Higher income, but more variable
Unlike standard rental properties, with holiday rentals you can spike prices during peak periods such as summer, Christmas, school holidays and holidays, although you will probably never be able to charge as much as £ 5,700 a night on these luxurious Scottish digs await. make up during May holidays. However, you are also likely to have off-season periods when far fewer visitors pay lower prices if you are in a traditional holiday area.
Apartments in the city center can be more attractive year-round, and those just a short drive from major cities like London are more likely to be booked for weekend trips than more isolated destinations like Cornwall.
Thanks to the explosion in popularity of sites like Airbnb, tourists are increasingly booking holiday rentals rather than hotels and tourism in general is on the rise in the UK. According to the 2014 Office for National Statistics travel trends report (the latest available), visits to the UK increased by 5.3% in 2014 and reached the highest level since records began in 1961. The research from Visit England suggests that the number of UK residents taking holidays in the country has also increased in recent years, and with growing fears about terrorism abroad, it is likely to rise further.
Mortgages
The good news in terms of financing a vacation rental is that you will only need about the same deposit, about 25%, that you would need with a purchase to rent a property, although as with the rest of the mortgage market, the best rates are reserved for those with low loan value products.
The bad news is that there is a much smaller range of products to choose from. While there are over 1,000 purchase mortgage products to allow on the market today, only a handful of lenders offer vacation mortgages and the requirements may be more stringent than those of purchase mortgage providers to allow. For example, Leeds Building Society, one of the top lenders in this market, requires the primary applicant to have a minimum income of £ 40,000, while most buy-to-allow lenders require only £ 25,000.
Other lenders in the vacation rental market include the Cumberland, Furness and Monmouthshire building companies. Market Harborough offers a second home mortgage that allows you to rent up to 24 weeks per year, which could be suitable for those looking to use the property for themselves for substantial periods throughout the year.
It is a good idea to consult a broker if you are looking for a vacation rental mortgage, as there are also some conventional lenders who will consider vacation rentals on a case-by-case basis.
Rules and regulations
Before you get carried away with the high prices that vacation rentals are dominating in hotspots like London and decide to switch from your standard rental to a vacation rental, keep in mind that there are a couple of things that could ruin your plan from the start. .
First of all, if your property is rented, check the terms of your lease, as some only allow leasing on a secured short-term lease. Second, most London boroughs will insist that you need planning permission to change the use of the property if you want to leave it permanently as a holiday rental, although these rules have been relaxed for short-term holiday rentals. Outside of London, this is a problem in some areas, but not others; check with the appropriate council for their position.
To take advantage of the tax exemptions offered to vacation rentals, you must meet HMRC criteria and must be available to rent for a specified number of days per year.
Extra costs …
With buying to rent properties, even if you are self-managed, you may not hear from your tenants for months, but with the holidays, the demands on your time and your wallet will be much higher. Managing a steady stream of bookings and keeping the property in the condition tourists expect can be time consuming.
Realistically, it can only manage itself if it is very local; otherwise, you will need to use a specialized agent and these can cost twice as much as a leasing agent service costs in a standard rental. On the positive side, a reputable agency will likely get a lot more bookings than you would on your own, so it can pay for itself when that is taken into account.
People expect things like Wi-Fi and in some cases pay TV in vacation rentals or serviced apartments, and they will have to pay for utilities as well. In addition, you will need to provide bedding and kitchen utensils, as well as furniture.
… but also some savings?
Depending on the conditions of your mortgage (and check that not all allow it) you can use the property yourself, thus reducing your vacation expenses.
However, some homeowners are reluctant to do so during peak periods due to the higher income you will lose, so this could be more of an off-season advantage. If you have flexible work hours or are self-employed, the opportunity to use the property when it is simply vacant can be a bonus.
The bottom line
In the past, many people with potential vacation rental properties did all the sums and concluded that they would hardly outperform a single rental property.
However, with the new tax rules, it is likely to suddenly make a lot more sense. Let’s compare a £ 300,000 property with a 5% yield owned by a higher rate taxpayer, first as a purchase property to rent once the new tax rules are fully in effect, and then as a holiday rental.
Scenario 1: Property executed as a purchase to rent
Rental income received – £ 15,000
4% Mortgage Interest on 75% LTV – £ 9,000
Allowable Deductions – £ 2,000
Profit – £ 4,000
Other income – £ 45,000
Property tax due under the new rules (£ 15,000- £ 2,000 X 0.4) = £ 5,200
Also, add 20% mortgage interest relief: £ 1,800
Total Tax Due – £ 3,400
Scenario 2: Property managed as a vacation rental
Rental income received – £ 15,000
4% Mortgage Interest on 75% LTV – £ 9,000
Allowable Deductions – £ 2,000
Profit – £ 4,000
Other income – £ 45,000
Property tax (£ 15,000- £ 2,000- £ 9,000 X 0.4) = £ 1,600
Total Tax Due – £ 1,600
This is a basic example that ignores the fact that you would likely have more allowable expenses with a vacation rental, but you can see that even if the property generates the same amount of income in both circumstances, it pays more than double in taxes. if it is a purchase to rent. So even if your property ends up yielding roughly the same as a vacation rental as it would a standard rental, you may be significantly better off once taxes are included in the equation, particularly if you are a taxpayer with a fee. higher or the new buyer to let the tax rules push you to become one.