If you have a client that has decided to invest in a rental property but can’t decide between a holiday let or a traditional residential buy-to-let, then West One is here to help!
In this article, we will look at the key differences between a holiday-let and residential buy-to-let and the key factors investors need to consider.
As the name suggests, a holiday let is a property that is rented out to holidaymakers or tenants for a short set amount of time, this could be for 2-3 nights or a fortnight. The property will need to be available for bookings for a minimum of 210 days per annum in order to qualify as a furnished holiday let for tax purposes.
A residential buy-to-let property is one that is available for residential tenants using an Assured Shorthold Tenancy Agreement, usually with a contract for a minimum of 6 or 12 months.
First things first, unless your client is in the very lucky position of being able to afford to purchase their rental property in cash, they are going to need to obtain a mortgage.
There are different mortgage products for each property type, while mortgages for residential buy-to-lets are available across specialist and high street lenders, holiday-let mortgages are more typically available via specialist lenders like West One.
There will be different criteria for each type of mortgage which means they are not interchangeable, if an individual with a residential buy-to-let mortgage was renting out their property for short-term holidays this could be viewed as a breach of the mortgage contract.
With a buy-to-let mortgage, the lender will usually be looking at the suitability of the property as an investment and will be looking at the value of the property and the expected rental income. When obtaining a holiday-let mortgage the lender will also be interested in the location of the property as they assess the viability of the property as a business.
In addition, although a holiday let mortgage may generate higher rental per month, it is important to note that lenders will often assess the suitability of the property, based on its standard private AST monthly rental, when calculating the debt service cover (DSCR).
Once the mortgage completes the owner will then need to consider furnishing the property. This is where the costs between a residential buy-to-let and a holiday-let can vary dramatically.
Residential buy-to-let landlords have the option to choose whether they let their property furnished or unfurnished. This will likely be impacted by the type of tenants they are hoping to attract – with furnished properties more appealing to students or young professionals who do not own their own furniture.
A furnished property is expected to contain kitchen appliances, living area seating, bedroom furniture and curtains/blinds throughout. By keeping the design of these items simple, it will allow tenants to personalise the space themselves.
A holiday let however will need to be furnished to a much higher spec; the finish of the property will impact the premium that the property can demand and will need to provide everything to deliver a home away from home experience.
A holiday let can provide much higher rental yields, as the daily or weekly charge is considerably higher than a residential buy-to-let. For example, as of July 2021, the average monthly rental of a property in St Ives, Cornwall is £795, while the average cost for a week-long holiday rental is 2.6 times higher at £2,067, check out West One’s staycation wish list to compare the differences in other UK holiday hotspots.
In some popular hotspots competition among holiday rentals is high which can result in price wars, driving down the profit margins for the landlord.
Holiday-let landlords will need to account for a potential dip in bookings during low seasons when there is less demand for UK breaks.
A residential buy-to-let has the potential to offer the landlord more consistent returns, with seasonality playing no role. However, landlords of residential buy-to-lets are more vulnerable to void periods if a tenant leaves with little to no notice, it might take a while for a replacement tenant to be found. Although a lack of housing stock means that rental demand remains high, mitigating that risk.
Another benefit for landlords of residential buy-to-lets to bear in mind is that they are able to pass on expenses such as utility bills to tenants rather than eating into their profit margins.
One of the main benefits of owning a holiday let is that it is classed as a business rather than an investment, meaning owners are entitled to certain tax advantages and income generated is classed as ‘relevant earnings’, allowing the landlord to make pension contributions and reduce their tax bill.
In addition, the landlord may be entitled to claim back the costs for certain improvements to the property, such as energy-efficiency measures.
It is important for holiday-let landlords to be aware that in order to qualify for the tax benefits mentioned, the property must be classified as a furnished holiday let by HM Revenue & Customs.
To qualify the property must be available to paying guests for a minimum of 210 days a year and successfully let out for at least 105 days of the year. The maximum number of days a holiday let can be rented out under one booking is 31 days.
In 2017 the benefit of being able to claim mortgage interest relief for residential landlords began to be phased out. Previously landlords could deduct expenses, such as maintenance and management fees, from the rental income they received.
Many landlords have chosen to work around this by transferring their properties to a limited company, which allows them to benefit from tax breaks, including Capital Gains Tax.
There are clear benefits to owning either a holiday-let or residential buy-to-let, which option is best will depend on the goal of the client, what they are hoping to get out of their investment and their appetite for risk.
While a holiday let can be more work it has the potential to provide much higher financial returns if managed and marketed well.
We have discussed some of the tax benefits associated to the ownership of each property, this information is generic and as each individual’s tax affairs are different, for tax advice, your clients may want to seek independent advice from a tax advisor such as an accountant.
Our comprehensive range of buy-to-let products offer options for amateur and professional landlords wishing to purchase or remortgage a residential or holiday let property.
Our expert team are committed to delivering cases with speed and flexibility. We apply an individual approach to underwriting to ensure we review each case on its merits, ensuring we support clients with the smooth and secure purchase or re-mortgage they require.
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