Holiday let v Longer term assured shorthold tenancy let – what is best?The age old problem for investors is identifying how to get the best return on their investment. A few years ago the smart money clearly identified student lets and prime location lets as key investments. However, with all the changes to the tax laws and the strong demand for holiday letting, this is not necessarily the case now. Holiday letting is now offering a fantastic income opportunity, and a really robust return on investment so many are considering it as a viable alternative option.
So what do you need to consider?
- Location – if you already own a property the market may decide for you what route is best. In general, holidaymakers want idyllic locations, often remote, where they can relax and switch off, whereas tenants are looking for good schools and good transport links. If you are starting with a clean slate, its more about what you want out of it. In the right location holiday letting by year 3 is likely to outstrip net income from a long let. To give you a couple of examples:
1 bedroom cottage in a rural Sussex village has earned £20,500 in the past year. It would have achieved £8,200 net as a long term rental. Even taking into account that all the running costs of the property would be paid by the owner there is a marked uplift in the net income achievable for the property as a holiday let.
Another example is a rural farmhouse in Somerset used to be let to students at an annual income of £12,000 net. The owner started holiday letting and in Year 1 the net income was £12,000 per annum, Year 2 it was £15,000 and by Year 3 it had risen £20,000 net.
- The second is what you want from your holiday cottage. If you want to earn an income and use the property then holiday letting offers the flexibility to do both. We have two distinctive ways people are using their holiday homes flexibly. The first is as a holiday house, giving the great mix of a special holiday home in a much loved location and earning income at the same time and the second is people who holiday let their main homes, moving in and out when it is let and making their homes really work hard for them.
One of our owners, Kim, is an example of this. She owns a 5 bedroom farmhouse in the Kent countryside and after a marital split now supplements her income by letting it out, giving her the best of both worlds, regular income and the ability to stay in her lovely home.
- Third is the favourable tax benefits. Holiday lettings are counted as a business for tax purposes and as such are able to take advantage of tax breaks not able to be claimed from a traditional property investment. In recent years holiday lettings have seen real benefits including offsetting a lot of the initial costs, furnishings, mortgage interest and you may not even have to pay council tax. Lastly profits could be put towards pension contributions which bring other tax advantages and if you decide to sell there is also the scope to reduce capital gains to a rate as low as 10%, whereas typical residential sales attract capital gains at the higher rate of 28%.
- Lastly holiday letting enables owners to start their own business, be their own boss, manage the property their way (or not as we can do this for you too), and enjoy all the benefits of being in charge of their own destiny.
An interesting example of this is Amy, an interior designer who is using her holiday let to supplement income in the early years of her new business but is really enjoying her holiday home being very much part of her business. Or Ian who had retired and was bored and has found a complete new lease of life running his own holiday letting business and loves the interaction with the guests and the preparation of his holiday homes but lets us take the strain on the marketing.
So all in all, holiday lets can offer a real alternative to long term letting; come and talk to us – we will talk you through the options.