Holiday Homes: A new cottage industry

Buy a romantic weekend retreat to get away from it all - and watch the cash roll in

You can no longer rely on house prices soaring to make you richer and Gordon Brown says you cannot put a buy-to-let flat in a pension plan, but there is still one way to make property give you an income - buying a holiday cottage.

Aside from giving you the chance to enjoy romantic weekends away it can also be a modestly profitable business if you make the right choices before you buy.

"It used to be that people would buy a place and then ask if it was appropriate to be let out, but increasingly people want to make the right investment, so check with agents before selecting an area and a property," says Sean Finnegan of Portscatho Holidays, a cottage rental firm in Cornwall.

"Those who give up quickly often do so because they're surprised they don't make more money. But most stick at it, sometimes for many years," he says.

Finnegan is not alone in describing 2005 as 20 per cent busier than 2004 - preliminary figures from lettings agents across the UK tell a similar story. So how do you turn a dream into potentially-lucrative reality?

CHOOSE THE RIGHT LOCATION:

The west country, East Anglia, the Cotswolds or the Welsh valleys may be obvious choices, but the summer lettings season in each is only 16 to 20 weeks, plus odd weeks at other times. If you need longer letting periods to cover your costs consider the Lake District or the Peaks, where winter walking takes the letting season up to 40 weeks.

Some cottages can be let to holiday tenants for most of the year and to a long-term tenant in winter.

CHOOSE THE RIGHT SORT OF PROPERTY:

Chocolate-box cottages look fantastic on agency websites, so they let quickly, although they do not always attract higher rents than similar sized homes without traditional features. Location and outlook are key.

"Properties that let quickest are those with sea views, easy parking and facilities nearby. People who rent want an easy life and don't want long walks to pubs or shops. Houses sleeping four to eight people are in highest demand and flats are the slowest to let because renters worry about neighbours downstairs or upstairs," says Sean Finnegan.

"Make sure accommodation ratios are right. If you rent to families you need plenty of bathrooms and downstairs facilities such as shower, drying room and utility space. Sufficient parking is paramount as holiday destinations become gridlocked in peak weeks and tenants need to know they don't have to take their chances with day trippers. Outside space doesn't have to be extensive but space for barbecuing or eating outside is a minimum," says Nicola Oddy of Stacks, a property-buying agency.

FIT THE RIGHT EQUIPMENT

Furnishings and decorations must be neutral, tasteful and comfortable. A telephone, CD and DVD players, a washing machine and dishwasher are common features. Do not skimp on comfort or you will never get repeat bookings, a traditional element of the holiday lettings industry.

SELF-MANAGED OR THROUGH AN AGENT?

Many owners want to manage their own properties but this means being on hand in the event of emergencies and always being available to handle Saturday changeovers in the peak season.

If you self-manage you need to be rigorous with vetting renters. "Say no if you feel uneasy about letting to anyone," says Ross Elder of www.holidaylettings.co.uk "Always ensure you have cleared funds for your bookings before giving keys or refunds. Ask for a deposit to cover any accidental damage - it's not unusual to request £100 or 25 per cent of the rental value, whichever is the greater."

If you hire a lettings agent expect to pay around 20 per cent of rental income as commission, plus other lump sums (typically £350 for a holiday season or £650 for a calendar year) for maintaining the property when it is empty.

"On top of that you need to factor in cleaning, laundering and replacement of white goods, which have a much shorter life than in a normal home," says Nicola Oddy. "Many holiday landlords redecorate throughout annually. This is all on top of the normal property maintenance issues."

But most of these costs, including the agents' commission, are tax deductible.

INSURANCE:

A lettings agent will insist on seeing your insurance certificates, but even if you let the property yourself there is no point in cutting corners on this.

In addition to normal property and contents cover, you must take out public liability insurance up to at least £250,000 in case little Darren gets his head stuck in your loo after slipping on a loose tile.

The Association of British Insurers says litigation in this field is very, very rare; however, it is not worth taking a risk.

HANDLING TAX ISSUES:

Remember that to maximise what you can offset your holiday home must be located in the UK, not be your principal residence and be fully furnished. You must make it available as a holiday let for at least 140 days a year and let for at least 70 to paying clients. It must never be let for more than 31 days to one client.

If you do all that and read through the Inland Revenue's brochure Taxation of Rents: A Guide To Property Income, you discover you can claim back:

* some set-up expenses, including the cost of buying, altering, building, installing or improving fixed assets in the property, such as white furniture

* basic wear and tear costs

* some replacement items

* travelling expenses to visit the property

* professional fees such as lettings agents' commission, legal costs and insurance

* mortgage interest - taking out a mortgage is a good move on a holiday home even if you can afford to buy one outright.

Personal circumstances always vary, so check with an accountant.

Contacts: Stacks, 01594 842 880, www.stacks.co.uk; Portscatho Holidays, 01326 270 900, www.portscathoholidays.co.uk; Association of British Insurers, 020-7600 3333, www.abi.org.uk; also www.inlandrevenue.gov.uk