Natalie Welcome to the discussion of “are holiday lets a good investment?” Whether you want an additional income or to boost your property portfolio, many people ask this question. The answer is always the same. Like any other financial endeavour, holiday lets require careful research and planning for profitable outcomes.
The benefits are there. Investing in furnished holiday lets, also called staycations, produces additional money and allows investors to diversify their property portfolios. They are also an alternative form of investment to the traditional buy-to-let homes. Also called vacation or short-term rentals, the investment involves temporarily renting to tourists, typically for a few days rather than every month.
Unlike residential property, furnished holiday lets revolve around tourism. They can be apartments, condos, cottages, villas, and quirky places like treehouses or houseboats. With websites like Airbnb and VRBO, owners capitalise on the staycation boom by renting to holidaymakers.
But before investing in short-term holiday lets, buyers should research and understand the holiday home market to boost their investing skills.
Are Holiday Lets a Good Investment?
Advantages of Holiday Lets
Higher Rental Yields: One benefit for investors is higher rental yields than long-term rentals. Research shows the tourism rental industry nets 30% more money than residential rentals, making it a profitable investment. Additionally, during peak seasons like the summer, owners increase their rental rates to charge premium prices.
Capital Appreciation and Income: Homes in popular tourist places always experience significant capital appreciation over a mid-to-long-term period. The added cash also supplements savings or wages from existing 9-to-5 jobs.
Tax Advantages of Being a Landlord
Tax benefits are worth looking at. To qualify, the property must rented out for 210 days per year. Guests must also not occupy the home for more than 31 consecutive days. Unlike buy-to-let properties, where the tax relief on mortgage interest is being phased out, holiday homes are still eligible for interest tax relief. (Please note that as of 2024, capital allowances are no longer available)
Furthermore, holiday homes benefit from business relief, so owners pay reduced or zero business rates. Under certain conditions, owners also get capital gains tax relief when they sell. Lastly, owners offset expenses like advertising to reduce their taxable rental income and council tax and lower their tax liability. The house also provides an income tax-free allowance of up to £1,000.
Risks and Challenges of Holiday Lets
Seasonal Demand and Management: Demand is inconsistent, with a surge during summer and holiday times. Off-peak seasons lead to lower occupancy rates and decreased profit. However, you must still carry out guest communication, repairs, and cleaning during these times.
Remember, properties in popular tourist destinations generate higher demand, hence more consistent bookings, and regular income. On the other hand, properties in remote areas result in inconsistent annual income.
Competition, where owners compete for bookings, is another significant factor. Where there is more demand, there are also more people renting out. Hopefully, it will not happen again, but most investors in tourist hotspots and coastal resorts also remember COVID and the global pandemic. This was an occasion where everything was out of their control.
Continuous Investment: Ongoing costs, repairs, utility bills, and replacements are inevitable expenses. Budget for these, and you will receive healthy returns in the future. This is not an area to neglect and is a top financial consideration.
We have seen it in the past, and while saving money during winter seems frugal, come the summer months, you will lose customers and damage your reputation. These days, given the ruthless vibes of social media and review sites, it is hard to bounce back after setbacks.
Advertising and Management Costs
Long-term tenants mean you do not have to advertise. However, running a holiday business involves constant marketing and management costs. Firstly, promotion is essential to attract customers and generate bookings, and portals like Airbnb or Booking.com are popular platforms for promoting rentals.
Management companies will assist with day-to-day operations. Still, they charge fees for various services like handling inquiries, managing reservations, and regular inspections to maintain quality and cleanliness. The bottom line is that property investment strategies are essential.
Key Factors Influencing Profitability
Desirable Location: A prime location is essential for an ideal property investment. Properties in coastal locations or popular walking destinations with high demand for short-term rentals tend to yield higher returns.
Property Type and Amenities: Before buying, always look at the home from the eyes of holidaymakers. Desirable features like ocean views, transport links, and private pools fetch higher rates.
Marketing and Occupancy: Effective promotion and publicity maximise occupancy rates. Consider competitive pricing and positive guest reviews to help drive bookings and keep occupancy levels high.
Operating Expenses and Market Trends: Owners must carefully manage taxes, mortgage payments, insurance, utilities, cleaning fees, and advertising. Do not cut down to maximise your profit. Monitor market trends, like tourist demographics, school holidays, and competitors.
Navigating Planning Permission
Many homeowners have considered converting their homes into holiday lets in recent years. But there are strict rules for conversions, extensions, or changes of use, and you need planning permission.
The property must comply with zoning regulations, environmental concerns, and community impact. Officially listed homes or those in conservation areas have stricter planning controls to preserve their historical and architectural significance.
Forming a Limited Company
Many investors establish limited companies to reap numerous benefits, including tax advantages, liability protection, and enhanced credibility. It is a quick process; within 15 minutes, you can set up your own limited company online. Just register it with Companies House, the UK’s company registrar.
You will also need to open a business bank account in the company’s name to separate business finances from personal finances. Use a professional accountant or tax advisor to comply with tax laws and optimise tax efficiency.
Should I get a Mortgage to Buy Holiday Property?
This depends on your financial situation, but do not take out a residential mortgage. Holiday home mortgages allow you to leverage capital and buy with a smaller initial investment, amplifying your return on investment (ROI). But remember, it comes with a higher money risk and monthly payments.
Cash Flow Considerations: Evaluate possible rental rates against monthly payments, maintenance, management fees, and other expenses. Ensure the cash flow will cover these expenses and generate profit.
Terms and Interest Rates: Compare holiday home mortgage rates to find the most favourable terms, including the loan-to-value (LTV) ratio, repayment period, and interest rate structure (fixed-rate vs. variable-rate). Many lenders also have mortgage calculators on their website.
Long-Term Investment Strategy: Evaluate your long-term investment objectives and how purchasing a professional holiday let with a mortgage aligns with your money goals. Remember to seek professional money advice and consult specialists.
Use Our Property Services
We are Spot Blue estate agents, and we sell homes around the world, including the UK. Regarding the question “Are holiday lets a good investment?” we hope you have gained lots of helpful information, tips, and advice. To learn more, see our extensive listings of stunning properties for sale across the UK.
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