Securing finance for your holiday home business
Running a guest house or holiday home can be a fantastic business opportunity providing you, not only with a regular rental income, but an investment property too.
If you already have a property or part of your home that you can turn into a bed and breakfast (B&B) then great, you’re good to go - all you need to do is kit it out and market it. But if you’re looking to purchase somewhere, either to start up a holiday let, as an addition to an existing portfolio or as a going concern then you need to look closely at your financing options.
Lenders can be funny about the kind of criteria you need to fulfil to secure a holiday home or commercial mortgage, not least because they prefer to see such properties run by people with a proven track record. If this is your first time running a holiday business, you’ll need to provide some strong start-up figures and forecasts.
In addition, a holiday home isn’t always let out all year round with peaks in the summer and often little or no business in the winter. Lenders again are particular about making sure the rental income from the holiday season is enough to cover mortgage repayments all year round. They like to see contingency plans if the rental doesn’t prove as popular or profitable as first hoped. Plus, if you’re planning on mortgaging an existing property to raise capital to buy a B&B you can run into difficulties, particularly if your only planned source of income is the new rental property itself because lenders like to see an alternative income source, again to ensure you can meet mortgage repayments.
“Securing finance for a B&B or holiday home business can be tricky at times because the lending criteria are often quite different to that of a personal mortgage.
“However, with a bit of work, being approved for a commercial mortgage is possible. I have researched extensively the mortgage lenders out there who offer such finance and now have a database of niche lenders and private banks specifically tailored to this sector.”
According to Smarta Business School, the UK B&B sector turns over £2bn a year, making it 28% bigger than the low-cost hotel sector, and 35% of the size of the UK hotel sector.
The best B&Bs can make up to £100,000 a year, offering tourists everything they look for – fantastic location, comfort, style and personal service. Below that there are many more B&Bs or holiday homes which command far more modest incomes or are even loss making. Factor in a hefty mortgage and it can easily eat into any profits you might make so it pays to do your research first to make sure you can cover all the costs and still make a profit at the end of it all.
A bank will normally provide around 60-70% of the purchase price for a B&B property which means you will need at least a 30% deposit to get the ball rolling. In addition, you’ll need to set aside money for buying costs as well as insurance including; buildings and contents cover, public liability, employer liability, motor insurance for business use and personal accident in case you are incapacitated and can’t run your business.
“There are certain things which can increase your chances of securing a commercial mortgage for a holiday home. Make sure you have proof of deposit of around 30% or more and wherever possible, proof of trade or other relevant experience.
“You’ll also need to have three years trading accounts or if it is a start-up, a strong business plan and income projections as well as a good personal credit history.”