Holiday lets and HMOs offer opportunities in the BTL market

Andrew Ferguson, Managing Director, Buy-to-Let 

The buy-to-let sector celebrated its 25th anniversary in 2021 and despite changes to mortgage interest relief and a surcharge on stamp duty for second homes, it remains a popular option for investors.

Although the past 18 months have been turbulent because of the pandemic, the future for the buy-to-let sector remains positive. According to the ONS, private rental prices paid by tenants in the UK increased by 1.3% in the 12 months to September 2021. Demand also remains strong, with the Association of Residential Letting Agents noting in their latest Private Rented Report that members are reporting record high number of prospective tenants.

Those looking to invest in buy-to-let properties now have a range of options. Savvy investors are looking at Houses in Multiple Occupancy (HMOs) partly influenced by record numbers of students attending university, and holiday lets are growing in popularity due to the staycation boom.

With the range of options available for investors, working with a specialist lender has never been more important. Here are some of the key factors to consider before investing in an HMO or a holiday rental.

Staycations here to stay

While the pandemic may have accelerated the rise of staycations in the UK, there are a number of other factors at play that suggest the boom in staycations is set to continue, even once travel restrictions are removed.

A drop in the value of sterling since the Brexit vote in 2016, has meant our spending power in Europe has taken a hit. In addition, longer queues at passport control and stays in the Schengen Area limited to 90 days per every 180 has deterred many Brits.

Increasing awareness of climate change has resulted in a growing number of holidaymakers choosing to reduce their carbon footprint by avoiding air travel and remaining in the UK for their holidays.

There has also been an increasing trend of multi-generational - or '3G' - holidays, as more and more choose to spend time with their families. Since the start of the pandemic, an estimated 2.3 million households have also welcomed a new pet into the family, and are therefore looking for more local, pet friendly accommodation.

With the majority of these factors set to stay for the foreseeable future, many landlords and potential investors are looking into investing in a buy-to-let property.

Considerations for holiday lets

Those who invest in a holiday let property may have to spend to ensure it is furnished. Unlike a traditional rental, it's unlikely holidaymakers will provide their own sofa, but holiday let landlords can offset the cost generated from a holiday rental is classed as ‘relevant earnings’ which means the landlord could make contributions towards your pension and reduce their income tax bill.

If an investor decides to sell their property, they will be able to claim certain Capital Gains Tax reliefs including Entrepreneur’s Relief, Business Asset Rollover Relief and Gift Hold-Over Relief.

There is also the potential for higher profit margins as the daily and weekly charges for holiday lets are considerably higher than traditional buy-to-lets.

Those looking to invest in a holiday let should look to work with a specialist lender that operates flexibly. One of the hurdles for investing in holiday lets is the time it takes to conduct an assured shorthold tenancy (AST) rental assessment, so working with a lender that provides a quick and simple AST will make the process more efficient.

Some lenders will not lend on holiday lets to first-time landlords, or those with portfolios that don’t already include holiday lets. Ex-pat investors and those looking to purchase through a limited company are also excluded by some lenders, so finding a finance provider that works with a range of clients is crucial.

Shared living trend set to continue

If a holiday let is not quite right, many landlords and potential investors will be looking towards HMOs.

The potential for increased rental yields is one of the main drivers behind the increasing number of landlords looking to HMO properties, especially in university towns and smaller cities. The relaxation in change of use rules presents a huge opportunity for property investors to convert empty high street units into homes.

Factors to consider for HMOs

HMOs offer a range of benefits. One of the main ones is increased rental yields as the landlord can charge a higher rate of rent per room.

There are also fewer void periods, as the landlord will still be receiving rent from the other tenants while a replacement tenant is found. This also means the landlord is less exposed to arrears.

Coupled with higher-yield, there is also high demand for HMOs at the moment, particularly in cities, from students and young professionals who cannot afford the cost of a single-let property.

In some situations, there can be tax advantages to HMOs, with more of the landlords’ costs being tax deductible.

What to look for from a BTL lender

Flexibility is crucial for buy-to-let lending, and this is certainly the case if an investor is looking to purchase an HMO. Some lenders will not lend to first-time landlords, so if the investor is new to the market this will be an important consideration.

The number of bedrooms will also be significant, as some lenders will not lend above five or six bedrooms.

The investors’ personal situation may also be another factor when considering which lender to work with, as some lenders will not work with ex-pats.

The key is finding a lender that will work flexibly with a specialist underwriting team and treat each case individually.

With both experienced and new to market landlords almost certain to continue investing in HMOs and holiday lets, brokers will need to work with lenders that offer a flexible approach. With a specialist underwriting team, West One will consider applications from across the spectrum, and will work with the broker to find the right product.

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