Domestic tourism and the rise of the staycation – what does that mean for buy to let buyers?

With restrictions on travel and off-putting quarantine requirements, even dedicated sun worshippers are turning their back on long haul holidays in favour of the Covid-19 era staycation. With the UK’s future relationship with the EU also looking increasingly uncertain, the popularity of domestic tourism isn’t set to wane any time soon. Indeed, UK holiday home bookings from 1 July – 31 August saw an 156 per cent increase compared to the same period in 2019 according to the holiday let search engine Holidu and bookings for 2021 have seen a 62 per cent increase compared to 2019 according to Historic UK.

Enter the rise in popularity of the buy-to-let holiday rental property. However, there are a few things potential buy-to-let buyers should consider before they hit Rightmove and Zoopla in search of that dream rental investment. 

For instance, what are the differences between buying a residential property or a buy-to-let investment? What are the advantages of short-term holiday rentals? Where are the current property hotspots and what impact will forthcoming legislative changes on buy-to-let properties have in 2021? Read on to find out.

What are the differences between buying a residential property or a buy-to-let investment?

Unless you are buying a buy-to-let property outright in cash (lucky you!) you will need a different type of mortgage to the normal residential mortgage, which is imaginatively known as a buy-to-let mortgage.

Most buy-to-let mortgages are interest only, which can appear cheaper in terms of monthly repayments. However, lenders require a higher deposit (anywhere from 25-40% of the total property price) and you will often need to pay higher upfront fees and interest rates. You will also have to pay more in stamp duty for a second property that is not your main residence, with a 3 per cent additional home surcharge. With an interest only mortgage there will also be a much larger lump sum of the capital amount to be repaid at the end of the mortgage term.

As a landlord, you will also have certain legal obligations to fulfil. You will need to take out the more comprehensive (and costly) landlord insurance, ensure the property meets stringent health and safety requirements and cover most of the costs for repairs and maintenance. If you do not wish to be responsible for finding tenants and the day to day management of the property you will also need to pay a property management company and/or lettings agency to undertake these tasks for you.

As with any property purchase, research is key to get the best return on your investment. But perhaps even more so with a property that your plan to rent out, whether on a short or long-term basis. Before you find a property to purchase, speak to letting agents in the local area to gauge the level of potential rental income to ensure this will cover the cost of your mortgage, property maintenance, landlord obligations and any other costs associated with the property.

What are the advantages of renting out your property on a short-term basis for holiday rentals?

For buyers wanting to take advantage of the stamp duty break and make an investment in property, is it better to rent out the property on a longer term basis with an assured tenancy agreement, or take more flexible, short term holiday lettings?

When we talk about a ‘short-term’ holiday let, this is generally a letting period of around 3 nights to a few weeks. A longer-term property let is usually classed as a rental period of 6 or 12 months at a time, minimum.

The explosion in popularity of sites like Airbnb has made it much easier for landlords to rent out their properties on a short term basis at a lower cost than you would expect using a property management or cottage booking company and many landlords are making the jump. This also gives you the added bonus of being able to enjoy the property yourself from time to time.

And whilst you may not be able to guarantee a year round occupancy as you would with a longer term rental property (although your tenants can still leave you high and dry with a month’s notice), many holiday lets in popular areas of the UK will see occupancy rates of up to 40 weeks of the year. And, of course, the main advantage of a holiday let is the potential return. During the peak school and summer holiday seasons your holiday home can net you the same amount you would earn in a month for a traditional buy-to-let with just a one week booking, with the potential to earn around 30% more annually than a buy-to-let property. 

Where are the current property hotspots?

Whilst, Salford, Manchester and Leeds top the list of the best areas to purchase buy-to-let properties when it comes to longer term rentals, when it comes to holiday lets, the popularity of areas in scenic rural locations near to popular tourist hotspots has increased even more so in the Covid-19 era. Indeed, estate agents in rural areas are reporting three times the amount of interest this year from buyers in search of a holiday let income.

Already one of the most popular areas for holiday lets in the UK, St Ives in Cornwall saw homes selling to buy-to-let investors within 20 minutes of listings going live when the property market reopened after the initial lockdown period of March-May 2020. But with many agents seeing as much of 80% of their business in holiday buy-to-lets and second homes, competition in the South West is pretty fierce with a price point to match.

Whilst those buying additional properties in Scotland are still liable for a 4 per cent surcharge and the thresholds for the equivalence of stamp duty in both Scotland and Wales has increased to £250,000 (from £145,000 and £180,000 respectively), there are still some great property deals to be had and buyers can get a lot more for their money in a less competitive market.

What impact will forthcoming legislative changes on buy to let properties have in 2021?

Landlords will see further changes to taxation arrangements in the 2020-21 tax year as mortgage interest tax relief is phased out and adjustments are made to capital gains tax. It has also been suggested that a new stamp duty surcharge may be introduced for buyers outside of the UK investing in property here and UK based property investors are cautiously watching out for any adjustments to the 3% stamp duty surcharge for additional properties which was introduced in 2016.

But it isn’t all bad news, and the proposed leasehold reforms which seem to have stalled in 2020 are expected to gain momentum in 2021. Expect to see limits introduced for service charges, permission fees and ground rents on existing leasehold properties, the opportunity to buy a much longer lease tenure (thereby removing ground rent) and the ban on new homes being sold on a leasehold basis. 

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