13th July 2023
Are holiday lets a good investment?
Investors in every area of property have to work hard to strike a balance between effort and expenses to generate profit. It is only with this approach that an investment strategy can be fruitful. When considering if a holiday let investment will generate enough profit to merit the resources expended, there are a few elements that must be considered prior to purchasing the property.
In this blog, our experts at SDL Property Auctions will be looking at the potential benefits and disadvantages of buying a holiday let property in comparison to more common buy-to-let investment types. We’ll pay close attention to the management and tax costs involved, provide advice on how to pick the right property, and answer the ultimate question: is it worth owning a holiday let?
What is a holiday let?
A holiday let is a property which is let out to holidaymakers on a short term basis. The most common length of stay is usually between three to seven days, but, according to tax regulations, as long as no stay exceeds the maximum of 31 days, the property can be classified as a holiday rental. There are also additional classifications of holiday lets, such as a furnished holiday let (FHL), which we’ll go into further detail on in later sections.
Is a buy-to-let the same as a holiday let?
No, while both buy-to-lets and holiday lets are types of property investment, there are some key differentiating factors that separate the two. As mentioned above, one of the most important differences is that holiday lets are available for short stays, while buy-to-let properties rely on long-term contracts between landlord and tenant. This may seem minor in nature, but these contract terms have a considerable knock-on effect of marking the former as a business, while the latter is considered as more of a passive income-generator.
Beyond the term length, buy-to-lets and holiday lets also attract different tenants, are often in different locations, and require different levels of investment, both in terms of time and funds. If you’re considering which of these property investment strategies is best for you, read through the pros and cons of each below.
Initial investment and mortgages
Buy-to-let properties typically require a smaller initial investment than holiday lets. This is because mortgages are harder to secure on a holiday rental lot due to there being fewer lenders offering this specialised type of deal, and many of them request a larger deposit than they would for a traditional buy-to-let. Even cash buyers may need to set aside a larger budget in the initial stages of setting up a holiday rental, as these will need to be fully furnished and advertised appropriately before income is generated, while residential rental properties can be offered partially furnished or unfurnished.
Running and management costs
One of the main drawbacks of owning a holiday let is the high running costs it can incur. Everything from advertising, management and cleaning costs, to everyday household bills, internet and additional entertainment subscriptions, will need to be calculated as outgoings. This is not something that landlords often need to worry about, as tenants in most agreements (with the exception of some student housing) will need to pay for their own monthly bills, and will take care of cleaning. Management and advertising, when outsourced, is also often cheaper for landlords as the long-term nature of the contracts limit the frequency of work needed.
General upkeep responsibilities
As with running costs and management fees, keeping a holiday let in pristine, rentable condition is a more cost- and time-consuming task than it is for a buy-to-let property on a regular basis. This is because replacing breakages, cleaning stains and missing goods can pile up and need to be addressed swiftly between bookings. Holiday let owners are also more likely to spend money updating the property on a regular basis, keeping appliances and technology up to date with the latest features to attract luxury holiday-seekers.
Contrastingly, in the long-term, repairs, maintenance and cleaning can become equally, if not more costly for residential rented properties as landlords can’t know about damages unless they’re reported or a routine inspection is arranged. This is particularly true when renting to certain groups, such as students, but less of a concern for exceptionally long-term tenants, who are typically more likely to care for the home as though they owned it.
While holiday rentals usually call for more investment, both initially and over time, they also generate considerably more income over a shorter period. Provided your marketing strategy is good, and you’re able to keep the property occupied as often as possible, the potential returns can raise far above what you might get for long-term rentals. This is what attracts many investors to this type of property over more traditional options.
Demand and competition
Holiday lets are a seasonal business, with the majority of holidaymakers looking for weekend getaways and summer vacations. This has a noticeable effect on rental occupancy rates through the year and, in turn, can cause income to be significantly higher in the summer months than in the winter.
Despite this, however, there have been signs that staycations are becoming a more and more popular option for UK holidaymakers. This trend started during the pandemic, where travelling abroad was a challenge fraught with cancellations, covid tests and banned travel, but has remained popular once these effects wore off. The ongoing cost of living crisis is another contributor to increased demand, with people looking to spend less while still getting away. Considering seasonal pricing can also help with the lull during quieter periods.
Running a holiday let is no easy task, and doing so without help from a management agent can quickly turn into a full-time job. Unpredictable and unique challenges are not unheard of, and it pays to be close-by to your property to ensure guests’ issues are handled quickly, turnover days run smoothly, and everything is kept in order. Landlords can face similar issues, particularly for troublesome tenants, and, while tricky holidaymakers will be gone before long, it’s much more difficult to evict long-term tenants.
Tax rates and reliefs
One highly-attractive factor of holiday rental yields is the tax rules that are in place around them. These are quite complex, and have changed in recent years – though these have been in favour of the holiday rental owner, while buy-to-let investors have been stung. The most up-to-date tax rules surrounding property investments can be found on the HMRC page of the Government site, but as of March 2023, some of the biggest tax reliefs and benefits include:
- Holiday let owners are eligible for full mortgage interest tax relief due to it being classed as a business property. There’s also no limit set on the amount that can be deducted, so savings on income tax can be considerable.
- Capital allowances can be claimed on holiday let expenditures, such as refurbishments and maintenance costs, money spent on equipment and furnishings, as well as monthly bills. Combined, these deductions can help to reduce your taxable income and make the venture more profitable.
- Capital Gains Tax (CGT) relief can be applied to your property should you come to sell it. Which relief you’re entitled to will change depending on the situation, but the most common CGT reliefs include entrepreneurs relief, business assets disposal relief or rollover relief, and gift hold-over relief.
- Earnings made from running a holiday let are, under UK tax law, classed as Net Relevant Earnings (NRE). This means that they can be counted as earnings for pensions, allowing you to make contributions from it.
Note: The above tax rules only apply to properties which are classed as a furnished holiday let. We’ve included the eligibility criteria for this status below.
What are the requirements for a furnished holiday let?
According to the most recent classification update (6 April 2023) set out by the government, a FHL must meet the following criteria:
- The accommodation must be in the UK or in the European Economic Area (EEA)
- It must be suitably furnished, meaning ‘there must be sufficient furniture provided for normal occupation and your visitors must be entitled to use the furniture’
- The property must not have 5 continuous stays of 31 days within the year analysed (for continuous lets, the tax year is followed, while new and ending lets the first or last 12 months are taken respectively)
- The property must be available for at least 210 days in the year, and must be occupied for at least 105 of these days. Any days that the property is used by the owner, or friends/relatives at a free/reduced rate does not count towards either total.
Is it worth owning a holiday let?
Yes, owning a holiday let comes with incredible potential earnings and considerable benefits. Beyond the financial earnings it can provide when managed well, running a holiday rental can also be highly rewarding, with good reviews creating a sense of pride, particularly those relating to special occasions such as proposals, birthdays and anniversaries. What’s more you can even use the property yourself during off seasons, and let it out to friends and family as a surprise or for a discounted rate.
Even with all that said however, there’s no doubting that this particular property investment is more intensive than a buy-to-let property – so be sure to decide on a route specific to your circumstances.
How to buy a holiday let at SDL Property Auctions
If you’ve decided that a holiday let is the right investment strategy for you, find the perfect property by browsing the lots available online at SDL Property Auctions. We have properties in a range of highly sought-after locations, and many boast attractive features such as garden space for a hot tub or BBQ facilities. Browse our timed auction and auction event lots and, before you bid, read through our guide on how to calculate holiday let yields to improve your chances of securing a profitable lot.