How to Turn a Buy-to-Let Property into Serviced Accommodation

Serviced accommodation is a hot topic in property circles at the moment, with more and more investors looking for ways to benefit from the lucrative rental yields and tax-free income.

As such, many investors are now looking at their portfolio of buy-to-let properties and wondering how they can turn them into serviced accommodation.

Unfortunately, turning a buy-to-let property into serviced accommodation is not as simple as just putting it on a hosting website like Airbnb. Instead, there are a number of key elements of your property that you’ll need to change.

Leasehold Restrictions

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While serviced accommodation comes in all shapes and sizes, the most common form is the one or two-bed flat in the city centre.

These are successful because they are in a location that will attract both tourists and business people, while the size of property appeals to single travellers, couples, friends and small families.

In short, this style of property is suited to a wide range of people, which helps increase its demand and potential income.

It’s possible that you’re looking at your portfolio now and thinking that you already one or more properties that fit this description. However, if you do own a city centre apartment, it’s likely to be a leasehold property and therefore you need to review any restrictions.

Leasehold restrictions vary from property to property but the ones you’ll want to keep a careful eye on are:

  • Restrictions on who you can let to: You may find that your leasehold agreement limits the types of people you can rent to. For example, you may be unable to let a two-bed apartment to unrelated occupants. This could severely limit your target audience and result in significantly lower profits (if any at all).
  • Restrictions on the length of lease: While you may have the occasional longer-term lease, the bread and butter of serviced accommodation are short-term lets of a few nights. If your lease limits you to only offering ASTs, the property won’t work as serviced accommodation.

If you do find restrictions in your lease that will stop you using the property as serviced accommodation, you can speak to your landlord to negotiate a change of terms, also known as “varying the lease”. This will likely result in some expense.

In the event that your freeholder will not change the terms of the lease, you may have to accept that you won’t be able to use the property as serviced accommodation. If you do, you could find yourself facing legal action or even forfeiture of the lease.

Service Accommodation Guide

Mortgage

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Alongside leasehold restrictions, it’s more than likely that the terms of your buy-to-let mortgage will not allow you to use the property as serviced accommodation.

The reasoning behind this is that serviced accommodation is closer to commercial property than the traditional buy-to-let and, therefore, you need a more specialist commercial mortgage.

If you do decide to stick with your existing mortgage and your lender finds out, you may find they demand all the money back, so it’s not worth the risk.

While finding the right commercial mortgage may seem like a pain, it does come with some sizeable advantages. Most notably, the tax relief on mortgage interest that is being fazed out for residential landlords can still exist for serviced accommodation, so long as it is classified as a Furnished Holiday Let (FHL).

Of course, there are specific requirements for becoming an FHL, so you should always confirm with a property tax advisor whether your mortgage cost can be offset.

In order to find a commercial mortgage for serviced accommodation, you should seek the support of a specialist mortgage broker. While some high street lenders occasionally offer this type of mortgage, they are few and far between.

Plus, the application process differs from your standard buy-to-let. As this is a commercial mortgage, lenders will want to evaluate your experience in these types of lets, the commercial value of the property’s location and potentially even yearly turnovers in previous years.

This can be particularly daunting if you’re new to serviced accommodation, so ensure you use a specialist broker to guide you through the process.

Insurance

Insurance may mean another monthly cost but it’s important if you want to protect your investment. Just as we’ve seen with mortgages, the standard insurance you use for a buy-to-let property won’t cover you for the short-term lets of serviced accommodation.

As a starting point, you can speak to your existing insurer to see whether they will insure you for nightly lets, but don’t be disheartened if this request is denied. There are other insurers.

If your current insurer will continue to cover you, be careful to identify if any restrictions are placed on your policy. These clauses, known as “endorsements” could exclude things like:

  • Fire caused by guests
  • Escape of water caused by guests
  • Theft without forced entry

It may be, then, that you need to supplement your existing insurance with additional policies, or it may be easier to find a brand new policy anyway.

Organising your insurance is a good starting point when turning a buy-to-let property into serviced accommodation, and can make the rest of the process much smoother.

For example, in some special circumstances, a mortgage lender will grant special permission for nightly lets, meaning you don’t need to find a commercial mortgage. It’s unlikely you’ll get this permission, though, if you don’t have the right insurance in place.

Planning Permission

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The final major consideration when turning a buy-to-let property into serviced accommodation is whether you’ll need to apply for planning permission.

A typical residential dwelling is known as a C3, signifying that it’s to be used by an owner-occupier or rented out. In contrast, a hotel or serviced apartment which offers no “significant element of care” is categorised as a C1.

Therefore, you may need to apply for planning permission to change from a C3 to C1.

However, this is not always the case, with rules varying from local authority to local authority and the amount of time you intend to rent the property out having an impact. For example, in London, a residential property can be rented out for up to 90 days without needing a change in its planning permission.

The most guidance we can offer on whether you need to apply for planning permission comes from the government itself, which states:

However, the government did publish advice on short term lets in its Planning Practice Guidance document, which said:

“Planning permission is not required elsewhere in England to short-term let a dwelling house, so long as there is not a material change of use of the property. Where it is a change of use and planning permission has not been obtained, a local planning authority can consider whether to take enforcement action. “

There is a grey area around what constitutes a “material change” in the use of the property, though there is some case law to give some insight. In any case, if you want to use a property as a serviced apartment all year round, you’ll likely need to seek planning permission.

Conclusion

Serviced accommodation can provide an exceptional return for investors, but it’s not without its complexities, especially if you want to convert an existing buy-to-let property.

For more information, read our dedicated Guide to Investing in Serviced Accommodation or get in touch to learn more.

Service Accommodation Guide