Serviced Accommodation (SA) seems to be the new HMO in terms of the property strategy everyone is talking about doing.
I can see the attraction for an investor. Like HMOs, SAs offer a superior monthly cash flow, but do I need any special mortgage for a property I am going to let out by the night or can I use a normal BTL mortgage?
You cannot run a Serviced Accommodation business with any normal type of mortgage; not legitimately anyway. If you look at any mortgage lender’s T&Cs, they state the minimum and maximum length of a tenancy agreement they will permit. For pretty much every lender, that will be a minimum of six months and a maximum of 12 months. Clearly letting for a few nights breaches these conditions.
When you commit a breach and the lender becomes aware of it they can call in the loan. Some lenders may not, but others certainly will.
I suspect that plenty of SA businesses are being run without the mortgage lenders knowledge. This conversation is not unusual:
Lender: We think you are using the property for short-term letting.
Borrower: No I am not, it is a normal AST.
Lender: Here is a copy of your Airbnb advert we found for the property.
Unsurprisingly, this results in the application being declined.
Commercial lenders have been lending on short-term propositions for decades; guesthouses, B&Bs, hotels, holiday lets, even kennels and catteries and SA fits neatly into this bracket. However, such lenders do tend to treat short-term lets differently from HMOs, for example, a lender’s primary concern is serviceability of the mortgage payment. With any normal tenancy this is pretty simple, you have five ASTs for your HMO so the lender can see the monthly income will be based on these ASTs and thus determine your ability to meet the mortgage payments.
It’s not so straight forward with short-term letting because the lender has no idea what your income from it will be. In their eyes, they have no idea what you will be earning month to month, you could be full one week, but empty the rest of the month.
Lenders being lenders will always look on the pessimistic side and if they can’t see a guaranteed income, they will assume the worst and that means no mortgage because you cannot prove you can service the mortgage from the property income.
So how can you legitimately fund an SA property? The solution has been applied to short term lets for decades and it is all about your occupancy rates. For an established short-term letting business, you will be able to show the lender your historical occupancy rates. They usually want the previous 12 months to base their lending on i.e. if you were at 86% occupancy for the previous year the lender will assume you will do a similar percentage in the coming 12 months and lend on the basis of that level of income.
However, a lot of investors are coming into this new and don’t have a track record, or are buying a new property to operate on an SA basis. At first glance you would fall at the historical occupancy fence, but there could be ways to still obtain borrowing.
When you get the funding right SA can be a good business strategy, but don’t come a cropper by trying to deceive lenders. A potentially lucrative business can fall apart if you are shut out of the mortgage market as past misdemeanors tend to catch up with you!