Is now the right time to invest in a holiday let?

Holiday Let

The UK property investment market is changing; since tax rates on buy to let property changed in 2017, buy to let has gradually become less favoured by UK investors keen to boost their property portfolio.

Investors looking for alternatives might consider holiday lets, which can offer better profit margins than buy to lets.

The UK holiday accommodation market is now a £2 billion market. However, it’s important to bear in mind that holiday lets do come with extra costs and pitfalls compared to traditional BTL investments, and whether a holiday let is the right investment for you will depend on both your financial position and your appetite for risk.

What is a holiday let?

If you are thinking of investing in a holiday let, it’s important to know exactly how holiday lets are defined. According to the Housing Act 1988, a holiday let is defined as a ‘tenancy the purpose of which is to confer on the tenant the right to occupy the dwelling house for a holiday’. There’s no legal limit to the length of a holiday let, but the Furnished Holiday Letting Rules state 31 days as a limit, and mortgage lenders may set their own rules, too.

Essentially, a holiday let is rented out on a short-term basis. Properties listed on sites like Airbnb are undoubtedly usually holiday lets, aimed mostly at guests taking a holiday or city break for a few days or weeks. Nightly rates on holiday lets are higher than those on longer-term tenancies, but naturally, holiday lets are also more susceptible to frequent periods of unoccupancy.

What are the benefits of investing in a holiday let?

First, it’s important to know what kind of an undertaking a holiday let is. Compared to traditional buy to let properties, holiday lets cycle through tenants much more frequently, with many staying for just a few nights. This means that holiday lets require cleaning between stays on a frequent basis, as well as increased admin costs of finding and booking new guests.

Holiday lets also bring in a more seasonal income compared to buy to let properties, due to the simple fact that more people are holidaying and away from home during Spring, Summer, and Christmas time.

However, provided investors understand this, there’s no reason why holiday lets can’t be a fantastic investment when properly run. Per night, holiday lets bring in a much higher rate compared to buy to let properties. While holiday lets are not always occupied, on average many holiday lets still bring in a higher return annually because of their higher nightly rates. In fact, in a case study presented by Love Money, both an average seaside holiday rental in Whitby and a city centre pad in Liverpool offered better profits for holiday lets than traditional buy to let properties.

The stark difference between returns on holiday lets and buy to lets is in part due to tax differences between the two. Since 2017, buy to let landlords pay tax on all of their rental income, while holiday let tax is paid after deducting the cost of mortgage interest and other costs, meaning tax is only paid on profits.

While it might sound like a small difference, over the course of a year this can have a huge impact on profits, and helps to explain why so many buy to let landlords are turning to the holiday let market instead. A report put together by ARLA Propertymark earlier in 2020 suggests almost 50,000 properties have been changed from long-term lets to short-term lets.

Why now?

There’s sufficient evidence to suggest that holiday lets are a good investment opportunity for those keen to explore the UK property market. But is it the right time to invest in 2020? With Brexit looming on the horizon, many investors may be feeling nervous about making big changes.

The truth is that, despite Brexit, 2020 is the perfect time to invest in a holiday let. Both Brexit and the current Covid-19 pandemic have hit international tourism hard, and many Brits are opting to vacation closer to home amid rising fears of the virus abroad and quarantining rules for those coming from countries with current outbreaks.

Even before the pandemic hit, the UK’s tourist industry was doing well. VisitBritain predicts that Britain’s tourist industry will be worth £257 million by 2025, equivalent to just under 10% of UK GDP. Inbound tourism is set to be the fastest growing sector, although the rise of staycations amid the pandemic may well change this.

On top of this, 2020 offers investors a unique opportunity to purchase property with significant stamp duty relief. In a bid to keep the UK property market afloat in spite of Covid-19, Chancellor Rishi Sunak announced a stamp duty holiday lasting under March 2021.

Before the stamp duty holiday, investors would pay standard SDLT plus 3%, with standard rates rising in line with property value. New rates mean that while the 3% surcharge still stands, holiday let investors can still benefit from the massively reduced standard rates, saving thousands of pounds on a single purchase.

How to fund a holiday let investment

Funding a holiday let requires that property investors take out a mortgage product specifically designed for use with holiday lets. Lenders consider holiday lets to be a somewhat riskier venture than buy to lets, due to the seasonal nature of the income. This means that holiday let mortgages are usually paid at a slightly higher interest rate compared to BTL mortgages.

As with buy-to-let mortgages, most holiday let mortgages are interest only, and borrowers will have to put down a significant deposit of at least 25%. Most lenders will also require some level of proof that the expected rental income will average out to at least 125% of the mortgage interest payments over the course of a year.

It’s also important to consider the cost of insurance when taking on a holiday let. This can cover accidental damage as well as loss of rent and is designed to cover your property when it’s unoccupied as well as when it’s occupied. While holiday let insurance may, again, amount to a little more than BTL property owners pay, this is because of the irregular nature of holiday let tenancies and is easily mitigated by the higher nightly rates that holiday let owners charge.