMO rightly so. The government has reacted to the nation's housing crisis through financial disincentives.

My sincere advice is that you do not risk the hard-earned roof over your own head because this sector is too vulnerable to state intervention. Plus I am certain the economy is heading south (again, IMHO but don't wait for it to turn into fact). Stick to premium bonds for now.

elsien

In my case, it'd have to be the lottery.

When you say holiday lodge, is it a similar set up to a static caravan which depreciates over time and the site owner can insist you replace with new?

Cornucopia

I've moved this thread to the House Buying, Renting and Selling sub-forum.

GDB2222

Can you get a mortgage on a park home? It doesn't offer good security to the lender. That leaves remortgaging your home, but I doubt that you could offset the loan interest against the rent for tax purposes.

Even allowing for depreciation, the figures look quite tempting! Too good to be true, really.

silvercar

We've done our sums, similar holiday homes are bringing in around £25'000 per annum at 50% let throughout the year. I'm very good at marketing and hospitality and would be pushing to get it more closer to at least 75% let.

Don’t kid yourself, why do you think you will get 75% occupancy? Other people will have return visitors and established rental agents. Starting from scratch it will take years to build a decent client base.

On the average occupancy of the site, does it add up? Are you prepared to only use it when you don’t have paying guests?

madmax76

Hi all,
Thank you all for your advice, this is definitely something we won't be jumping into with our eyes closed.

The lodges are permanent buildings and do not require updating/replacing as I know is the case with some holiday parks.

I've been keeping an eye on these lodge values over the last decade as I've always dreamed of owning one and they have gone up in value. Pretty much stayed in sync with the value of a 3 bedrooms house in our local area.

PasturesNew

Do not underestimate the "damage" done in holiday lets. I lived next door to a place that was locally managed and saw first hand who came/went and what went on.

In just one season, without trying to take notice: Group of girls, got drunk before they "went out" and they didn't go out via the front door, but through the back and over the rear fence (why?).

Girls brought boys back, because a couple of them weren't allowed in the nightclub... lots of shouting/banging and nonsense - I had to call the local manager for the "safety concerns" of one of the girls.

A fridge had been filled with sand. An ironing board had been mis-used/trashed. Mattresses had been peed on.

Dogs were chained to the radiators and left all day to howl.

A family booked it - and then did "over occupancy" and had a huge BBQ and invited "other people/friends" they knew who were staying locally "because they had the room/equipment to hand and the others didn't".

Blocked loos and drains needed rodding.

Holidaymakers aren't "nice/twee people, looking for a quiet break to read a book", often they're "large groups of loud people whose sole aim of being on holiday is to get drunk".

For occupancy: you'd be surprised how low most actually are - and to fill it you need to "accept any bookings", let dogs in, let young people in, allow smoking.... and all/anything that people might want, just to get a booking. What I saw of occupancy is it's mostly just school holidays then nothing.

babyblade41

It's not something I would attempt whatever glossy brochure claim.
It's hard work being a LL on bricks and mortar tenants but a holiday let would be a nightmare

For a week or two they are in holiday mode and all normal thought process goes out the window...the cleaning up, the linen changes etc ,etc , and it's all very well during summer months but what happens in the void , last minute cancellations and whinging holiday campers

I'd tread very carefully at funding an enterprise such as this with loans , some companies offer their own finance deals which invariably are expensive .. if the figures are as you claim they wouldn't need to advertise they'd be a waiting list

I use to own a lovely chocolate box village pub and eatery with rooms in a fairly affluent area and you'd be surprised at what even what I'd call well healed people do when they are away for a few days and it wasn't pleasant half the time

It wouldn't be somewhere I'd invest in that's for sure

Ozzuk

VfM4meplse wrote: »

Congratulations on paying off your mortgage ahead of plan!

My advice is A) its the wrong board, try The House Buying, Renting & Selling Board;

If you are a novice to property investment (and buying your own home is not that) I suggest you read the rules carefully. The heyday of this as a passive income route - if it ever existed - is over, and IMO rightly so. The government has reacted to the nation's housing crisis through financial disincentives.

My sincere advice is that you do not risk the hard-earned roof over your own head because this sector is too vulnerable to state intervention. Plus I am certain the economy is heading south (again, IMHO but don't wait for it to turn into fact). Stick to premium bonds for now.

I'd say this is a good post for buy to let, but not so much for holiday lets. This is a sector the government/local councils like to support as it has secondary income routes - increased tourism. there is also a lot of support for advertising, which you don't get for rentals.

If the economy heads south, more people stay in UK for holidays (though I haven't got anything to back this up, just opinion). Holiday lets usually bring in far more money than standard lets, and if in the right location occupancy rates much higher than 50% can be achieved. So it is a model that can work.

However...the biggest factors are location and price. OP is having to borrow to purchase, so the cost of borrowing needs to be factored into business plan. Also, I think he'll have a big shock when he tries to release equity - lenders won't give him anywhere near the figure he thinks (unless very lucky).

Another factor, if it is a lodge type, I've never seen one that isn't leasehold, and worse than that usually very short leases - 20, 30 or 40 years is very common, so at the end you have lost the asset completely.

Then there are other risks, holiday makes do something that causes serious damage (that you can insure against), or even something that the owner then blocks you from letting (check contract).

So it can be high return, but its high risk, and something usually better if you aren't borrowing too much. I ran holiday lets for several years, but it was old cottages so a much safer buy (I owned the land). The average summer week was £450-£650, whereas I would only get that a month renting. Off season it was attractive to workers (good area), journalists, clubs, lots of repeat business which helped profitability.

Tread carefully would be my advice!

ouraggie

I am going to scream DON'T DO IT.
I own a small holiday cottage at the UK seaside in a popular resort. It's an hour and a half from London. It was always my dream to have one and I finally did it in 2008.
Since then I have let it out and used it myself as a bolt hole for weekends etc.
I advertise it on 3 websites, I have a raft of 5 star reviews but I am lucky if I let it for 6 weeks a year. Probably if I accepted the requests I get for 1 or 2 nights I would get a few more, but the overheads would mean making a loss on such bookings. Most of my 6 or so bookings are now return guests.
I would agree with the above poster who described some of the holidaymakers you may get , though there are some lovely families too. If you go ahead, always take a damage deposit of at least £200 a week and be prepared to charge for broken furniture, ruined towels etc. I find it hard to do this but you must.
You will need to constantly replace stuff like glasses, cutlery, placemats, teatowels etc. I allow £25 a year for small bits and usually have none of this left by March. I also stock up on kettles, toasters, duvet covers etc when I see them on offer, as you have to replace these every time they get damaged, which is regularly.
One of my main sources of frustration is knowing that I am really careful with a house and it's contents and things tend to last me years and still look like new, but because I have to let it out things get quickly scratched, bent, worn and dented constantly. I long for the day I no longer need to let it.
I am totally amazed that a holiday lodge could bring in £25k a year. Assuming your 50% occupancy rate, that's £1000 a week!! Highly unlikely. This sounds like the rental income figures the site salesperson quoted to my sister in order to persuade her to buy a lodge. I myself charge £500 a week , which brings in between 3000-£4000 a year. After I have paid council tax, water, fuel, TV licence, holiday let insurance, advertising and tax I have practically nothing left.
I have thought of selling mine recently, but as it is a second home I will have to pay CGT on the profit I make, so currently it makes sense to hang onto it.
Finally, I would say that it is important to consider the surrounding environment before making a purchase. When I purchased my cottage a lovely old gent lived next door and the road was fairly quiet. However, next door is now occupied by a family on benefits with 4 children and a husband who communicates by shouting expletives. And did I mention the 2 dogs? Another neighbour has 2 giant white vans which he parks in the road, despite having a drive, taking up 4 parking spaces. Both of these affect guests but are outside my control.
I appreciate that all of the above sounds rather negative. There are many positives too but I find these are not to do with making money.
I can recommend a forum called Lay my Hat which is a similar idea to MSE but specifically for people who let out holiday homes. Worth a look in order to gain a fuller picture of the industry from those already doing it.
Do let us know what you decide in the end.