Opportunities

There are many reasons why people look to invest in the property market. Whatever your own personal reasons for purchasing this book, it is probably true to say that you are exploring the possibility of buying and letting a holiday home with a view to making money your venture.

In today’s society when pensions are performing badly, people are working very long hours and everyday life is becoming a bind, it seems to me that many people are looking for an exciting opportunity that will give them pleasure and satisfaction in addition to earning an extra income.

The national state pension in Britain is unable to keep pace with inflation and, with the cost of living increasing, company pensions performing badly and poor job satisfaction, people are beginning to look elsewhere for an escape. The opportunity of investing in something that not only will give years of enjoyment, but also produce an additional income, is becoming more and more appealing.

Not so very long ago, the thought of owning a second home was virtually unheard of for a person of average means. Property developing had not gained the interest of the average household and house prices were extremely buoyant. Now, with property programmes dominating our television screens, a wide audience has been targeted and it seems we all have an opinion on the state of the property market!

Although it is possible to make good money from letting out a holiday home, I do not feel that this should be your only reason for investing. If the sole intention is to make money on a regular basis, then perhaps you should be thinking of purchasing a property with a view to renting it out on a long-term basis rather than as a holiday let. In my opinion, purchasing a holiday home should be as much for your own use as for the income it is likely to generate.

Will buying to let work for me?

A holiday home, if marketed correctly, should provide steady capital growth over time and, hopefully, the income generated from holiday lets should help the property to pay for itself. Certainly this should be your aim when looking to invest in the holiday let business.

Property is still a good investment. Despite the recent scares of plummeting house prices, it is always worth remembering that property prices rose by approximately 75 per cent in the 1990s despite a recession in the early years.

Before entering into the holiday let business it is wise to explore your other options, to ensure that you are making the right personal decision. Will you be able to make reasonable money from:

• a)savings plans;
• b)pension plans;
• c)unit trusts; or
• d)interest rates paid from the bank?

If you have been disappointed with the above, then perhaps it is time to turn your attention to buying property with a view to renting it out as a holiday let.

So, will buying to let work for you? The answer to this question depends entirely on what you are expecting from your property and how much homework you are prepared to do in sourcing the right house and then preparing it for letting.

The right location

You will need to look for the right location. This must be an area that will appeal not just to you, but also to the average person looking to book a holiday. An important factor when deciding where to purchase your property will, of course, be the amount of funds available. Although this may seem obvious, it is all too easy for people to jump into buying property while being totally unprepared, and this can lead to disaster. In the main, do not let your heart rule your head. It is easy to fall in love with a property, and make it your permanent residence. However, when buying a property to let, you must weigh up the pros and cons and look at the property as a business venture. The property must not be simply pretty and appealing to the eye – it must have the necessary potential to rent out and make your venture work!

It will undoubtedly be easier for you to sell an area to holidaymakers if you yourself are passionate about it and know it well, but ask yourself why this particular area is so special to you. Is it simply because you have been visiting, out of habit, for the past twenty years or so and have never thought of going elsewhere or is it because of the area’s outstanding natural beauty and fantastic beaches?

Ask yourself a few important questions before deciding on what kind of property to purchase and in which location:

• 1.Do you want your holiday property to be used mainly for yourself and your family and friends, with the opportunity or renting it out occasionally?
• 2.Do you want to rent your holiday home out most of the time?
• 3.Are you hoping that the property will increase in value?
• 4.Are you intending to market your property with an agent or will you try to let it yourself?
• 5.Is there a minimum return you would like to see with regard to rental?

The answers to these questions will make a difference to the type of property you buy and how you go about marketing it. If you are buying your property for the sole purpose of using it yourself and perhaps renting it to family and friends, then you will need to be equipped with much less information than if you are intending to rent the property out for much of the year to people you have never met.

can I afford it?

Only you can answer this question accurately. It is absolutely paramount that you go into your business venture with your eyes wide open. Be aware of the problems and pitfalls you may encounter and always have a contingency fund for if things go wrong.

It is easy in today’s society to borrow money. By simply picking up the telephone or going on line you can secure a loan. It is, however, vital that you consider very carefully the implications of owning a second property and the effect it can have on your finances. Although in reality the aim is to make the property self-financing, you will almost certainly make a loss in the first year and maybe even in the first few years, until your holiday let business becomes established. You will need to finance the decorating and furnishing of your property, not to mention covering the fees incurred in buying it and marketing it as a holiday home.

Your own personal finances must be able to withstand this loss initially if your holiday let business is to be a success. By failing to sort ort your finances or overspending at the outset, you will be setting yourself up for a fall.

If you are in the enviable position of being able to finance your property purchase with cash, or you have been lucky enough to inherit a property, then the importance of examining your finances in detail will be reduced, as the main expense, repaying the mortgage, will not be an issue. Not having to worry about mortgage or loan repayments will, of course, ease the initial financial pressure.

If, however, you are intending to borrow money to finance your purchase, then you must be prepared to do your homework and look at the state of your finances truthfully. If you have never been good at saving, then bear this in mind when calculating how much you are asking to borrow. Banks and building societies will lend money depending on your earnings but is this really the best way of calculating how much you can afford to repay?

For example: two adults starting in the same job, on the same day, earning exactly the same amount of money will most definitely not be in the same financial position five years down the line. This is because no two adults or families are the same. People have different lifestyles and view their finances in very different ways. While one person may think they are affluent if left with £50.000 in their account at the end of every month, another may only be happy if they have £50.000 left over after paying all the bills. Others live constantly with an overdraft, often failing to make ends meet.

It is a good idea to make a list of all your monthly outgoings, including existing mortgage, loans, bills, insurances, ect., and then include how much you usually spend on socialising. Add to this a percentage to cover the cost of clothes and holidays and then look at how much surplus cash you have, after taking all your expenses from your monthly earnings. It is important to be honest with yourself at this stage and not kid yourself that you will be happy going without a holiday if you usually spend a month in the Caribbean every year! If you smoke and drink on a regular basis, the cost of this must be taken into account when calculating how much money you have to spend.

If you have a family who are dependent on you, then you must take them into consideration when calculating your worth.

When you have done your sums and taken all your monthly outgoings from your monthly income, you will be in a better position to see how much money you can actually afford to borrow rather than how much money you will be allowed to borrow. Armed with this information, you should be able to decide whether investing in a second property is a viable option for you and, if it is, fine the right mortgage to suit you.

If you are left with £500 surplus cash at the end of every month, don’t be tempted to accept a mortgage with repayments of £600, hoping that the income generated from the holiday let will cover the other £100. This is a recipe for disaster as you will have the stress of finding the extra income if the property is empty, not to mention having to pay the bills and finance the initial furnishing of the property.

In reality, the amount of spare cash you have each month will have to be used to:

• 1.Pay the interest on any mortgage or loan on the property.
• 2.Pay for decorating the property.
• 3.Pay for furnishing the property.
• 4.Pay for the upkeep of the property.
• 5.Pay any bills on the property, including gas, electricty, water, council tax, insurances, etc.

you will need to cover these costs from your existing income until such a time as your business venture is up and running. Remember also that, although you may make good money when you have guests in your property, the holiday season in different areas differs immensely, and there may be many months, perhaps over the entire winter period, when the property is empty. Despite not generating an income, you will still have to meet the mortgage repayments and keep up with the maintenance side of things.

Other financial considerations that you will have to take into account are:

• 1.Bank or building society setting-up fees. Depending on the type of mortgege or loan you opt for, lenders sometimes charge an administration fee or a set-up fee.
• 2.Legal fees in connection with purchasing your property.
• 3.Stamp duty.
• 4.Agent letting fees if you choose to market your property with an agency.

It is important to remember that while property prices haven risen dramatically in recent years, this trend cannot continue indefinitely and you must bear in mind that there is always an element of risk when buying property. You must ask yourself how much of a risk you are prepared to take and base your investment on this answer. It is probably not a good idea to buy an expensive property in a popular area if you are hoping to make a quick return. Resist paying over the odds for a property and bear in mind that an asking price is just that and may not be a true valuation of the property’s worth.

In order to put things into perspective and reduce the uncertainty, it is a good idea to try to calculate how much you are likely to make from your investment once your business is up and running.

An easy method of calculating your profit would be to multiply the rental per booking with the number of bookings you hope to achieve, and then deduct any expenses. However, things may not be quite so straightforward it the amount you are asking in rent varies considerably from week to week and season to season. For example, you will be able to ask a much higher rental fee for a week in August than you will for a week in November. It is important that you do not command unrealistically high rents as this will almost certainly make your business suffer. A profitable approach – and this is what you should be aiming for – is to set your rents at a sensible level that will maximise your income by securing a high number of confirmed bookings throughout the year. This is of course much more preferable than securing just two or three weeks at a price which is out of the pocket of most holidaymakers.

Calculating Yield

By spending a few minutes calculating the yield of your investment, you may get a better picture of how much you have profited by. There are several ways of calculating yield and the method you use will depend on whether you wish to calculate the gross yield or the net.

It is difficult to say what a realistic yield should be on a holiday let, simply because this will depend heavily on the area the property is in. The following examples show how to calculate the gross and net yields on a property worth £150,000.

Gross Yield

property Value	£150,000
Annual rent	£10,000
Annual Yield	6.6%

This amount is calculated by dividing the annual rent by the property value and then multiplying it by 100.

A more accurate percentage, however, will be the net yield, as this is the return after all your expenses have been deducted and is a much more realistic figure.

Net Yield

Property value	£150,000
Annual rent	£10,000
Expenses	–£2,500
Profit	£7,500
Annual yield	5%

This amount is calculated by taking the total rent, less expenses, and dividing it by the property value and then multiplying it by 100.

In short, when calculating whether or not you can afford to invest in a holiday let venture, you must ensure that:

• 1.You are in it for the long term. You will not make a quick profit as young outgoings in the first year will almost certainly outweigh your profit, as you will have to prepare your house for rental.
• 2.You have a little capital behind you for emergencies.
• 3.Your existing income can cover the mortgage repayment of your holiday home when the property is empty.
• 4.Your existing income can cover the council tax, water rates and other bills when the property is empty.
• 5.You bear in mind that there will be ongoing expenses, for example a housekeeper, gardener, repairs and maintenance.

When you are happy with the state of your finances and are confident that you can meet the mortgage repayments and other expenses, then it is time for the dream to begin. Sourcing a property and preparing it for the holiday let market can be a very enjoyable and rewarding time, providing you keep a business head and take a sensible approach.