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The ups and downs of vacation rentals

Higher income, but more variable

Unlike standard rental properties, with holiday rentals you can increase prices during peak periods such as summer, Christmas, school holidays and bank holidays, although you’ll probably never be able to charge as much as £5,700 a night for these. luxurious Scottish digs hope to recoup over the May bank holidays. However, you are also likely to have off-season periods with far fewer visitors paying lower prices if you are in a traditional holiday area.

City-centre apartments may have greater appeal year-round, and those within a short drive of major cities, such as London, are more likely to be booked for weekend trips than more expensive destinations. isolated, like Cornwall.

Thanks to the explosion in popularity of sites like Airbnb, more and more tourists are booking holiday rentals instead of hotels, and overall tourism is on the rise in the UK. According to the Office for National Statistics 2014 Travel Trends report (the latest available), visits to the UK increased by 5.3% in 2014, reaching the highest level since records began in 1961. The research from Visit England suggests that the number of UK residents holidaying in the country has also increased in recent years, and with growing fears about terrorism abroad, this is likely to rise further.

mortgages

The good news in terms of financing a vacation rental is that you’ll only need about the same deposit, about 25%, that you would with a buy-to-let property, although as with the rest of the mortgage market, the best rates are reserved. for those with low value loan products.

The bad news is that there is a much smaller range of products to choose from. While there are more than 1,000 buy-to-let mortgage products on the market today, only a handful of lenders offer vacation rental mortgages and the requirements can be more stringent than those of buy-to-let mortgage providers. For example, Leeds Building Society, one of the leading lenders in this market, requires the primary applicant to have a minimum income of £40,000, while most buy-to-let lenders require just £25,000.

Other lenders in the holiday rental market include the Cumberland, Furness and Monmouthshire Building Societies. Market Harborough offers a second home mortgage that allows rent for up to 24 weeks per year, which could be suitable for those looking to use the property for themselves for considerable periods throughout the year.

It’s a good idea to consult a broker if you’re looking for a vacation rental mortgage, as there are also some major lenders that will consider vacation rentals on a case-by-case basis.

rules and regulations

Before you get carried away with the steep prices charged by vacation rentals in hotspots like London and decide to swap your standard rental for a vacation rental, keep in mind that there are a couple of things that could ruin your plan early on.

Firstly, if your property is leased, check the terms of your lease, as some only allow renting on a secured short tenure basis. Second, most London boroughs insist that you need planning permission to change the use of the property if you want to rent it out permanently as a holiday rental, although these rules have been relaxed for short-term holiday rentals. term. Outside of London this is a problem in some areas but not in others; check with the appropriate council for its position.

To benefit from the tax breaks offered to holiday rentals, you must meet HMRC criteria and must be available to rent for a specified number of days per year.

Additional cost…

With buy-to-let properties, even self-managed, you may not hear from your tenants for months, but with vacation rentals, the demands on your time and pocket will be much greater. Managing a constant stream of reservations and keeping the property in the condition tourists expect can be time consuming.

Realistically, you will only be able to self-manage if you are very local; otherwise, you will need to use a specialist agent and these can cost double the cost of a rental agent service on a standard rental. On the plus side, a reputable agency will likely get you a lot more bookings than you would on your own, so it can pay for itself when factored in.

People expect things like Wi-Fi and, in some cases, pay TV in vacation rentals or serviced apartments, and they’ll also need to pay for utilities. In addition, you will need to provide bedding and kitchen utensils, as well as furniture.

… but also some savings?

Depending on the terms of your mortgage (and check that not all allow it) you can use the property yourself, thus reducing vacation costs.

However, some owners are reluctant to do so during busy periods due to the increased income you’ll lose, so this might be more of an advantage in the off-season. If you have flexible work hours or are self-employed, the opportunity to use the property when it is unoccupied may be more of an advantage.

The bottom line

In the past, many people with properties with vacation rental potential did all the sums and concluded that they would hardly get more than they would with a single rental property.

However, with the new tax rules, it may 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 buy-to-let property once the new tax rules are in full force, and then as a holiday rental.

Scenario 1: property managed as buy-to-let

Rental income received – £15,000
Mortgage interest at 4% 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
Plus 20% Mortgage Interest Relief Cashback: £1,800
Total taxes due – £3,400

Scenario 2: property managed as a vacation rental

Rental income received – £15,000
Mortgage interest at 4% on 75% LTV: £9,000
Allowable deductions – £2,000
Profit – £4,000

Other income – £45,000
Tax due on property (£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 probably 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, you pay more than double in taxes. if it is a buy to rent. So even if your property ends up yielding about the same as a vacation rental as it would a standard rental, you may be significantly better off once taxes are factored into the equation, especially if you’re a higher rate taxpayer. or the new purchase to Let the tax rules push you to become one.