Investing In A Holiday Let
Holiday let investment checklist
Why should landlords look at investing in a holiday let to rent out? I can reveal that after 30 years of being a buy-to-let landlord my two most recent property investments have been investing in furnished holiday lets (FHL) NOT buy-to-lets (BTL). Any landlord that has been letting through Airbnb rather than using an assured shorthold tenancy is effectively letting out a holiday let and they don’t have to be letting a cute cottage in the countryside for the property to qualify. City centre apartments can equally be classed as a holiday let for tax purposes.
For those landlords and property investors who have ever thought about buying a holiday let to rent out as a business, then this holiday let checklist looks at the opportunities and problems of holiday let investing.
Is a holiday let a good investment?
The short answer is YES …..if you get it right which ultimately means taking some expert investment advice before embarking on the journey to invest in a holiday let.
Unlike buy-to-let over the last few years; the tax advantages of a holiday let remain significant and up until Covid-19 the short break market in the UK was undergoing a sustained expansion. This meant more people than ever from the UK and abroad were looking at particularly 2-3 night breaks to defrag and relax. Many guests were also seeking a little bit more space and flexibility during their stay and therefore were after an alternative to a hotel or traditional B & B.
The latest tourism survey from Visit Britain reveals that in 2019 there were 99.1 million over night stays in the UK away from home with an average duration of 3 nights. In short, there a loads of people looking for a short break in the UK.
Where should I buy my holiday let?
After Covid-19 people in the UK are looking more than ever to avoid the perils of flying and international travel and looking at having a ‘staccation instead’. This means that the demand for holiday let accommodation in the UK is soaring and at the same time more people than ever are looking at investing in a holiday let for the first time. If you are looking at investing in a holiday let where should you look to buy? As with all property investments a landlord or investor needs to look at the likely rental yields. That is the likely income in relation to the capital purchase price. In the case of a furnished holiday let the gross rental yields can be much higher than a buy-to-let but this will depend on the levels of occupancy of your property. Levels of occupancy relate to getting your holiday let right and lots of positive reviews on the hosting platform such as Airbnb, Tripadvisor or Booking.Com. It also depends on what part of the country you buy your holiday let in. What you want is a location that has all year round appeal. I was amazed when I brought my holiday let in Bakewell in the Peak District just how popular it was in January, February or October & November. I was led to believe by one of the traditional holiday letting companies that it would be popular in the Spring, Summer and parts of the Autumn. WRONG! If you get it right it is possible to have good occupation across the seasons and for 52 weeks of the year. Pre-covid I was running at over 90% occupancy.
To find out how check out the details of our forthcoming Investing In A Holiday – Masterclass
This year round occupancy of your holiday let has a massive increase in your gross rental yield. Remember with a holiday let your expenses are likely to be higher so there will be a bigger difference between the gross rental yield and your net compared to a buy-to-let property. So where in the UK are the highest rental yields for a furnished holiday let (FHL)?
Where are the best yields for holiday lets?
Here at Property Hawk we are a cynical bunch so don’t believe much that we read. However, recent research does show that the likes of Wales (11.7% gross yield) and Northumberland (11.5% gross yield) lead the way. However, this largely results from the lower house prices in these areas.
Popular coastal areas in Dorset and the South Coast whilst having good year round bookings of up to 280 days a year their yields are poorer at around 6% because of the more expensive purchase prices.
The reality it is very property specific so what any holiday let investor wants to look at is the holy grail of low capital cost combined with potentially year round appeal. Investors need to think creatively to up their yields by finding unusual properties but with wide appeal. Whereas buy-to-let properties can be mundane and let well; a guest in a holiday let is looking for something extra ordinary, a stand out property to enhance their holiday experience. Get that right and to a degree the holiday let can be in many locations across the UK. Do remember that accessibility for visitors is important and a big nearby tourist attraction that brings in lots of international visitor will help boost your occupancy rates and ultimate rental yield. My holiday let in Bakewell benefits from having the fantastic Chatsworth House on it’s doorstep.
So how does a residential property investment qualify as a furnished holiday let (FHL)?
Furnished holiday let (FHL) occupancy conditions
There are a number of strict occupancy conditions that relate to a a Furnished Holiday Let (FHL) set out by HMRC that need to be adhered to in order for a property investor to have their holiday let qualify. ) These are as follows:
Firstly your furnished holiday let must be in the UK or in the European Economic Area (EEA) – the EEA includes Iceland, Liechtenstein and Norway. Secondly unsurprisingly it must have furniture that is it must have sufficient furniture to allow normal occupation and your guests or visitors must be able to use it. So no wrapping your sofas in cling film! In addition to these basic qualifying conditions there are a three occupancy conditions on your holiday let that apply:
- Your holiday let must be available for commercial guests and holidaymakers for at least 210 day or 30 weeks a year and the property must be let for 105 of these days to qualify. There are a number of ways around this for instance if you have more than one holiday let and also in the early days if you are struggling to get your occupancy up. HMRC describes these as elections and it enables the property investor to retain the considerable tax advantages available to owners of holiday lets if they can make use of these elections.
- If your furnished holiday let is rented out for more than 31 days to the same guest these periods are excluded from the 105 days of letting referred to above (unless) the guest falls ill and cannot leave on time or they have had to extend their holiday due to a delayed flight.
The differences between buy-to-let and a holiday let
I am an experienced landlord with over 30 years of renting out residential property and it is only over the last 3 years that I have started renting out short term holiday lets. I’ve talked at length before about investing in buy-to-lets.
First of all, what I would say is that they are very different animals. If you thought that renting out a buy-to-let was lots of hassle with tenants pestering you constantly about the odd leak from a broken tap, then a holiday let goes up several notches.
There is a reason why the taxman considers a buy-to-let to be an investment whilst a holiday let is assessed as a trade or business for tax purposes. Simply, the latter is more work and time consuming.
There are massive upsides particularly on the tax front, which I will go into in this FREE holiday let tax guide, but if you are looking at investing in a holiday let you must be prepared to be managing it on a daily basis rather than on a weekly or probably monthly basis with a buy-to-let. So the main difference is time.
Renting out a holiday let – the hospitality approach
When you invest in a holiday let you need to develop a hospitality mentality pretty quickly. When people are renting your holiday home or holiday let then they want things to be right. For some guests their short time at your holiday let might be the only holiday they get that year. To ensure that your holiday let not only meets but exceeds your guests expectations is going to be key to you getting good ratings and then hopefully a successful holiday rental property and business.
What is my biggest holiday rental tip?
The biggest tip for any new buy-to-let landlord to make their buy-to-let investment and business a success is to get a good tenant. Once you have a good tenant renting your property then everything is pretty straightforward and success, hopefully, follows on assuming you have followed the 3 pillars of buy-to-let. A bad tenant will mean you will have a nightmare experience.
So, with a holiday let you pretty much learn that success depends on your cleaner or cleaning company. If you get the right one, life is a whole lot easier and you are half way to success. It is the cornerstone business relationship of your holiday lettings business.
How long should I let my holiday let for?
This is an interesting question particularly looking at the way you can play about with the weekly rents, using the various rental platforms such as Airbnb.
Traditionally, with the holiday cottage rental sites such as Holiday Cottages, most people both owners and guests would look at renting a cottage for a week and that week would normally start on the Friday night – so in essence a 7 night stay from Friday to Friday. However, this model has been quite dramatically undermined and superseded with the advent of greater flexibility introduced by the new letting platforms such as Airbnb and Booking.com, both of which I use, and therefore I’m quite familiar with. On these platforms it is easy and acceptable to many owners to let for as little as one night just as in the way you might book a hotel room.
I was literally taken back by the variety of lets I received and the range from mid week to weekend breaks from anything from 2 nights to a week. My 2 holiday lets are very different in nature one being city centre the other being in the chocolate box Peak District town of Bakewell. In my city centre apartment I have had a number of longer bookers of over a month in duration who were working in the city. In my Bakewell holiday let bookings have been for short breaks of a single week downwards to as little as a single night. Pricing of your holiday let will have a significant impact on bookings and when guests look to stay.
The pricing policy for your holiday let
Here we have two contrasting worlds in the holiday lettings world. So if you look at the ‘old school’ holiday cottage lettings market and agencies they have a complicated pricing structure based around Peak Season / Mid Season / Off Season. On this basis they will adjust the pricing of your holiday home for different times of the year. They will even include traditional holidays such as Easter so with my holiday let the price with Holiday Cottages goes up from £455 per week in late March to £600 a week later because it is classed as Easter Holidays. This works across all traditional holiday periods. I’ve no idea how the holiday letting agencies work the price out but this is how it is.
In contrast I have discovered the new letting platforms available to holiday let owners focus on the weekend as their premium letting times and specifically Friday and Saturday nights. If you are planning a break away without having to take time off work then most people will go for Friday/ Saturday nights. This means that both nights can be charged out as a premium. In my case I have no problem charging £90 per night for these two nights as opposed to £70 for the other remaining days of the week. I understand from my calculator that this amounts to a 28.5% premium on the standard daily rate. So anyone, who thinks the pricing of your holiday let is going to be straightforward…think again. On top of this we have the added complication of what the various agencies/platforms charge you as a holiday let owner for their services. So you might be letting your holiday let for more on one platform; but actually receive less in the hand after they have charged you their commission. We go into detail on this in the Holiday Let Investment Course.
How much commission should you pay on a holiday letting?
The essential question for a holiday let to their agency or letting platform is what percentage do they take?
For anybody who has buy-to-let rental properties there are similarities with the question of which letting agent to use. Does the cheapest necessarily mean the most effective? For example a cheap platform or agency that fails to bring in the punters is not saving you money because they aren’t bringing you business. The big difference between traditional buy-to-lets and holiday lets is that in the holiday let world there are no overt restrictions on the number of potential agencies you use to market your holiday let. The most difficult thing for a holiday let owner is keeping track of bookings across a multitude of different letting platforms. This is covered fully in our investing in a holiday let course.
How to buy a holiday let?
There are a number of things that you need to consider before buying your holiday let.
Firstly, just in the same way as with a buy-to-let when looking at which tenants you want to let to, you will need to have in mind who you are going to target as your ideal guests. This will inform where and what type of holiday let you look to buy. Some of the questions you probably need to ask yourself about your holiday let are:
- What group size do I want to attract?
- Is there a specific age group?
- Am I looking for year round or just peak season lets?
- Upmarket, middle market or budget holiday let?
Once you have properly evaluated these different options then you should have a much clearer view on what type of holiday let you want to invest in.
Personalising your holiday let
One of the things that is attractive about a holiday let is that the accommodation is a personable space with individual touches provided by the owner. In otherwords, not an identity kit hotel room reproduced from the same catalogue of the same corporate interior designer. People are increasingly looking for stylish furnished individual spaces that add to the experience of their stay but at the same time provide luxury and comfort. Making the space attractively different without alienating significant numbers of potential guests is one of the challenges for all new hosts fitting out their holiday rental.
Practical comfort in your holiday home
Your holiday rental must be practical to use and keep clean. Remember with any luck you are going to be busy which means lots of guests coming in and out with suitcases and stuff. In the same way as buy-to-let try and design your holiday let in a way that is luxurious but robust. Things that are easy to break or surfaces that show wear marks will pretty quickly. However, try and avoid a cheap finish and look. This might have been perfectly acceptable for a buy-to-let where generally the property will be unfurnished or part furnished so that the tenant can add their touches. However, in a furnished holiday let the idea is that the place is finished and furnished just like someone’s home ready for occupation.
How to furnish your holiday rental?
The level of furnishing in your holiday let is something that we go into in much more detail on our investing in a holiday let course looking at all the items that you should include within your holiday cottage or property. There are certain items that are essentials and others that you can add in if required and depending on the type of guests you anticipate and the property that you are letting out.
How many weeks will my holiday rental be let for?
There is no definitive answer to this. To a degree this will depend on many factors and how successful you are. I can tell you that one of my holiday rentals has achieved an occupancy of over 90%. YES that is 90% of 365 day it is let out so that is about 330 days a year. Many months there is literally only the odd day that it isn’t being used. I can reveal some of the secrets to getting the occupancy to this level. Most holiday lets will work on a much lower occupancy level of between 40-60%.
What are the potential tax savings of a holiday let?
The tax saving for investors in holiday lets can be substantial compared to buy-to-let. Having run a portfolio of buy-to-let properties for over 30 years and now more recently having acquired several holiday let investments I can reveal just how extensive the tax benefits of holiday let investments are with some surprising opportunities to cut your tax liabilities legally.
Why take a course on holiday let investing?
The answer in simple terms is that you don’t need to. You could read a book or trawl through the vast amount of free information on the internet ….some good, some bad some totally inaccurate and I’m sure that after many months of research you would be well enough versed to know a little bit on where to begin.
However, holiday lets from buying to their operation along with the potential missed tax advantages are a massive step up in complexity compared to a buy-to-let investing. With a single holiday let you really are running a business from day one which is why HMRC classes it as a business not an investment as is the case of a humble buy-to-let. This means the opportunities to get it wrong or not as right are massive. This will cost you not only a few thousands but tens of thousands in lost rent, missed tax saving opportunities as well as an awful lot of hassle from unforgiving guests.
In light of my experiences Property Hawk has teamed up with some of the leading operators in the holiday lettings business to run a one day book camp (in the nicest sense) into how to invest and run a holiday rentals business. It assumes no prior experience. It will upskill you with interactive presentations and a comprehensive bible of how to go about entering the exciting space of holiday lettings investment. Whether you are an existing buy-to-let investor or this is your first look at investing in a holiday home or holiday letting business you will have the confidence of being able to access the opportunities available and progress your ideas to success.
More Expert Insights In Investing In Holiday Lets
Want to know more about investing in holiday lets
How to book a course on investing in holiday lets
How to avoid costly mistakes when investing in a holiday let?
Government guidance HS253 Furnished Holiday Lettings