Holiday Homes.
As the weather gets warmer and the days become longer, many of us will be thinking of that next summer holiday. With current airport chaos leaving potential holiday-goers nervous and the current cost of living crisis leaving less money in their pockets each month, it’s no surprise domestic holidays are becoming more popular. Is this the time for potential investors to diversify their property portfolios with the addition of holiday lets?
Well, a recent poll suggests that 39% of Britons are choosing to stick with their staycations even after COVID. These figures are likely to increase further on as we settle into our new holiday habits and concerns over environmental issues rise. 62% of people planned to spend their summer break in the UK in 2021 – a 50% increase from 2019 Overall, the last few years have seen enormous growth for holidays within the UK and with the demand for holiday let accommodation rapidly increasing, now would be the perfect time for those looking to invest. So, whether you’re dreaming of owning that cliffside cottage in the highlands or that beach hut on the coast of Cornwall, this article is here to help.
Why Has The UK Become So Popular?
The aftermath of the COVID-19 pandemic has bottlenecked international travel. With severe staff layoffs, fuel shortages, and COVID restrictions still looming over international borders, people are turning to the beautiful British countryside for their family trips and getaways.
Saving Money.
One of the main reasons people are choosing staycations instead of international travel is simply money. After booking the flights, hotels, and travel to and from the airport, international holidays can add up. Not to mention mobile roaming charges and other minor costs associated with holidays. Consumers are also reallocating their holiday savings for cheaper, domestic destinations due to the cost of living crisis.
Post-COVID Era.
People are still uncomfortable with the idea of travelling after COVID. Especially when heading to countries that have lackluster laws and regulations and access to healthcare. People are simply not willing to take the risk to their health. Rory Boland, Which? Travel editor said, “The pandemic spawned a boom in UK trips as holidaymakers could only dream of getting away without restrictions.”
People simply want to explore more of Britain.
Britain has an abundance of rolling hills, lush countryside, sandy beaches, majestic lakes, and quiet, quaint villages and towns. In a recent survey conducted by Rough Guides, Britain was voted the sixth most beautiful country in the world, surpassing Iceland, Finland, and the USA. As international borders relax and people take to the skies for their holidays, many are looking to return to the UK.
High demand means property investors can charge higher, more competitive rates. Demand can be so high that holiday let owners can earn in one week what a traditional buy-to-let property could earn in one month. The average annual income for a holiday home was £28,000 in 2021. An increase of 33% since 2019. These figures are based on a four-bedroom holiday home and conducted by the rental agency Sykes Cottages. But what constitutes a property to be a holiday let? HMRC says in order for your property to qualify as a Furnished Holiday Let (FHL) you need:
- A property based in the UK or Europe.
- Furnished
- Commercially let out.
What are some of the advantages and disadvantages of investing in a holiday let rather than the traditional buy-to-let?
Getaway Options.
One of the most attractive points about holiday homes is having the ability to go on holiday whenever you like. Take that spare weekend and take a break during your second holiday let. Your friends and family can take advantage of regular holidays in a place you love. Another advantage is not having to pack very much for your trips. Simply leave your holiday gear there for you not to worry about.
Tax breaks.
We all like paying less tax, no matter how virtuous you may think you are. The most inviting and attractive advantage for investors is the difference in tax between the two. As long as you meet certain conditions you can gain certain tax advantages.
Holiday lets are considered businesses and are therefore taxed as such. You may be eligible for Small business Rate Relief meaning you won’t have to pay council tax. The profit you earn from your property can allow you to contribute towards your pension with tax deductions. Full mortgage interest can be deducted from the profits of holiday lets but is restricted to the basic rate of 20% for income tax. When coming to sell your holiday let, certain Capital Gains Tax reliefs are available.
Overall, the key difference between fully furnished holiday lets and buy-to-lets is holiday lets are treated as a trading business for tax purposes whereas buy-to-lets are regarded as investments and taxed as such.
Potential Retirement Home.
Whilst your customers effectively pay your second mortgage, equity within the house will build over time. When the time comes, you will have to make a decision. Do you want to sell your holiday home and stay where you are or do you want to move into your new retirement home with your partner? We know what we would do. But it’s not all sunshine, rainbows, and profits. Like any investment, there are negatives attached.
More work.
There is more work involved with running the day-to-day around a holiday let. With a high turnover of people using your property, the general cost of upkeep becomes higher than a buy-to-let. General wear and tear around the property is inevitable and things will undoubtedly break and need replacing. Furniture and other daily used appliances are going to have the most wear and tear and to keep your property looking attractive to potential customers, regularly replacing this equipment is advised, and costly.
Marketing.
As well to consider is the marketing of your property, management of bookings, and customer inquiries and issues. Nothing worse than double booking your property. Unless you live nearby and are willing to take on the added responsibility, we recommend using dedicated holiday let management companies.
Obtaining a mortgage.
Mortgage lenders will be wary of accepting your application, especially if this is a second home, as they want to see evidence that you can pay off your second mortgage. They might also hold off from accepting your application if your holiday home is located in areas susceptible to flooding or other weather conditions such as the Lake District.
Insurance.
Whilst insurance is considered an unnecessary expenditure, it does offer peace of mind when accidents happen.
Standard insurance will not be enough to cover your holiday home so you will need to take out holiday home insurance.
Letting out your home to the public will require public liability insurance. If there are periods of inoccupation then the risk of damage from leaky pipes and theft increases.
Where should I invest?
This is one of the most important questions to consider when coming to your holiday let. Location can make or break your investment. Research several areas and choose a location based on your budget. Many owners choose a property in areas they themselves like. For optimal occupancy throughout the year, consider purchasing your holiday let in a location that’s popular all year round. Beaches and seaside resorts remain popular throughout the summer but receive low traffic throughout autumn and winter. Properties in the Lake District receive consistent traffic but investors will have to pay a premium. Also, consider what is local and nearby, what type and how many restaurants are close by, and whether there are any seasonal or weather issues to be aware of.
Regions with the highest occupancy rates.
- Cumbria & the Lake District – 80.2%
- Northumberland – 80.1%
- Peak District – 78.6%
- Southern Scotland – 78.6%
- North York Moors – 78.4%
% days in the year that the property was occupied.
Highest earning regions for holiday homes, 2021.
1. Dorset – £35,864
2. The Cotswolds – £35,027
3. Peak District – £33,833
4. Devon – £33,071
5. Somerset – £32,708
Based on the average annual income of a four-bedroom property the study also suggests that Dorset, the Cotswolds, and the Peak District were the top 3 most successful earning locations with Dorset and Somerset coming in fourth and fifth. As you can see, there are high annual returns on investment with holiday lets. The ability to charge higher rents for short-term lets within a highly desired area can produce high profits.
What type of property should I invest in?
If new to holiday let investing, your safest option is purchasing pre-existing holiday homes or finding a property in areas with proven, high potential yields. People often travel on holiday as a family, a group of friends, or a couple. A property with two to four bedrooms will meet the demands of most. Any properties higher or lower will likely get looked over due to not enough space or too higher costs.
Quirky and different properties are more likely to capture people’s attention too such as wood cabins, glamping pods, historic cottages, barns, and even old chapels. There are websites dedicated to offering you off-beat and unusual properties. If located right, holiday-goers would be willing to pay more.
Preparing your holiday home means creating a well-furnished, fully equipped living space with everything they will need. From a well-stocked kitchen, TV, and WIFI to a well-dressed bedroom. Sykes’ research revealed the top three amenities for a holiday let are a garden or outdoor space, proximity to the beach, and modern technology. Consider the aesthetic value of the property. First impressions matter and having an attractive, well-maintained outside is just as important as the inside. Take some time to market your property in a way that sparks the customer’s interest and leaves them wanting more.
Overall, holiday lets can be a great investment if you’ve chosen the right property in the right location and made all the necessary changes to appeal to a competitive holiday-goers market. A lot of work is involved in the maintenance and marketing of your property but the returns on investment can be high so the hard work can be very worth it. There are overall risks involved but just like everything in the financial and property world, preparation and mitigation of risk are vital. With the added value of using the property yourself for a short getaway, that alone is enough for some people.