Until the pandemic buy-to-let was a secure investment for many people in the UK. But the government has basically given tenants the right to withhold rent on hardship grounds, and not fear eviction for 12 months now. That’s understandable, but if you are on a buy-to-let mortage then there is no income to pay the mortgage – maybe that’s the government’s aim? There is no sign of things changing anytime soon, so is the answer to sell up, cash out and forget about letting property?
Maybe not. You could buy a holiday home instead, let it short term, take cash upfront and therefore solve a whole stack of tenancy problems. But there are still some legal T&Cs to consider. Here’s some insights;
In the last three months alone, search demand for ‘holiday homes for sale’ have grown by 73% year-on-year. Exploring into the recent surge in the demand for holiday homes, Matt Stevenson, Senior Commercial Banker at Private and Commercial Bank, Arbuthnot Latham discusses whether this surge is just a short-term situation or will the increased UK holiday trend continue.
It is a balance that owners of landed estates have contended with for many years: providing the best return on property and land assets whilst also leaving the estate in a better position than when they took over.
With the arrival of the coronavirus pandemic in 2020 – and the associated restrictions on international travel – UK-based holiday demand hugely outstripped supply as soon as people were able to get away.
Many estate owners may be looking at existing dwellings or redundant buildings that could be repurposed for holiday letting and asking themselves whether this is the right diversification for them.
Stability of UK tourism sector is good for investors
Based on data published by Visit Britain to 2019, the overall domestic tourism spend and bed nights have both stayed relatively flat since 2011. This is a £25bn industry. The largest section of the market, accounting for 43% is for parties of two. This has been consistent throughout the period reviewed. The biggest shift is towards larger properties which offer accommodation for ten or more – seeing a 35% increase, perhaps owing to multigenerational holidays or families holidaying together. Albeit this only accounts for 2% of the total market.
Data for 2020 is still being compiled by many agencies, with some planning not to report for the year. Anecdotal evidence shows demand is incredibly strong for 2021 – just try to book a week in Cornwall, Norfolk or Anglesey, for example, and you’ll be hard pushed to find somewhere in high season.
Furnished holiday lets have historically benefitted from a favourable taxation regime in comparison to unfurnished residential letting (buy-to-let). This remains the case, but the exchequer has reduced this over recent years. In order to benefit, there are strict criteria that must be met, such as how many nights the property is available for letting, how many nights it is actually let for and how long guests can stay. As with all taxation, it is best to discuss plans with your accountant to gain advice and guidance based on your individual circumstances.
Considerations for holiday home investors
One of the major lifestyle changes that Covid-19 has brought, in between Zoom quizzes and a newfound penchant for baking banana bread is pet ownership. It is estimated that over two million puppies were bought in 2020, which compared to the estimated 10 million dogs owned as at February 2020 by the animal charity PDSA, is rather a substantial rise. It is not inconceivable to predict that demand for holidays with dogs will see an increase, therefore it is important to consider whether you will permit pooches.
Income from holiday lets typically generates a higher gross yield than on a buy-to-let basis, however there are a number of considerations on whether the net return is worth it.
Wear & tear – Holiday lets are likely to suffer higher maintenance costs to keep the property in good condition as there is a high turnover of tenants. Possibly more so if pets are allowed.
Costs – You will be responsible for all utilities, council tax and business rates. There are likely to be seasonal void periods which means cashflow needs to be managed. You will also need specific insurance to cover holiday lettings and third party liability cover. It could an idea to take out legal expenses cover, in case of ongoing disputes over refunds, complaints from nearby resisdents, HMRC investigations etc.
Changeover – Whenever guests depart, the property will need to be cleaned and linen changed Who will undertake this task and what are the costs?
Privacy/disruption – What is the location of the property in relation to other dwellings and how might the comings and goings of new guests impact those tenants.
Is your property suitable as a holiday let?
- Are there any covenants or planning restrictions prohibiting short-term letting of the property?
- Location – is the property in a location that will attract tourists?
- Competition – how can you differentiate yourself from the local market in popular tourist areas?
- Facilities – what standard does your target market desire? Open fires, hot tubs and fast Wi-Fi are all popular searches.
- Agents – will you use a booking agent or manage yourself? Seek recommendations from people you know.
- Pets – will you allow them? If so, how many and will you charge extra for them? Consider the additional cleaning that may be required.
There is potential to generate a greater return from a property by letting short term than on a traditional Buy-to-Let basis, however there are a number of considerations to make before taking the leap.