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News: Forget BTL - HLs yield the big bucks

Mon, 11 Jun 07

Buying a property to let out to Scottish holiday-makers could be a much more lucrative investment than traditional buy-to-let - especially in Scotland's tourist hot spots...

A typical buy-to-let four-bedroom flat in Edinburgh could earn you between £1,200 and £1,600 a month on a six-month tenancy. But you could get up to £1,000 per week for the same property as a holiday let.

This is obviously a seasonal market, but there is nothing to stop you having a holiday let in the summer and letting to students the rest of the year.

Every summer, thousands of people descend on Edinburgh for the International Festival and Fringe. And in August this year golfers and fans will flock to Carnoustie for the Open Championship. Yields are falling in buy-to-let, and markets such as Edinburgh are becoming saturated, so holiday letting is well worth considering.

Fiona McDonald, associate at Pagan Osborne, the legal, financial and property specialists, said: "Many of our clients are getting extra income by renting out a room. You can generate up to £4,250 per year tax-free. The advantage is you don't have to come up with extra capital to buy a new property. But there are risks involved if you don't know the tenant. You should think about getting a proper lease drawn up.

Tax benefits

"The other option is to buy a property and use it as a furnished holiday let. This gives you better tax relief, in terms of capital gains tax, than buy-to-let. To do this on a commercial basis the property must be available to let 140 days a year, be physically let for at least 70 days and can't be occupied by the same person for more than 31 days. A holiday let property can help with inheritance tax [IHT] relief if it's gifted down the generations.

"In Edinburgh there's a real demand and it should be relatively easy to let out a property during the festivals or over New Year.

"Clients going for holiday let range from people looking for extra income in retirement or young couples with a spare property."

Employing a letting agent to manage a property is recommended as there is a lot of work involved given the high turnover of tenants.

Strict criteria for mortgage lending

Cath Slade, head of letting at Pagan Osborne, explained:

"For a holiday let, we'll visit the property to make sure it's up to standard and meets all the safety requirements. If we think it could be improved with a lick of paint, for example, we'll recommend people do that. We'll tell people what sort of rental income we think we can get.

"The next stage is for us to put the property on our holiday website and include it in our brochure and holiday letting list."

The letting agent will check references of people renting the property and ensure they are properly vetted. The charge for the letting service tends to range from 13 per cent to 20 per cent of the rental income.

You should also be aware lenders can be strict about the criteria on mortgage for a holiday let.

Market becoming more competitive

David Watson, consultant with Savills Private Finance, said: "Lenders tend to view holiday lets as higher risk than a traditional buy-to-let where there would normally be a six-month tenancy agreement in place.

"Because of this they normally only lend a maximum of 80 or 85 per cent loan to value [LTV], compared with 85 or 90 per cent loan to value for a traditional buy-to-let, and sometimes only to experienced landlords who own a portfolio of five or more properties. That said, the market is becoming more competitive and it is likely that lenders will offer 90 per cent LTV on holiday let mortgages in the near future.

"With relatively low yields in parts of the country, some property investors are turning to holiday lets as an alternative to buy-to-let, since the yields tend to be much higher. The management of these can be more time-consuming as you tend to have new tenants every week or fortnight but there are now companies who will help turn these properties round ready for the next tenants.

"Investors tend to aim their properties at tourists looking for more flexibility than a hotel or bed and breakfast offers."

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