Although standard commercial property has its advantages, many smaller property investors prefer the familiarity of residential property. This means that they effectively have a choice between regular buy-to-lets or holiday lets (or a combination of both). With that in mind, here is a quick guide to both, a look at how they compare and some thoughts on their prospects.
The basics of buy-to-let
Buy-to-let is one of the UK’s most established sectors. It has, however, gone through substantial changes in recent years. There has been a significant increase in regulation (and corresponding administration) along with a burdensome increase in taxation.
These changes have seen many “accidental landlords” exit the buy-to-let sector. In fact, even some experienced property investors have divested or at least reduced their portfolios. Overall, however, the sector remains popular simply because of the continued, strong demand.
The basics of holiday lets
Staycationing is nothing new but it has grown hugely over recent years. There is also, usually, demand from overseas visitors. The preference for self-contained and/or self-catering accommodation is far from unique to people from the UK.
Assuming they are run to HMRC-approved criteria, holiday lets qualify as commercial property. This means that they have a more favourable tax status. Purchasers still have to pay the investment Stamp Duty surcharge (assuming they’re buying a second or subsequent property). They can, however, deduct mortgage interest from their investment income.
It’s also worth noting that holiday lets are exempt from the regulations which apply to residential buy-to-let. That said, landlords must still ensure health and safety.
How they compare – choosing properties
For both BTL and holiday lets, a significant part of an investor’s success depends on their ability to find the right property in the right location. Currently, this is probably more of a challenge for BTL investors than holiday-let investors.
The former need to figure out whether or not remote working is going to become an established part of the “new normal”. The latter just need to do their research on where people like to go on holiday.
BTL investors who want to buy now might want to consider their options for hedging their bets. For example, they could look for city-centre property which could be marketed to people who have to work mostly on-site e.g. key workers. This approach is likely to work best in the Midlands and North where city centre prices are much more affordable than in London.
Another option would be to look at locations towards the far end of commuter lines. Properties in these areas tend to be fairly affordable (especially outside London) due to the extended commute. Rents are set accordingly. If, however, remote/hybrid working becomes a fact of life, these areas could become a whole lot more appealing.
How they compare – financing properties
Here, BTL investors are likely to have an easier time than people looking to finance holiday lets. The nature of residential buy-to-let means that investors should have income for most of the time they own it. It is, however, important to note the difference between “most” and “all”. Even BTL investors will have to cope with void periods and lenders know this.
Income from holiday lets, by contrast, is often much harder to predict with confidence. There are three main reasons for this. Firstly, people do not need to rent holiday lets the way they need to rent or buy somewhere to live. Secondly, holiday lets can be vulnerable to adverse events. COVID19 was an extreme example of this, poor weather is a more likely one.
Thirdly, while the holiday let market in the UK is nowhere near saturated, it is competitive. This means that the profits from a holiday let depend at least as much on how well it is marketed and managed as they do on the property itself.
How they compare – exit strategies
As a rule of thumb, BTL investors are likely to have a more straightforward exit strategy than holiday-let investors. BTL investors are, by definition, buying properties which are desirable as places for people to use as their main homes. Holiday-let investors by contrast may have a much more limited market for their properties.
How they compare – workload
This one can probably be classed as “the same but different”. BTL investors need to choose their tenants with care (and without breaching the Equality Act). They also have to comply with a multitude of regulations concerning the state of the property and the safety and welfare of the tenants. On the whole, however, they do not get involved with the day-to-day upkeep of the property.
Holiday-let investors, by contrast, don’t have to concern themselves with tenant selection or the BTL-specific regulations. They do, however, need to ensure that the property is serviced to a very high standard. They also need to turn it over quickly between guests.
For residential buy-to-let overall, the future probably holds much more of the same. While the government may be eager to encourage people onto the property ladder, many people are quite happy to rent for lifestyle reasons.
The traditional market of young adults continues to hold. Now, increasing numbers of older people are choosing to rent, at least for a while. This may be an “in-between” step after selling the family home but before choosing a “forever home”. It may, however, also be a strategic move to reduce their estate liability.
For holiday lets, the overall situation looks promising. The staycation market was growing long before COVID19. Some UK residents might indeed be desperate for a post-COVID19 overseas break. The same, however, could presumably be said of people from other countries. What’s more, if Brexit weakens the pound, then the UK could become even more attractive.
The big question is whether it will remain viable to have holiday lets in cities or if they will be constrained to more rural areas. The answer to this is likely to depend on whether or not there is a post-COVID19 resurgence of city property markets, especially city-centre property markets. This will probably depend on whether remote working is here to stay.
Mark Burns is the managing director of property investment company Pure Investor, who specialise in UK property investment and Buy-to-Let Property Investment.