A Deep Dive into Buying a Holiday Let for Landlords and Investors
Buying a holiday let investment is a popular type of property investment strategy. In this article, we look at everything you need to know about buying a holiday let (also known as holiday homes), including the pros and cons, rules and regulations and what sort of letting yield you might expect from a holiday let investment in the current UK market.
Contents
- Why should I buy a holiday let?
- The disadvantages
- What is the definition of a holiday let?
- Are holiday lets a good investment
- The costs of running a holiday let
- Holiday let mortgages
- Locations
- Rules and regulations
- Stamp duty
- The tax benefits of buying a holiday let
- Is it best to use a letting agency?
- 7 Top tips when buying a holiday let
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by Robert Jones, Founder of Property Investments UK
With two decades in UK property, Rob has been investing in buy-to-let since 2005, and uses property data to develop tools for property market analysis.
Why Should I Buy a Holiday Let?
Here are some of the reasons why you might consider investing in holiday property:
Growing demand. The popularity of staycations means holiday lets are in increasing demand in many places. Some locations have a shortage of holiday lets.
Strong rental income. Rents for short-term holiday lets are much higher than for long-term lets.
Strong yields. Letting yields are usually much higher than long-term lets. It’s possible for holiday letting yields to be 100% more than a long term let – in some cases much more.
Another advantage is that you can also use your holiday let yourself for part of the year.
The Disadvantages of Holiday Let Ownership
Higher purchase and set-up costs. Property prices in some good holiday let locations can be high. Holiday lets also need to be fully furnished and equipped too.
Higher maintenance costs. Holiday lets will need more maintenance and are likely to have more wear and tear than long-term lets.
Holiday lets need more management. You’ll need to deal with check-ins, check-outs, cleaning between lets and maybe queries and complaints – unless you pay an agency to do this for you.
Holiday lets have more void periods. Holiday lets tend to have more void periods than long-term lets. On average a holiday let will let for a maximum of 40 weeks a year. But this will depend on how popular your property is and what rent you charge.
It’s also important to bear in mind that buying a holiday let involves ethical issues. Too many holiday properties in one area can ‘hollow out’ the local community.
What is the Definition of a Holiday Let?
A holiday let is normally thought of as a property let to somebody for holiday purposes or as a short-term stay as serviced accommodation. Which is not their main home, for periods between 1 and 31 days. This is different to an assured shorthold tenancy where the tenants have a minimum of 6 month tenancy agreement.
The definition of a holiday let or short-term let, becomes important when you consider the tax and finance aspects too. For example, a holiday let maybe liable for business rates instead of local council tax. This can be of benefit to the owner, but you will need to prove a level of occupancy within the holiday let to the valuation office agency.
Some councils will also require planning permission, here is an example form York city council.
Are Holiday Lets a Good Investment?
Holiday let investments generally earn much higher rents and yields than long-term buy-to-lets. Here’s a worked example of how holiday lets compare with long-term lets:
An Example Yield from a Long-Term Let
- Purchase price: £200,000
- Monthly rent: £1,000 pcm
- Annual rental income: £12,000
- Gross yield = 6%
An Example Yield from a Holiday Let
- Purchase price: £200,000
- Potential monthly income: £2,250 (at 70% occupancy)
- Average nightly rate: £107
- Annual rental income: £27,000
- Gross yield = 13.5%
To break this down further:
- At 70% occupancy (a fair target for well-managed properties), this means the property is occupied for approximately 255 nights per year
- The same property earning £1,000 per month on a long-term let (£12,000 per year) could potentially generate £2,250 per month as a holiday let (£27,000 per year)
- This represents a significant increase on the gross rental income through holiday letting
Important Note: These figures represent gross rental income. Holiday lets typically have higher running costs than traditional buy-to-lets, including:
- Regular cleaning between stays
- Utility bills
- Furnishing and maintenance
- Management fees if using an agency
- Marketing costs
- Insurance
Even after accounting for these additional costs, it's not unrealistic to double your return compared to a traditional buy-to-let strategy, when you consider the net rental yield and income for both strategies.
(Figures used are examples only. Actual returns will depend on local prices, rents and occupancy rates.)
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The Costs of Running a Holiday Let
Running a holiday let incurs several ongoing costs, with the average owner spending around £7,400 to £11,500 annually.
The key expenses of running a holiday home include utilities, cleaning, maintenance, insurance, and business rates.
Additionally, some owners may choose to work with a holiday let management company, which typically involves agency fees such as commission rates, setup fees, and annual fees.
Partnering with a trusted holiday let agency can be well worth the cost for several reasons, particularly if you want to maximise your income, reduce your workload, and provide a seamless experience for your guests.
Despite the costs of running a holiday home, the average annual income from short-term letting remains strong. Property owners can expect to earn around £24,500 per year, according to Sykes’ Holiday Letting Outlook Report. Also by using advanced data-driven pricing algorithms and property data, you can adjust your rates based on market demand, helping you earn an average of 27% more per year.
Sykes have a Holiday Let Income Calculator to estimate how much you could earn.
Holiday Let Mortgages
You can’t normally buy a holiday let investment with a standard residential or standard buy-to-let mortgage. You will need a specialist holiday let mortgage.
Rates will vary all the time and like a buy-to-let, with a holiday let mortgage the maximum LTV will often be around 75%, however, we often see this is even lower for holiday lets around 50-65% loan-to-value, meaning you’ll need a minimum deposit of 25%. The interest rate is also likely to be higher.
Locations
What Makes a Good Holiday Let Location?
Firstly, be objective. Buy a property that will have the best potential for holiday letting, rather than one you like personally.
Check what supply and demand is like. Good locations for holiday lets are usually those which already have a high demand for fully furnished short-term let accommodation like major cities, seaside resorts, or historic rural locations, as it shows there is good demand.
Holiday property letting agencies can usually tell you about supply and demand if you are considering a particular area. For example, Manchester has very high demand at the moment from property buyers, sellers and tenants, but what is the holiday let demand like?
Chester and York are wonderful historic cities with a lot of interest from tourists and short-term stays, but you might find it is more seasonal, with quiet times outside of school holidays like November and really busy months in the summer.
The countryside and the coast tend to be favourite locations for holiday homes. But don’t forget that some towns and cities have a holiday let trade too that is very seasonal and comes with a lot of local competition from hotels, BnB's, campsites and caravan parks.
Considerations
- Distances from major towns and cities. Is it near enough for a weekend break as well as a holiday?
- What local amenities are there – such as pubs, restaurants and local shops?
- Things to do – beaches, walks, sporting amenities, arts, cultural and historic places to visit.
The Best Locations in England for Holiday Lets
The most popular holiday locations in England include Cornwall (even inland areas like Truro), the Cotswolds (which is known for its historic villages and pretty listed buildings), Devon, Dorset, the Isle of Wight, the Lake District, London, Norfolk, the Peak District and the Yorkshire Dales and coast.
The Best Locations in Scotland for Holiday Lets
The most popular holiday home locations in Scotland can really vary, with lots of interest in small villages across the highlands for rural breaks, whilst the major cities like Edinburgh and Glasgow can attract year-round tourists whatever the weather with major festivals like the Edinburgh Fringe and monthly festivals across Glasgow as a major city of culture.
The Best Locations in Wales for Holiday Lets
Wales is famous for it's scenery and outdoors and that shows with the most popular holiday let locations including Carmarthenshire, Gower, Pembrokeshire, the North Wales coast and Snowdonia. Cardiff is a perfect location as a base to explore the south coast and the Brecon Beacons.
Rules and Regulations
Do I Need a Licence?
You do not always need a licence to set up and run a holiday let in England, however that does depend on the local council.
In London, you can only let a property on a short-term basis for up to 90 days a year without planning permission.
The government has recently run a consultation regarding introducing a registration scheme for short-term lets. This is not the law at the time of writing.
In Scotland, you will need a short-term let licence to let a holiday property.
Wales is planning to introduce a licensing scheme for short-term accommodation.
In Northern Ireland holiday property must be approved by Tourism NI.
Restrictive covenants, local occupancy conditions or leasehold restrictions can stop you from letting a property for holiday use in some cases, so it is important to consult with the local council and your conveyancing solicitor before buying.
Proposed New Planning Rules for Holiday Lets
The government has recently run a consultation on changing the planning permission rules so that short-term lets, including holiday lets, might need planning permission in some areas in future. This proposal has not become law at the time of writing.
Stamp Duty
If you already own a property or properties you will have to pay the higher rates of Stamp Duty when buying your holiday let in England. These rates are 3% over the standard rates. These additional costs need to be factored into your buying costs.
Scotland and Wales also charge a higher rate of Land and Buildings Transaction Tax or Land Transaction Tax respectively for additional properties.
The Tax Benefits of Buying a Holiday Let Investment
A holiday let can be a tax-efficient business opportunity, however tax changes all the time.
Up until recently, a holiday home has been regarded as a business, not simply a traditional property let. One of the benefits of this was mortgage interest could be claimed as an expense and offset against tax, which is no longer the case now with a standard buy-to-let.
However with recent suggested changes by the government this could change.
These proposed UK government revisions include
Proposed revisions
This change will remove the tax advantages that current furnished holiday let landlords have received over other property businesses in 4 key areas by:
- applying the finance cost restriction rules so that loan interest will be restricted to basic rate for Income Tax
- removing capital allowances rules for new expenditure and allowing replacement of domestic items relief
- withdrawing access to reliefs from taxes on chargeable gains for trading business assets
- no longer including this income within relevant UK earnings when calculating maximum pension relief
After repeal, former furnished holiday let properties will form part of the person’s UK or overseas property business and be subject to the same rules as non-furnished holiday let property businesses.
Link to the latest gov.uk updates here
In addition to the day to day running costs, there are other tax considerations. Holiday lets may be eligible to pay business rates rather than Council Tax, which may be cheaper or even zero if you are eligible for Small Business Rate Relief.
There may be Capital Gains Tax (CGT) benefits to owing a holiday let when you choose to sell, (however remember not to rely on this as governments can and do change the tax position all the time, so what might be true today may not in 5, 10 or 20 years whenever you choose to sell your property).
It is essential to set up correctly and take professional financial and tax advice before buying your holiday investment property if you want to maximise your income and reduce any potential tax.
Is It Best to Use a Specialist Holiday Management Agency?
Many people buying holiday homes ask whether it is best to manage your property yourself or use a holiday property letting agency to do it for you.
This really does depend on the person. If you are from a hospitality background, you may thrive on providing an extra level of care, attention and detail that no management agency could.
However, there are some significant advantages to using a holiday property letting agency, the main one being that they can help make your property a hands-off investment. A good company should be able to increase your occupancy, by using the latest price matching tech to change nightly rates to make you competitive and have a wider reach for marketing. Including advertising your property to their existing customers, on their website, as well as on holiday let websites like Airbnb.co.uk, Booking.com and Vrbo.com.
Remember they can handle enquiries and bookings and also your guest changeovers, cleaning and maintenance too.
The main disadvantage is that their charges will cut into your gross rental yield. Holiday letting agents are likely to charge around 20% of your rental income as commission.
By self-managing your holiday let you should be able to make a higher return on investment, but is it worth the trade of time? it can be very time-intensive and only really worth it for property investors who like to be hands-on.
7 Top Tips When Buying a Holiday Home
- Look for a property that has something special, to help it stand out from other holiday lets in the area. For example, barn conversions, converted churches, old mills and country cottages often feature in holiday property searches.
- Look for properties with features that renters look for. For example, a sea view, waterside location, a wood burner, close to a pub and a garden or terrace.
- Large properties are usually better for holiday lets. They have more letting potential and can be let to couples, families and groups. A sofa bed (or beds) means you can let any given property to more people and charge more rent.
- Holiday homes that are dog-friendly may get more lets. Many people who rent a holiday home in the UK often like to take their pets.
- Furnish, decorate and equip your holiday let to a high standard. Use good quality furnishings that will resist wear and tear and which will last.
- If you can, offer the amenities that holiday renters are coming to expect nowadays. For example, a dishwasher, a power shower, king-size beds, superfast broadband, think creatively.
- To be really successful a holiday let should offer a similar or ideally better standard of accommodation than guests are likely to have at home or a hotel. Make it something unique and consider what would make you book if you were a guest looking for a special UK holiday.
Finding The Best Holiday Let Investments
Finding the best location and property can be time-consuming and difficult, but it's not impossible.
If you know where to look and what to look for, you can find some incredible opportunities all around the UK.
To help you, we have partnered with an investment agent who helps all our clients with sourcing properties across the country. They specialise in high-yielding properties and have experience with holiday homes. To get access to the best holiday let investments across the UK you can sign up here.