In a world of amber, red and green border restrictions, the pandemic has caused a sharp rise in demand for staycation properties. Brits are finding paradise at home in the way people used to do before Ryanair and easyJet existed.
A number of regulatory changes, like the Tenant Fees Act, has caused landlords to consider divesting their property portfolio. Others are pivoting to a different property based money making strategy – holiday homes, or short-term rentals.
Holiday Is The Time To Splash Out
Listing sites like Air BnB have made attracting holiday makers far easier for landlords. Though other factors are driving interest in holiday lets. As rental yields from long-term rentals are becoming less attractive a report by the letting agent professional body found that 500,000 properties in Britain have been changed from long-term to short-term let.
“Those with a second home or money to invest are increasingly viewing holiday letting as an attractive property investment to consider,” Bev Dumbleton, chief operating officer at Sykes Holiday Cottages explains, highlighting that the average four-bed holiday cottage generates a gross annual income of £21,000.
A holiday let costs approximately twice as much as a residential one does for the same period of time. However, most figures show that after costs, a holiday rental delivers a similar level of profit to a residential one.
Tax Policies Are The Sun That Allows The Landlord’s Garden To Grow
There are lots of reasons that a landlord can wake up on the right or wrong side of the bed in the morning. The biggest one is tax.
Strict tax rules on buy-to-lets, which have arisen from 2017, have made it increasingly difficult to turn a profit especially for private landlords. With unfavourable tax policies, the margins become slim and make investing successfully more challenging.
Landlords have slowly lost the ability to take mortgage interest costs from their turnover before calculating their tax bill. Since April 2020, property owners haven’t been able to take any finance costs from their property earnings, receiving only Basic Rate tax relief.
Stamp duty surcharges still apply to holiday or second homes. However, properties used as holiday lets are still able to deduct all of their mortgage interest and other costs from their overall turnover before calculating tax.
Without Evictions, Landlords Are Becoming Benefactors To Nightmare Tenants
Something else that has made landlords drastically change direction is the government’s plan to abolish Section 21 evictions (also called ‘no fault’ eviction). This means that soon landlords will have no way to evict tenants without a good reason. This is great news for renters and tenants, but bad news for landlords who want to be flexible with their investments.
On top of this, the pandemic’s eviction ban or moratorium has left many landlords fearing that they will be left with non-paying nightmare tenants for long periods of time.
This is scary for small-time landlords who are looking for safe long-term investments.
Naturally, this issue is serious for longer-term lets. The sting of a nightmare tenant is lessened when the tenant is only in the property for an predetermined arranged 2 week holiday.
Nightmare tenants living full-time under a contract is a completely different story. The risk is significantly higher. With lower yields than ever before, it makes long-term renting seem less attractive and more bothersome.
A Section 8 notice (also known as a Notice to Quit) is still valid, though many landlords believe the process often doesn’t allow for bad tenants to be evicted efficient manner. Under section 8, the tenant can be served if they have breached their contract with the landlord, giving the landlord grounds for possession. The most common reason for eviction is rent arrears (a minimum of 2 months), although there are other ways in which a contract can be breached.
If you’re considering acquiring a rental property then you need to weigh up the pros and cons carefully between short and long-term contracts. Occupancy rate is a very important consideration for short term lets. Accurately estimating the percentage of the time the property will be rented and the average price (across varying seasonal demand) will be key to securing your anticipated investment return.
Is the area your property is based near enough to tourist attractions to be busy? Does it have an all year round appeal for holidays? Though your target market might not exclusively be tenants on vacation. Properties near busy commercial districts or ones that are close to hospitals, can cater for a high turnover of freelance staff and capitalise on strong short term rental demand.
Short term lets should offer rental margins that are seem far more financially attractive – people often far more to go on holiday than they do for the equivalent time in their residential home (approximately double). However, there is the hassle of responding to constant enquiries, monitoring reviews as well as covering the costs of upkeep and management fees which are a lot higher.
And it’s not a one-size-fits-all choice. If you live near a potential holiday let and don’t mind regularly cleaning and changing sheets, then it could be a favourable option. If you already have multiple properties, that’s probably not practical. But if you have to hire cleaners and a management company, margins start to rapidly reduce.
In any case, with tax breaks favouring holiday lets right now, landlords should do the sums and explore this increasingly popular option thoroughly.