Holiday lets are much more lucrative than residential lets, here we take a look at the pros and cons.
Since it was announced in April 2017 that tax relief would be reduced to the basic rate by 2020, many landlords have been looking for ways to lessen the tax burden on their finances and maximize profit.
Suggestions include transferring tax liability to a spouse or partner, reducing letting costs by self-managing, setting up a limited company to manage your portfolio or switching from long term rentals to short term holiday lets.
Holiday lets have many advantages, one of which being a higher profit than long term rentals, but there are some considerations before you make your decision. The main advantage of holiday lets is that it is not subject to the reduction in mortgage interest relief. Which means if you’re a higher rate tax payer or have a large mortgage, you could make significant savings on your tax bill. And, unlike with long term rentals, you’ll also be able to deduct any losses on your holiday let, further reducing your tax liability.
Holiday lets are also much more lucrative than long term lets; the weekly rate for holiday lets can be 3 or 4 times higher, which will boost your profit. With a holiday let, you also have the option of staying there yourself, or allowing family and friends to use it. However, tax relief will not apply to periods of personal use.
As mentioned, there are still drawbacks to offering holiday lets. Firstly, you may find there is not enough demand to let your property for an entire year- with void periods eating into your profit. If you’re looking to invest in a holiday let, research areas with high tourism- but be aware that even these places are seasonal and could leave you with significant void periods. You’ll also need to consider the cost of marketing the property year round, although these costs are significantly cheaper if you do this yourself.
Income for holiday lets is much higher than long term lets, but your costs will be higher too. For a holiday let, you’ll need to fully furnish and provide cutlery, crockery, toiletries and linen. You’ll also be required to pay council tax, water rates and energy bills. Holiday lets must be kept to a very high standard to ensure good reviews and repeat customers, so you’ll have the cost of regular cleaning and maintenance with the high turnover of guests. If you are not able to meet guests as they check-in, you’ll need to factor in the cost of paying a third party to do so.
You should also ensure that there are no restrictions that apply to your buy-to-let mortgage- check that your lender will allow holiday lets first. This also applies to freeholder contracts, so double check before renting your property as a holiday let. Plus, your insurance cover needs to be specific to holiday lets, the usual landlord insurance won’t cover it. Some areas require planning permission to be sought before operating a holiday let. Check with your local council to see if there are any restrictions or permissions to be obtained.
Finally, whilst the rewards and profits from a holiday let can make it seem like a no-brainer, be prepared for more work compared to a long term rental. Because holiday lets are short lets, you’ll be required to move guests in and out at a much faster rate than in a 12 month tenancy.