Is a home an investment? Most homeowners instinctively assume so, as it tends to be their largest asset. But property professionals like to point out that, if you never intend to sell your home, it's an investment so passive it hardly counts. Moreover, most people buy their home because they like it and it is useful, not because it has a better chance of increasing in price than a comparable house - making it a consumer good.
Conversely, buy-to-let landlords are forever being reminded not to treat property as a consumer good. The Association of Residential Lettings Agents, a trade body, even has a charter that requires landlords to buy property based on an "objective business decision" and "not on personal taste" - a reworking of the old saw that business and pleasure don't mix.
So where do holiday homes fit in? They are the ultimate luxury good, yet they can also be let out to generate an income. Around 246,000 dwellings in England are officially registered as second homes, and roughly 470,000 households also own a home abroad. Most are probably used somewhere on the long sliding scale between second home and lettings business. In a survey of 1,700 Britons who let holiday homes overseas, portal HomeAway.co.uk found just 14 per cent were full-time landlords.
The attraction of this model is obvious. A second home is just that - the owners spend most of their time elsewhere. So without impacting on their lifestyle, they can defray running expenses by letting it out when they are not there. This is easier than ever thanks to the proliferation of internet portals – gone are the days when holiday homeowners were reliant on postcards in the local post office.
Stuart Law, chief executive of property investment group Assetz and a holiday-let landlord himself, says it's possible to follow this 'semi-investment' route and still cover all basic property costs such as council tax, repairs and maybe debt-interest costs. This doesn't mean a second home is cash neutral: unlike buy-to-let investments, holiday homes are typically bought with a repayment mortgage, which means owners have to make transfers every month to pay back the loan. But these transfers are a saving, not a cost, so a second home effectively becomes a scheme for boosting the household pension pot. "It has worked very well for very, very many people," stresses Mr Law.
At its best, this approach has great flexibility - owners can raise as much income from lettings as they need or want at a given time. The overseas landlords surveyed by HomeAway.co.uk typically earned between £2,000 and £6,000 a year in gross rental income, but even this broad bracket only accounted for about 30 per cent of respondents. Many earn substantially more.
Of course, this flexibility is only possible if you own a holiday home with broad appeal. This effectively boils down to location and looks. The property has to be picturesque enough to stand out on an internet portal; and it has to be somewhere accessible that also has a long holiday season. Accessibility is particularly important abroad – holiday-makers don't want to drive more than two hours from the airport.
Mr Law's top choice is the Lake District, because it attracts visitors all year round: owners can achieve a 40-50-week season, he reports. He dismisses UK beach locations because the domestic sand-and-sun season is pitifully short, but proximity to a beach is very important abroad. A more counter-intuitive UK holiday destination is Central London. Because the capital attracts tourists all year round, Mr Law says a Covent Garden flat can achieve a net yield of 5 per cent – a good deal more than a normal buy-to-let tenancy.
This raises an interesting point. Well-located, intensively-let holiday homes can yield 10 per cent gross - 5 per cent net of the onerous management, cleaning and upkeep costs (which can be outsourced). Nothing special, you might think - such net yields are also typical of buy-to-let properties. But there's a difference: UK holiday homes tend to be in prime locations, where supply is constrained by tight planning and demand stimulated by City bonuses. So, for a comparable yield, they offer better capital growth prospects than your average rental flat.
That capital growth can be volatile, like City bonuses - more volatile than the wider housing market, because it depends on discretionary or speculative spending rather than basic housing needs. Prime homes on the Cornish coast still cost about 28 per cent less than they did in 2007. Homes in Spain have been even worse hit, with falls of 40-50 per cent due to rampant speculation by both investors and builders. I can only repeat my usual warning that buying property requires detailed local knowledge.
So owners may not be getting something for nothing - the higher net yield is accompanied sometimes by more volatile house prices, and always by the higher letting risk associated with hosting a dozen or more families a year. Yet for investors who can handle this risk – and particularly those who have time to advertise and manage the lets themselves – second homes can offer an attractive combination of income and capital growth. If you don't mind mixing business and pleasure, holidays are even thrown in for free.
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