Holiday let or Buy to let

Holiday let or buy to let: What’s best for your money?

When it comes to the lettings market, deciding between investing in a holiday let or a buy to let can be a tough choice. A holiday let can offer personal enjoyment as well as potential income but can take a lot of maintenance and care. A buy to let certainly offers long-term financial stability, with less work, but the tax benefits may not be as fruitful.

 So how do you decide? Ultimately, it’s personal choice, but talking through the benefits and drawbacks is a good place to start.

With both options your return on investment is dependent on many things, including the location you choose, the demand in that area and the amount you invest initially. As with all house purchases, due diligence is key and it pays to invest time researching potential rental income and costs.

One thing is for certain, buy to lets mean longer-term tenants as the property needs to be let for a minimum of 6-12 months and tenants often stay much longer. This guarantees a stable income, predictable expenses and the outsourcing of bills for things like utilities and council tax. The predictability is more appealing for mortgage lenders with more deals available for buy to let purchases. Plus, an unfurnished property is often more of a draw for long term renters, and you save money not having to kit your property out.  

Stability and reliability do mean you are tied to that one tenant for a longer period though. If you have difficulties it may be harder to take action as they will have rights under their tenancy agreement. Long term tenants are also living in your property, they aren’t on holiday so are spending longer inside and that might mean more wear and tear which needs dealing with during their stay or when they leave.  

Financially, many of the perks that appealed to buy to let landlords in terms of tax benefits are no longer available. Capital gains tax relief has been reduced, inheritance tax is payable against your mortgage and you can’t deduct your mortgage interest from your income tax bill. Some landlords prefer to purchase property through a limited company to regain some of the benefits.  You also need to consider that if you have a gap between tenants there can be a period with no income where you become liable for any household bills.

For a furnished holiday let the tax benefits are very different and more attractive. Technically, the property becomes classed as a business, you pay business rates as opposed to council tax, you’re exempt from inheritance tax and are also able to offset business costs like bills and furniture against your income. In terms of mortgage interest tax relief, you can claim the interest against your profits, which can mean a significant reduction for higher rate payers. Another bonus is, if you decide to sell your holiday property your capital gains tax relief can be transferred to any subsequent holiday home. The condition of all of this, is the property must be available to rent 210 days of the year and be occupied for at least 105 of those, and not for more than 31 consecutive days by any one renter.

On a personal level, holiday lets definitely bring the fun. If you pick a location a couple of hours from home, then you’ve got a readymade holiday home that you can use on a regular basis. But there are often tough criteria to meet for a holiday let mortgage. The issues of seasonality, potential risks for the location (some of the prettiest places experience real extremes of weather) and the uncertainty around interest and bookings all make it a risky decision for the lender. Although this is something that is improving, as more people choose to invest in holiday lets, so more mortgage options are become available all the time.

In addition, managing and maintaining the property can be time consuming and includes things like covering bills and keeping equipment updated, whether that’s a dishwasher or the internet. Technology has made the advertising and booking process more manageable if you’re doing it remotely, but there’s still the day to day running and maintenance. Shorter stays mean more changeovers, making the management more hands on than with a long-term renter in a buy to let, although this can be outsourced at additional cost.


Buy to let

The problem with deciding how to invest is, one size doesn’t fit all. What would work for you may not work for your neighbour, friend or colleague. For every pro there’s a con. It’s a hard decision to make but get it right and you’ll enjoy a sound investment with a great return ultimately it is a balance of risk versus reward.

If we look at risk in terms of two elements; the cash investment and the time/effort required, the holiday let requires more of both but the potential monthly return is significantly higher.  The buy to let route presents much lower cash and time investment with lower returns.  

Whatever you decide, the key is your financial review to ensure the numbers work and the investment is worthwhile – you can have a totally hands off buy to let or holiday home, by paying a company to fully manage, if the numbers work and still clear the profit you need.  Ultimately both routes present sound investment practices generating both monthly income and longer-term returns where house prices rise. 

We can produce a detailed investment review and offer help and support along the way, or if you just want to talk through the options available to you then we’re happy to do that too. We know for personal experience that it’s a tough call to make, but you don’t need to do it alone.

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