The number of people who are investing in second properties has grown exponentially. In fact, 1 in 10 Brits now own a second home and second homes are now worth more than £1tn to Britons. If you’re thinking of joining this second property club, you have options and quite a few decisions to make.
One of the first choices to make is between investing in a buy to let property or a holiday let mortgage. Both fantastic investment opportunities with the potential to generate great returns. Yet holiday lets are notoriously less understood. From tax brackets to rental yields and long term commitments to personal use; it’s vital to understand the differences between investing in a buy to let and a holiday let.
Whilst the buy to let was once a booming market, holiday let mortgages have crept upon investors and pose as serious money-making contenders in the property market.
Domestic holidays are increasingly being booked via holiday lettings. There remains room to enter this market and take a piece of the investor pie.
How do you want to use your property?
Owning a holiday let gives you the advantage of being able to stay in it, visit it and use it throughout the year- in most part at least. There are certain occupancy restrictions to adhere to. Typically, you must adhere to HMRC’s guidelines and monitor your usage. Holiday lets tend to perform well as attractive homes in picturesque touristic locations like the Lad District, Cornwall and the Cotswolds.
Successful holiday letting, however, isn’t exclusive to the countryside and seaside towns. It also includes short-term rentals in city centres. Think Airbnb and their break into the letting market. Either way, if your second property is attractive and useful enough to entice visitors and guests, you’ll probably want to enjoy some of the benefits of owning a home away from home, regularly throughout the year.
Buy to let properties can and do exist pretty much anywhere. Where there are available tenants, your buy to let will do well. In fact, the proportion of UK renters has doubled in the past 20 years. It is, however, fair to say that buy to let properties perform better in city centres and towns near to where people work.
Owning a profitable and successful buy to let will mean that you have long-term tenants living in the property- removing your options to stay there. This, coupled with the fact that voids in the property will mean the home will be unfurnished, makes it difficult to use the property in the short term.
Availability of Mortgage Finance
Holiday let mortgages are indeed a specialist area of finance and are poorly understood by traditional brokers and home buyers. Holiday let mortgage specialists have risen to the occasion to fix this problem.
The remortgaging market is the active force in the buy to let sphere. Within both types of finance, lenders will typically assess the rental income cover ratio of 140% – 145% at an interest rate of 5.5% (ThisisMoney). Lenders will size up loans based on how much rent you predict to clear each month.
Return on Investment
The financial return on your property investment will vary and depend on a number of things. Primarily, the initial house price and its location are key factors in determining your return. Is the value of your mortgage reasonable enough to enjoy some of the profits yourself? Is the location of the property compelling enough to attract high paying residents?
Buy to let properties in large cities can deliver consistent and high returns all year round. Since people will continuously need to be in the commuter distance to the cities. On the other hand, whilst holiday lets are somewhat limited by the cities occupancy rules, when the location is right- they come up trumps and deliver higher rental yields.
As with all investment opportunities, the future for property investors can be unpredictable. Holiday lets are often more unique possessing some quality of charm. For example, period properties are significantly different to typical buy to let flats. You cannot build another 300-year-old cottage- this helps to retain value and generate capital gains.
It’s important to consider how well your property performs in terms of consistency. Buy to let’s generally have a fixed monthly rental yield. They’re stable and predictable. Since holiday lets are more seasonal, owners must cover the running costs of the property during off-peak periods. These expenses should be calculated when determining profitability.
Data has shown that as long as the holiday let property is well-maintained and marketed efficiently, it should generate a reliable and relatively consistent revenue profile all year. Whereas buy to let’s are typically reliant on a single or few tenancy contacts throughout the year- which can be terminated or defaulted on at any moment.
Following rigid changes to the way income tax is calculated on buy to let properties, landlords can resultantly claim on a portion of their mortgage interest as of-settable against profits. Those with large mortgages, therefore, will notice a significant change to net profit.
Holiday let mortgages are considered by HMRC as a business, meaning there are no limits on the amount of mortgage interest incurred that holiday let owners can offset against their profits. This could reduce income tax bills by thousands for those higher rate taxpayers.
You’ll be eligible for certain capital gains tax reliefs if you sell your holiday let- reducing the tax on the sale to 10%. For comparison, capital gains on buy to let properties currently stands at 28% for high rate taxpayers (Which).
What are the inconveniences?
Regardless of where you are in your decision-making process, you’ll have to spend ample time considering the inconveniences of each investment to determine whether you are up for the challenge.
Be under no doubt- holiday lets require a higher level of upkeep. From housekeeping to maintenance and everything in between. It takes a great deal of effort, time and money to maintain a pleasant holiday-let that will welcome and allure guests. A lower level of upkeep can be expected from a buy to let on a daily, weekly or even monthly basis. However, it pays to brace yourself for some large-scale damage to your property at the end of the tenancy agreement.
You should also be aware of the relations you will form with your tenants in each case. In the case of buy to let, your tenant will possess a legally recognised status, granting them legal rights and responsibilities too. Holiday let’s do not have such rigid legal concepts. Rather, guests simply get a licence to occupy your property for a given period of time. Become familiar with what you can expect from your guests and what they, in turn, can expect from you.