Renting out a holiday home for the short term can be an attractive form of property investing if you own a property in a popular and attractive location, and it’s proving a popular method amongst investors who are keen to take part in the growing trend.
In this blog, we’ll go over everything you need to know about holiday lets including ways to generate profit from them, popular holiday regions in the UK, rules and regulations for landlords, and how to manage your property.
What is a holiday let?
A furnished holiday let (FHL) is a short-term rental property, mainly used for the purpose of holiday stays. It can be any type of property such as a cottage, house, or flat, usually rented out anywhere between a couple of days and a few weeks. Holiday properties tend to be in popular locations or close to areas of interest such as scenic regions in the countryside or high-demand city centres.
Is a holiday let a good investment?
Demand for UK holiday homes has risen sharply since the pandemic. The initially strict testing and travel rules caused 2021 bookings to surge and many popular stays even started to book up well in advance. Industry researchers are confident that this upward trend will continue and many investors have been turning to holiday lets as a safe haven.
Given that you do your research before entering the buying process, a holiday let can be a great and rewarding way of investing in property.
When looking for the right holiday let, it’s important to understand:
· Your target market: Are you looking for something spacious that’s perfect for families, a romantic getaway for couples, or a scenic cottage for those that enjoy an active trip away? Understanding who you’re catering to will help target the right location, property type, and marketing strategy that’s right for your holiday home.
· Suitable locations: Depending on your demographic, budget, and profit expectations, every location will have something different to offer. A deep dive into popular destinations is a good way to start this process, which can help determine the regions that have the potential to meet your needs.
· Your USP: While the right location is important, it can also mean saturation. How will you stand out from the crowd? A good USP or unique property features such as pet-friendly facilities, scenic views, or a luxurious hot tub could significantly impact booking value.
Whether or not a holiday let is the right investment for you will also largely depend on your personal goals. Some questions you could consider before getting started are:
- How will a holiday let impact your investment portfolio? Will it help you diversify?
- Are you eligible for the right mortgage? The borrowing process for a rental home is different from a standard mortgage. A simple eligibility check can help with this.
- Are you financially prepared? A holiday let requires regular expenses to keep the property maintained to a high standard, so it’s important to make sure that you can afford the ongoing costs.
- What are your projected returns? It’s a good idea to do the maths and make sure that you will generate a suitable profit from the investment.
Popular holiday locations in the UK
Despite the pandemic having temporarily restricted international travel in the last two years, what we did see is the rise of the staycation. This holiday trend has continued in the post-pandemic world and domestic stays remain a popular travel choice.
The graph below shows the main types of domestic holidays taken in 2022 versus 2019.
It’s clear that holiday habits amongst Brits have changed since the pre-pandemic period; while a city break was the most popular holiday type in 2019, this has been overtaken by beach destinations this year. City breaks haven’t fallen far behind, though, taking second place, followed closely by countryside retreats.
In 2021, the southwest was by far the most popular staycation choice with 37% of holidaymakers spending their summers in areas like Cornwall and Devon. This was followed by Northern Scotland (19%), London (18%), and the southeast (16%). This year, even though airports reopened and most Covid-19 travel procedures eased for vaccinated travellers, the UK still experienced record high staycation bookings, which were up 30% year-on-year.
It was also found that nearly half of travellers preferred multiple UK holidays rather than one trip abroad, with many planning on as many as three staycations in 2022. Now, with the pressures of Covid being replaced with the pressures of the cost-of-living crisis, many Brits continue to favour UK holidays over travelling abroad, with 35% choosing domestic trips due to squeezed budgets.
Some of the key trends that have been reported as the top influencers for Brits choosing their holiday homes this year are:
· Glamping has become increasingly popular with bookings of yurts and shepherds’ huts up by 46% versus 2021 and +94% versus 2019
· 35% of bookings so far this year included pets (vs. 33% in 2021)
· Gardens/outdoor space, reliable WIFI, and easy beach access were the top 3 features that influenced staycation bookings this year
Whilst many people have returned to international holidays, domestic travel has remained a popular choice, and this is expected to remain the case for some time. CEO of Sykes Holiday Cottages, Graham Donoghue, comments: “The shift towards staycations had already begun pre-Covid, but our latest research proves that it is still showing no signs of slowing,” adding that “As well as uncertainty, increased pressure on household budgets is leading to many turning to staycations as the better value options, with tourism economies across the UK expected to receive a boost.”
Property regulations for holiday let landlords
If you’re thinking about investing in a holiday let, there are several legal obligations to be aware of. This includes areas like letting permission, fire safety, and insurance.
1. Letting permission
First, check that there are no restrictions against the property being used as a holiday let. Depending on the property type, such as HMOs (houses in multiple occupations), there may be details in your title deed or leasehold agreement that could restrict the property from being used for these purposes.
2. Safety in the property
You’ll need to carry out a general health and safety review of the property to ensure the safety of your guests. This can either be done independently or via a consultant and they will need to be done regularly to make sure that the correct safety standards are maintained.
3. Fire, electrical & gas safety
Your holiday home will also need to undergo regular fire, electrical, and gas safety assessments. There is certain equipment that the property will be legally required to provide such as an extinguisher and a smoke alarm, all of which will need to be checked frequently. All furniture will also be subject to fire safety regulations. You can conduct your own fire safety review, but a certified engineer and electrician will be needed for the remaining checks.
You are legally required to insure your holiday let with the right level of building and contents cover to protect you and your guests from any incidents. You will also need specific holiday home insurance.
Holiday let tax rules
An FHL is subject to the same taxes as any other property, but with some key differences.
· Income tax
Any profits made from a holiday let are subject to income tax. However, an unlimited mortgage interest offset rate applies to your holiday let profits, which can significantly reduce your tax bill. Landlords can also benefit from capital allowances on items such as furniture and fixtures.
· Capital gains tax
You may be entitled to various forms of capital gains tax relief when you sell your holiday let, subject to the Furnished Holiday Let criteria.
· Council tax
If your holiday home is available for short-term lets for 140 days or more per year and let for at least 70, it is rated as a self-catering property and subject to business rates, which can save you up to 50% on council tax.
· Stamp duty land tax
In most cases, a holiday let is likely to be an additional property to your main home of residence. For a second property, you will pay a 3% surcharge in stamp duty.
How to finance your holiday let
Financing your holiday home can be a complicated process. To start with, you should find out:
· How much you can borrow?
· How much you will need for a deposit?
· What will your mortgage interest be?
These are all key questions that should be researched as accurately as possible as a holiday let mortgage is very different from other types. Your deposit will be much higher than a traditional mortgage and there are various lending rules and criteria that apply specifically to FHLs.
Subject to your circumstances, the maximum loan-to-value (LTV) on holiday lets is 75-80%, so you will need 20-25% as a minimum deposit. This is a considerable jump compared to a residential mortgage, for which the minimum deposit is typically between 5 and 10%. You will also need to consider whether you apply for a repayment (used to pay back the initial sum borrowed plus interest) or interest-only mortgage (interest repayments only) as well as a fixed or variable term.
As an example, let’s look at a property value of £400,000 on an interest-only mortgage. With an average deposit of 20% at 75% LTV and a 2.75% interest rate, your monthly repayments would be £688. Naturally, the larger the deposit, the lower the repayments.
When doing your calculations, it can be easy to forget the additional costs that come with a holiday let investment. As well as various taxes, don’t forget the expense of furnishing your holiday home and providing general necessities like cutlery, bedding, and toiletries, which also require maintenance and refreshment. These are all extra outgoing that should be considered when thinking about your available deposit.
Pros and cons of holiday lets
If you’re considering investing in a holiday let, it’s a good idea to be aware of its potential pros and cons. Below are some of the benefits that a holiday let can offer investors and some possible drawbacks:
- Demand for UK holiday properties is high since the pandemic
- Possibility of high rental yields as holiday lets are normally in popular tourist locations (up to 30% more than BTL)
- The pandemic has increased remote working and, therefore, the possibility for longer guest stays, which can reduce admin expenses for landlords
- Long-term potential for capital growth if you buy a development property and upgrade it in an area that becomes popular
- Many tourist hotspots can be oversaturated with competition, which can reduce your earnings
- Holiday lets can be seasonal, leading to sporadic bookings with some parts of the year fully booked and some scarce
- Regular maintenance and updates to facilities and equipment is needed, which can be costly. This can be anything from replacing a set of towels to renovating the kitchen
- Securing an FHL mortgage can be more difficult and complicated than a BTL. A larger deposit is also normally required
How to profit from regular returns from property
Like a BTL, a holiday let comes with the need to manage physical property and tenants, which can be very time-consuming and expensive. If you’re looking to invest in property but the hand-on aspect of a holiday let isn’t for you, you could consider property bonds.
With Propiteer Capital, our Propiteer Capital Property Bond offers the unique advantage of a passive form of property investing, through which you can invest in a diverse portfolio of property types and geographical locations. By investing in our bond, you can benefit from purpose-built residential properties in popular spots across the UK and Ireland, ultra-efficient branded hotels in high-demand areas, and built-to-sell development properties in the UK’s most robust locations.
With flexible profit and term options, you’ll know exactly what returns you can expect and when they’ll be paid to you, and all Propiteer Capital returns are fixed rate, meaning your returns won’t change for the duration of your term, so you can benefit from regular payments, which the seasonality of a holiday let might not be able to offer.
To find out more about us, our bond, and our rates, visit our website or get in touch with our friendly customer service team if you have any questions.
Recommended Read: Pros and Cons of Secured and Unsecured Bonds