Getting into serviced accommodation

THE QUESTION

For the last six months I've been trying to find the route into the property sector known as Serviced Accommodation.

The first problem was finding the right property that ticked my boxes, as well as being 'fit for purpose'. Having found the elusive house, I went in pursuit of the pennies to pay for it.

Most local lenders seemed totally unable to comprehend the concept of SA.  Did I mean Buy to Let? No; I’d have asked about BTL if that's what I meant.  Did I have the last 2 years accounts for the business? No.

But yesterday I got a breakthrough. Yes, my new broker friend could get me a mortgage for a SA purchase. The only problem is I have 'no experience' of managing an SA unit.

Is there a way around this?

THE ANSWER

Let’s put some perspective on the post.  Your frustration is both evident and understandable but, as the saying goes 'walk a mile in another man shoes' and what you have been told may not seem so baffling.  For anyone involved, or wanting to get involved, in Serviced Accommodation (SA), this may be an interesting and informative read. So let’s look at

• The lending history of short-term letting
• How lenders get comfortable on short-term let businesses
• How they assess your affordability to make mortgage payments
• How they equate SA income to say HMO income
• How to get a mortgage, legitimately, if you have no SA experience

Lenders are very aware of SA, they have no catching up to do; for the right lenders that is.  SA is nothing more than a variant to short-term letting that commercial lenders have been lending on for decades; B&Bs, hotels, guest houses even kennels and catteries (different clientele, same concept).

So commercial lenders understand the short-term let concept very well.  Other lenders don’t and don’t want to get it.  Lesson here, pick your lenders carefully; or perhaps, pick your broker who knows how to pick the lender carefully.

A lenders’ primary concern when seeking to grant a mortgage is to get comfortable that you, the borrower, will be able to maintain the monthly payments, not fall into arrears and not become a problem borrower.

With normal renting, single or HMOs, it is easy for the lenders to get comfortable.  You show them the ASTs, they can see how much rental income a month you generate on the property.  The nature of the tenancy means this income will be consistent month in month out (allowing for occasional voids).  So the lender can easily work out your ability to consistently afford and make the monthly mortgage payments to them.

Short-term letting (including SA) presents lenders with a dilemma.  How do they get the same level of comfort when there is no guarantee or continuity of income from one day to the next, one month to the next?  From the lenders viewpoint, you may be full one week, but empty for the rest of the month.  If they want more certainty that you will not become a problem borrower they need a different way to get comfortable about your ability to maintain mortgage payments on a short-term let business model.

The way lenders do this is to look to the past to predict the future.  The results you have achieved from your SA business historically can give them comfort that you will achieve a similar result going forward.  Specifically we are talking about occupancy rates; if you have achieved a 74% success rate in filling your SA rooms. it is likely you will continue to achieve at least a 74% occupancy rate in the future. 

What time period gives some consistency to your occupancy rate? Lenders think 12 months is a solid enough base period upon which to project future occupancy rates.

So, any mortgage application for a short-term let business model will be met with a requirement to prove what the historical occupancy rates for your SA business over the preceding 12 months have been.  Not as a daft a request as you may think then.

For anyone with a trading history of short-term letting, occupancy rates are a walk in the park, as will be getting a mortgage.

The way a lender will calculate how much they can risk lending you on your new property will be to take the new property and determine what its rental income will be if let a full 365 days in a year, then apply the actual occupancy level your business achieves, to determine the projected rental income your new property will generate

e.g. full for 365 days will generate £40,000 pa but you only get 74% occupancy, so 74% of £40,000 = £29,600. So now the lender can assess how much to lend in the same way as if you had an HMO with ASTs generating £29,600 gross rental income

All very well if you have an SA business running for 12 months plus, but the problem investors often face is how to get started in SA when there is a chicken and egg situation.

There are legitimate solutions to this dilemma

• Buy the property with cash (yours or someone else's), run your SA business for 12 months, then apply for a mortgage...and repay that someone else from the mortgage proceeds
• Buy the property using bridging finance, run your SA business for 12 months, then apply for a mortgage and repay the bridging loan from the mortgage proceeds
• Buy using a Ltd Co structure, but bring in someone else with the required SA experience and historical occupancy rate data as a shareholder in your Ltd Co.  At the outset, establish a legal share buyback agreement to enable you to, after a sufficient period, buy back that persons shares in your Ltd Co for a sum detailed in the agreement. This would be when you meet your lenders requirement for SA experience and you would notify your lender so they can update their Personal Guarantee (PG) requirements

If you are wondering how I know so much about this? It’s because I broker exactly these types of deals with my brokerage Positive Property Finance.

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