For those fortunate enough to invest in a second home, the decision between a holiday let and a buy-to-let property can be challenging. The current dynamics in the property market, especially with the impact of new tax regulations on buy-to-let profits, have made the choice more complex.
In this discussion, we explore the nuances of both investment strategies, considering factors such as potential rental yields, tax implications, and overall investment goals. Specifically, we delve into the unique challenges and rewards associated with each approach, incorporating the relevance of Airbnb property management in Falmouth.
Distinction Between Holiday Let and Long-Term Let
A holiday let, typically short-term, caters to holidaymakers for durations ranging from a few nights to up to 31 days. To qualify as a Furnished Holiday Let (FHL) for tax purposes, the property must be available for at least 210 days a year and commercially let for at least 105 days annually. On the other hand, a long-term let, also known as buy-to-let, typically spans 6 to 12 months.
Return on Investment (ROI)
Holiday Let ROI
Pros:
The surge in demand for UK holiday properties, fueled by the staycation trend and evolving quarantine rules, has driven increased bookings.
Research indicates sustained interest in domestic holidays post-pandemic, with potential for high occupancy levels, especially in tourist hotspots.
Holiday lets in scenic areas or near popular tourist destinations yield higher rental yields, sometimes up to 30% more than buy-to-let counterparts.
Cons:
Holiday lets in tourist hotspots may face saturation and intense competition, leading to discounting and price wars.
Seasonality can impact income, with off-peak periods experiencing lower bookings.
Regular updates and investments in amenities are necessary to stay competitive, making holiday lets more costly to run.
Buy-to-Let Property ROI
Pros:
Properties in popular towns and cities offer consistent, high returns throughout the year.
Stability and predictability in returns with monthly rental income.
Better mortgage deals and a wider range of lenders for buy-to-let properties.
Cons:
Tenancy agreements may pose risks, with potential for rent defaults, damages, and longer periods of property vacancy.
Wear and tear are higher due to longer tenant stays, requiring more maintenance and replacements.
Upgrades for energy efficiency targets may add costs for landlords.
Tax Considerations
Holiday Lets and Tax
Pros:
Furnished holiday lets enjoy full mortgage interest tax relief, providing significant benefits.
Deductible expenses include equipment, furnishing costs, council tax, utilities, maintenance, and advertising.
Business rates apply to holiday lets, and there's potential relief for properties with a rateable value under £12,000.
Capital Gains Tax reliefs and exemptions from Inheritance Tax as holiday lets are considered business properties.
Cons:
Qualification for tax benefits requires meeting specific criteria, including minimum letting days and restrictions on letting periods.
Additional 3% stamp duty charge for second home purchases.
Buy-to-Let Property and Taxes
Pros:
Some landlords transfer properties into limited companies for tax advantages.
Limited companies may benefit from tax breaks, stamp duty, capital gains tax, or inheritance tax relief.
Cons:
Changes in tax rules have reduced the deductibility of mortgage interest for buy-to-let landlords.
Capital gains tax relief is scaled back, potentially costing landlords more when selling a property.
Automatic write-off for 'wear and tear' is no longer applicable for landlords.
The Overall 'Hassle Level'
Holiday Lets
Pros:
Short-term stays mean less ongoing hassle compared to long-term rentals.
Fulfilling experiences when guests choose the property for special occasions.
Cons:
Continuous guest turnover leads to higher upkeep and maintenance costs.
Managing a holiday letting business can become a full-time job, demanding constant attention.
Increased responsibilities, including changeovers, responding to inquiries, and dealing with complaints.
Buy-to-Let Properties
Pros:
Lower week-to-week upkeep with long-term tenants.
Reduced administrative tasks in comparison to holiday lets.
Predictable lease durations provide stability.
Cons:
Higher expectations from tenants, leading to potential maintenance demands.
Lengthy vetting processes for tenants, and riskier contracts.
Legal obligations to tenants can limit landlord control.
Enjoying the Property Yourself
Holiday Lets
Pros:
Access to picturesque tourist locations for personal use throughout the year.
Cons:
Continuous demand may limit personal use opportunities.
Buy-to-Lets
Cons:
Limited chances for personal use, especially in urban locations.
Often unfurnished, making it less appealing for personal enjoyment.
Where to Buy
Choosing the right location is crucial for both holiday lets and buy-to-let properties. For holiday lets, desirable locations, especially near the seaside or popular walking destinations, are ideal. Consider areas within a two-and-a-half-hour drive for personal use.
For buy-to-let properties, proximity to urban towns, universities, and places of work is advantageous. Investors often prefer areas they know well, facilitating property management.
Conclusion
Ultimately, the choice between holiday lets and buy-to-let properties hinges on individual preferences, time availability, and investment goals. While holiday lets offer potential for greater financial gains and tax advantages, they come with increased involvement and potential hassles. Buy-to-let properties provide stability and predictability, albeit with their own set of challenges.
For those considering Airbnb property management in Falmouth, evaluating local demand, potential rental yields, and the unique characteristics of the area is paramount. Whether opting for the charm of holiday lets or the stability of buy-to-let, investors should carefully weigh the pros and cons to make an informed decision. Outsourcing tasks to property managers or other professionals can alleviate the workload associated with property management.