A Deep Dive into Buying a Holiday Let for Landlords and Investors
by Property Investments UKThe Property Investments UK editorial team have been researching and writing about the UK's property market for more than a decade.
Buying a holiday let is a popular type of property investment opportunity today. Here’s what you need to know about buying a holiday let including the pros and cons, rules and regulations and what sort of letting yield you might expect from a holiday let.
- Why Should I Buy a Holiday Let?
- The Disadvantages
- What is the Definition of a Holiday Let?
- How Much Can I Make?
- Holiday Let Mortgages
- 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
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.
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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. Holiday-let residents don’t usually contribute to local life.
What is the Definition of a Holiday Let?
There is no clear definition. A holiday let is normally thought of as a property let to somebody for holiday purposes, and which is not their main home, for periods between 1 and 31 days.
How Much Can I Make?
Holiday lets generally earn much higher rents and yields than long-term 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: £250,000
Monthly rent: £950 pcm
Annual rental income: £11,400
Gross yield = 4.56%
An Example Yield from a Holiday Let
Purchase price: £250,000
12 weeks in high season (July, August, school holidays, Easter, Christmas, New Year etc.) at £850 per week – £10,200.
12 weeks in the middle season (April, May, June, September etc.) at £695 per week – £8,340.
12 weeks in low season (rest of year) at £575 per week – £6,900.
Annual rental income: £25,440
Gross yield = 10.18%
(Figures used are examples only. Actual returns will depend on local prices, rents and occupancy rates.)
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 many holiday lets, as it shows there is good demand. Holiday property letting agencies can usually tell you about supply and demand.
The countryside and the coast tend to be favourite locations for holiday lets. But don’t forget that some towns and cities have a holiday let trade too.
- Distances from major towns and cities. Is it near enough for a weekend break as well as a holiday?
- What local amenities there are – 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 let locations in England include Cornwall, the Cotswolds, 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 let locations in Scotland include Edinburgh and the West Highlands and Islands.
The Best Locations in Wales for Holiday Lets
The most popular holiday let locations in Wales include Carmarthenshire, Gower, Pembrokeshire, the North Wales coast and Snowdonia.
Holiday Let Mortgages
You can’t normally buy a holiday let with a standard residential or standard buy-to-let mortgage. You will need a specialist holiday let mortgage.
With a holiday let mortgage the maximum LTV will be around 75% meaning you’ll need a minimum deposit of 25%. The interest rate is also likely to be higher.
The maximum holiday let mortgage is likely to be based on your own income plus the potential rental income of the property. Compile a realistic rental projection to help with applying for a holiday let mortgage.
Rules and Regulations
Do I Need a Licence?
You do not normally need a licence to set up and run a holiday let in England.
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. Take legal advice before buying.
Proposed New Planning Rules for Holiday Lets
The government has recently run a consultation on changing the planning permission rules in England 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.
In some areas of Scotland, you may need planning permission for a holiday let.
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.
The Tax Benefits of Buying a Holiday Let
A holiday let can be a tax-efficient business opportunity.
A holiday let is regarded as a business, not simply a property let so mortgage interest can be claimed as an expense against tax unlike with a standard buy-to-let. To qualify for this your property will need to qualify as a furnished holiday let (or FHL as it’s known). A furnished holiday let should be available to rent for at least 210 days in a tax year and let for at least 105 of those days. The total of all lettings that exceed 31 continuous days must not exceed more than 155 days during the year.
With holiday lets you should be able to claim all the running expenses of your holiday property business against your income. This includes all utility costs, cleaning and maintenance costs, the replacement of domestic items, marketing expenses and agency fees.
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) and Inheritance Tax (IHT) benefits to buying a holiday let.
It is essential to take professional financial and tax advice before buying a holiday let if you want to maximise the tax benefits and minimise your tax bill.
Is It Best to Use a Letting Agency?
Many people buying holiday lets ask whether it is best to manage your property yourself or use a holiday property letting agency to do it for you.
The advantage of using a holiday property letting agency is that they can help make your investment a hands-off investment. They can advertise 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. They can handle enquiries and bookings and also in some cases changeovers, cleaning and maintenance too.
The main disadvantage is that their charges will cut into your gross 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. Just be aware that managing a holiday let can be time-consuming.
If you are planning on using an agency it’s wise to take their advice on what and where to buy to maximise the letting potential of your investment.
7 Top Tips When Buying a Holiday Let
- 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, a premium TV and even a hot tub.
- 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.