Holiday Lets: Risk or Reward?
Could switching your residential let to a holiday let make your money – or cost you a fortune?
Everyone loves a holiday, right? The planning, the packing, the relaxing! Fabulous!
And with UK staycations knocking foreign jaunts off of the top of the holiday charts, it’s no surprise that some savvy landlords are looking to explore the option of holiday homes, over the complexity of the residential legislation minefield.
But, are we being seduced by the idea of becoming a holiday host, rather than the reality? It’s all very well having a scroll through booking.com and thinking ‘how hard can it be?’ The smell of suncream and the clank of a bucket and spade can be an intoxicating mix, so before you make any big decisions, let’s go through the pros and cons.
In this episode:
- We speak to property litigation solicitor and head of dispute resolution, Adrian McClinton about whether holiday homes are actually a better bet for property investment than residential lets
- We figure out how to approach a business change plan with our neighbours, and whether a mini-hotel would sit well on your residential street
- We catch up with Landlord Action’s Paul Shamplina, who’s going to be answering a couple of questions from landlords in our private Facebook community.
- Mashroom’s Sunny Dirmaite talks us through the relevant insurances, and how to make sure you’re getting the best deal
Should landlords move into holiday lets?
‘Well, I’m going to do the lawyer thing and say that I think it really is a case of horses for courses, and a lot will depend on whether the property lends itself to holiday lets, and whether it will be lucrative or not,’ mused Adrian.
‘There are so many things that a property owner needs to think about if they’re going to switch from letting a property in the traditional way. On an Assured Shorthold Tenancy (AST), the property is likely to be someone’s principal home. It’s a big jump to deciding to use it as a holiday let, there’s lots to consider.’
Are holiday lets easier than residentials?
It’s important to remember that a holiday let is still a legislation-led business, just like any other. There’s still lots of lettings legislation tightropes with balance on, as well as delivering a level of customer service – now you’re a lettings professional and a hospitality superstar, congratulations, another hat to add to your collection!
So, is there much crossover between long-term residential letting and holiday lets?
‘Funnily enough, the individuals that are tasked with drafting our legislation, they’re quite clever. And they are very skilled at ensuring that the legislation that applies is designed and drafted to take into account that sort of conduct,’ explained Adrian.
If you’re going to use the property as a holiday let instead of your bog standard buy-to-let, there are a number of things that you need to consider that you don’t normally have to consider when using a property as a residential let.
‘There’s many ways in which the government has thought about the drafting of legislation that will capture individuals that think that just because they label the occupation as a holiday let, they can get around the regulations that apply to a normal buy-to-let.’
How much do holiday lets cost?
One of the main concerns of course, will be the loss of guaranteed income. With an AST, a landlord can be relatively confident of a regular rental income, with a holiday let, there’s no guarantees at all.
There are two really big things you need to consider:
- How will this change impact your mortgage?
- How will this change impact your insurance?
‘That’s absolutely correct. There’s a very real commercial consideration’ agreed Adrian. ‘If you look at it from the legal perspective, there’s a number of things that you need to consider. First of all, if you’ve got any borrowing on the property, is what you’re planning to do a breach of the mortgage conditions? Secondly, if you have insurance, will what you’re planning to do – moving from an Assured Shorthold Tenancy to using the property as a holiday let – be a breach of any insurance terms and conditions, which will invalidate your insurance?’
‘Further, there is also the consideration that you might have in terms of the use of the property, if you plan to materially change the use of the property, will this present planning considerations as well?’
Keeping on side with the neighbours
Depending on the location of the property, and the type of neighbourhood, there is an awful lot to consider with regards to keeping neighbours on side, so is there any way to navigate this tricky business, if you choose to go down the holiday let road?
This can be a real issue, because if you’ve got a place that you had one tenant in renting for the whole year, and then all of a sudden you’ve got all sorts of people coming and going, and you haven’t got much control over how they use the property when they’re actually in it, then that can cause lots of problems for the neighbours as well as for you as a landlord.
When are holiday lets the right choice?
Well, so far, so negative! But surely there must be something in it?
‘If the property is located in an area with high demand in terms of tourism, then it can be a lucrative use of the asset. But the idea that it’s hassle free, is just very misleading.’
‘Even in areas with the highest demand of tourism, you will have void periods. And you need to take those into consideration when considering whether it’s commercially more attractive.’
It could cause problems in terms of meeting your obligations, financial obligations under a mortgage. Also, there are a lot of hidden costs within holiday let’s that initially, when you’re looking at the spreadsheet, don’t jump out at you. Fact is you are competing with hotels, and B&Bs is based on the local area, and people staying and using holiday, let’s expect a level of service comparable to those hotels and B&Bs.
So ultimately, this could be the right choice for you, but you need to think long and hard about it first and then make some calls before you make the change:
- Is your property in an area with a lot of holiday interest?
- Speak to your mortgage lender and insurer to see if how this will affect those
- Calculate marketing costs
- Calculate upkeep costs – could you save by using a local cleaner in between guests?
- Consider your time – you’ll need to pop in more often to keep an eye on things than if you have long term tenants, do you have the time to do this? Or could you afford a holiday let management company to do this?
Why not head over to the Mashroom Landlord Community on Facebook and find out from other landlords how they managed changing the function of their property and any pitfalls to look out for.
Expert Section 21 advice from Paul Shamplina
Our Facebook group is a hive of information for landlords looking for help and advice on any number of topics. We have invited founder of Landlord Action and the star of Channel Five’s Nightmare Tenants, Slum Landlords Paul Shamplina along to get his thoughts on some of the questions you’ve asked on the Facebook page, and hear what he thinks about the sector at the moment
Every landlord will recognise the frustration of a tenant who has ongoing issues with property maintenance. But one of our Facebook commentators has a slightly more extreme scenario. Their tenant has stopped paying rent because of some minor issues in the property that have now been fixed. However, one of the issues was actually because they couldn’t work the thermostat. So, the tenant called in a plumber. And, and then obviously, it turned out that there was no work that needed doing! So, for that element who’s liable for paying that call out charge?
‘Well, let’s be really clear from the outset, a tenant must not withhold rent in lieu of repairs, but tenants do that,’ explained Paul. ‘In this incident, quite clearly the tenant is at fault. Whether they got consent to call a plumber out from the landlord, I doubt very much, because if the landlord had good lines of communication, and was being a good landlord, he would have obviously explained to the tenant how to use a thermostat, so the tenant is liable. The problem you have with loads of spurious disputes is that tenants will try and knock off some of these expenses, but in this incident, the tenant is liable.’
Makes sense. We all know though that things don’t always work out as they should – what if your tenant is withholding a certain amount of rent, for whatever reason?
‘As a landlord, you have a duty of care to carry out repairs within the least amount of time. That’s what it says in the contract,’ said Paul. ‘A tenant has the right for peaceful enjoyment and security in a property, if the tenant is not getting any hot water for six weeks, quite rightly, the landlord needs to act and act quickly. Actually, the only bit of strength the tenant can have would actually be to withhold the rent, which takes some sort of action off the landlord, but it should never come to that. There should always be good lines of communication if you’re a good landlord, you always communicate with your tenant because your tenant’s your customer.’
If every option has failed and your tenant has withheld an amount of rent for whatever reason, how do you start sorting that problem out?
‘In that instance, there are two ways of taking possession action. One is a Section 8, one is a Section 21. The problem you have is when there’s two months rent arrears outstanding, you can serve a section 8 notice for rent arrears, under a mandatory ground,’ explained Paul. ‘If the tenant doesn’t pay, you have to go to court, get a court order, and then get the bailiffs and now that’s taken the best part of four to six months. Now six months’ rent arrears, how do I recoup that? That’s a different story!’
‘Mediation is the way forward. I represent numerous companies at our company, Hamilton Fraser, and we have a mediation business, which we started in the midst of COVID, because the notice periods went to six months. You’ve got to try and mediate with your tenant. This is a business, you’ve got to actually put a price on your time, it’s really important. And, also the emotional state you can have by having a problem tenant, it just festers, you know?’
Moving on, literally! One of our community landlords has had a tenant move out after being served a section 21. The tenant is now not answering calls about the return of the keys. What are the landlord’s options?
That is an occupational hazard, unfortunately. We see a lot of scenarios where tenants don’t return keys, normally when there’s been some sort of dispute. But firstly, we have to determine if the tenant has moved out of the property.
‘We do an inspection, but we have to give 24 hours’ notice before we go to the property, can’t just let ourselves in, that’s unlawful. Take a witness with you, and take good photos and video, that’s your evidence. Make sure that you document everything and make sure the tenant can’t accuse you of stealing his Rolex because that happens as well. And then if you have to, change the locks, because obviously you have to secure the property.’
‘That cost is incurred by the tenant, because you’ve written mean numerous times to ask for the keys to be returned. But he hasn’t done that you’ve had to change a lock. That’s an expense that you’ve incurred. So that means that if I have to give the deposit back to the tenant, I’m going to put that charge in to offset against the deposit when I end up doing my deposit dispute at the end of tenancy.’
What happens if you have been trying to do all that for weeks and you’re pretty convinced they’ve gone. You go in and you change the locks, and then they come back?
‘You have to let them back in. Even if you had some of their belongings, you’d have to put that in storage for a reasonable amount of time. If a tenant hadn’t come back for six months, that’s a huge amount of time, but if it’s like a month, then technically, you have to let him back in.’
Changes to the How to Rent Guide
In this week’s landlord news, we went through the different ways the recent Budget could affect landlords and their tenants (be sure ot click through to read more!)
But, in n other news, the new How to Rent guide has also been making headlines, and these headlines come with an important to-do for all landlords. The guide, which details the rental process and landlord’s legal obligations in England and Wales and must be provided to tenants at the start of every rental process and renewal, was due an update, with all of us eagerly awaiting its arrival on the 17th March.
However, 17th March came and went, with no sign of the new documentation, to everyone’s dismay, clearly. The guide finally arrived on 24th March.
Landlords are reminded that failure to provide an up-to-date copy of the guide at the start of a tenancy, at the point of a tenancy renewal as part of the prescribed information, or following an update will result in the landlord losing the right to issue a section 21 notice. So, it is vitally important that you get this guide out to your tenants!
The changes include elements such as details on recent legal changes such as new rules regarding carbon monoxide alarms, as well as information on fitting smart metres, and how to help ensure your property is suitable for tenants with a disability.
How can Mashroom help?
We rounded off our chat with Sunny Dirmaite, Mashroom’s business development manager, to discuss exactly why so many landlords are talking about leaving the sector, and why maybe they should think about actually sticking around…
‘There’s the upcoming rental reforms that they’re worried about, and all the compliance that you need to keep up to date with, and interest rates, of course are another worry. It’s evident that things are a little bit difficult at the moment,’ said Sunny.
‘However, as long as you’re protecting your investment – making sure you have got things in place, like Rent Guarantee Insurance, or something like Mashroom’s landlord Let & Protect plans. For 5% you’ll get your rent guarantee insurance, the Home Emergency Insurance, and also your eviction and legal expenses as well.’
With such a topsy turvy market though, are insurances really worth it, and how can you be sure you’re getting the best deal? Mashroom’s Rent Guarantee Insurance is £299 a year, will that really cover all eventualities?
‘Obviously, people might think £300 sounds like a lot of money, but in comparison to not getting your rent at all…!’ laughs Sunny.
Yes, when you put it like that, it makes sense! But are there any other tips to help save the pennies?
‘Things like Buildings Insurance, make sure it’s not automatically renewing. Inflation has definitely brought premiums up. So, make sure that you shop around again, go to a broker. We’ve got fantastic brokers that search the whole panel of insurers and make sure that you’re getting the best price but for the same level of cover.’