Holiday Let or Buy to Let – What’s Best for Me?

If you are thinking about investing in a second property, you may face the interesting decision between choosing a buy to let property versus a holiday let property. Both can be brilliant business investments with the potential to generate a great overall return, but you have to choose which is the best option for you. From tax breaks to rental yields, here, we discuss key points that you should consider before making that decision.

Facts to consider

Over the last few years, things have changed quite a bit. While the buy to let market was once a very popular choice, recent trends have shown more and more people investing, instead, in a holiday let. Still, a holiday rental might not be for everyone, so below we discuss some key differences between holiday let and buy to let options to help you make up your mind.

Personal use:

• If you own a holiday let, you have the advantage of being able to stay in it throughout the year (although there are certain occupancy restrictions to adhere to, see our article on Holiday Home Occupancy Restrictions). Typically, holiday rentals will be attractive homes in picturesque locations that are popular with tourists – this could be the Lake District, Cornwall or the Cotswolds, for example. It’s not just rural locations, it can also include the short-term rental model in city centres, the type that was thrust into the spotlight by companies such as Airbnb. Either way, it’s likely that you will want to stay at your holiday rental and enjoy all the benefits of owning a lovely ‘home from home’, at regular points throughout the year.
• Unlike holiday lets, buy to let properties can exist almost anywhere, but it is fair to say that the better ones tend to be in locations near to where people work, such as city centres and towns. If you own a buy to let and things are going well, then you will most likely have long-term tenants living at the property, which will prevent you from staying there. Also, if you do have a void at your property (meaning your tenants have left and it’s sitting empty whilst you find new ones), it is most likely that the home will be unfurnished – as a result, there is effectively no opportunity to stay there and enjoy the home you own.

Financial return:

• The financial return on your property will vary depending on the initial house price and its location. Buy to let properties in major cities have the ability to deliver consistent, high returns all year round, whereas the returns generated by a holiday let tend to be limited by the city’s occupancy rules. On the other hand, in more rural locations and tourist destinations, holiday lets tend to come up trumps and deliver higher rental yields for the year.
• From a capital gains point of view, the future for property investors is unpredictable. However, a holiday let property is often more unique or could be a period property, so it differs significantly from the classic buy to let flat. You cannot build another 300-year-old cottage, but flats come and go at a rapid rate, especially in dense urban areas.
• With regards to financial return, it is also important to consider how consistent your profits will be throughout the year. Buy to lets generally have fixed monthly rental yields, and as a result, are stable and predictable (unless you have a major incident such as replacing a boiler or a void). Holiday lets are more seasonal, where owners can make a significant profit throughout the warmer months and key holiday dates such as Christmas, but only just cover the cost of running the cottage in winter.
• Finally, you should consider the reliability of your profits, which can differ notably between the two investment types. Holiday lets consist of many individual bookings throughout the year, with a high performing cottage having around 50 to 60 bookings. Data has shown that, so long as the property is well maintained and professionally marketed, a holiday let should have a revenue profile that is reliable and reasonably consistent all year round. Buy to lets, however, are usually reliant on a single tenancy contract, which can be terminated or worse still, defaulted on. Depending on the market and the state of the property at that point in time, a landlord can either get a new tenant in quickly and resume the monthly income, or end up with several months void, which in some cases, can wipe out the profit for the year.

Level of hassle:

• Holiday rentals will undoubtedly require a higher level of upkeep. This includes everything from frequent housekeeping and handling guest issues to repairs and maintenance of the property. With buy to let properties, there is a lower level of upkeep from week to week. However, there is the potential for greater hassle, if you find out at the end of the tenancy that damage has been done to the property. It is also important to note that it can be riskier taking on tenants – if they turn out to be troublesome, you will have a problem as they will be staying in your property for a much longer period.
• In the case of buy to let, a tenant is a legally-recognised status which comes with legal rights and responsibilities. These include the right to live in the property undisturbed and protection from being unfairly evicted – such privileges are designed to protect vulnerable people. On the other hand, a holiday let does not have such a legal concept, instead, guests merely have a ‘license to occupy’ your property, granting them little rights beyond what their booking conditions state.

Availability of mortgage finance:

• Holiday let mortgages are often considered to be a specialist area of finance and are poorly understood by mortgage brokers in the wider market. Holiday Cottage Mortgages aims to fix that problem (see About Us for more information).
• Buy to let mortgages are plentiful, although these days it is mostly the re-mortgage market that is active.
• Both types of finance are normally assessed using the rental income cover ratio, stressed at 140% to 145%, using a stressed interest rate of 5.5%. This means that a lender will typically size up the loan they are willing to provide based on how much rent you predict to clear each month.

Conclusion

While there are pros and cons to both holiday lets and buy to lets, it is evident that the holiday let, when chosen correctly and managed well, can provide financial, personal and tax advantages over the buy to let model.

It is important to note that if you own a holiday let and run it as a business, there will most likely be more work to do and more involvement throughout the year – although there is the option to outsource that work to a housekeeper or letting agent.

Before you make the all-important decision between the two property types, it is recommended that you consider your overall financial and personal needs, to determine which is the right asset for you.