Holiday rental, or buy-to-let?
Discussion
As is usual after our summer holiday reunion in Cornwall, my brothers and I were discussing the economics and effort-to-profit ratios of a holiday rental, let out from week to week with great margins but extra work, as opposed to a permanent buy-to-let.
Summing up briefly:
HR plusses: Higher margins, and you get to have the house free for a week in the summer and several weeks in winter.
HR minus: The hassle of maintenance and cleaning (which can be contracted out to an agency (but £££??), and the unpredictability of guests' behaviour and booking completeness.
BTL plusses: Much less work, steady income.
BTL minuses: Lower margin. and no chance to use the house yourself.
I dont know about mortgage terms for HRs. Are they similar to BTL?
In the end I think it comes down to being really sure about the specific economics of each, but it would be helpful if any of you folks have had experience of both so as to get a valid opinion.
Summing up briefly:
HR plusses: Higher margins, and you get to have the house free for a week in the summer and several weeks in winter.
HR minus: The hassle of maintenance and cleaning (which can be contracted out to an agency (but £££??), and the unpredictability of guests' behaviour and booking completeness.
BTL plusses: Much less work, steady income.
BTL minuses: Lower margin. and no chance to use the house yourself.
I dont know about mortgage terms for HRs. Are they similar to BTL?
In the end I think it comes down to being really sure about the specific economics of each, but it would be helpful if any of you folks have had experience of both so as to get a valid opinion.
Tax rules are different between rental properties (buy to lets) and holiday lets. A holiday let is treated as "trading income" whereas a buy to let is treated as "investment income". This has implications in respect of Capital Allowances and Loss Reliefs (and also Capital Gains Tax).
I had holiday lets that I changed to residential for long term renting. BTL was pretty easy, much higher income and cleaning for a few hours on changeover day wasn't difficult. We did have some difficult customers though, but the people who ended up renting were a bigger nightmare!
As well as the other posts, it also makes a difference to how you purchase (if you need finance). There are a larger number of BTL providers and its relatively straight forward to arrange. For a holiday let, you need a commercial mortgage (and its liable for business rates IIRC) which means you need to produce a business case. LTVs are typically the same, most require 70% though I did see a 100% one last week!
As well as the other posts, it also makes a difference to how you purchase (if you need finance). There are a larger number of BTL providers and its relatively straight forward to arrange. For a holiday let, you need a commercial mortgage (and its liable for business rates IIRC) which means you need to produce a business case. LTVs are typically the same, most require 70% though I did see a 100% one last week!
There's also the initial cost to buy the place the HL is going to be a lot more than the BTL. We do a lot of HOliday rentals and the places are always huge farm type properties with land, wood burners in the countryside or a coastal resort. There probably isn't much in it profit wise considering all the costs involved.
Hi,
I'm currently in the throws of researching the purchase of x3 wooden lodges on a site to sub let as Holiday Lets. I have an existing Ltd Company (A) with surplus cash, so would set up another Company (B) and fund purchase from Co. A capital. Looking at the figures, it would give a good percentage ROI and a nice place for friends/family to use. Just trying to work out operating taxation and liabilities upon ultimate sale.
Any pointers welcome.
I'm currently in the throws of researching the purchase of x3 wooden lodges on a site to sub let as Holiday Lets. I have an existing Ltd Company (A) with surplus cash, so would set up another Company (B) and fund purchase from Co. A capital. Looking at the figures, it would give a good percentage ROI and a nice place for friends/family to use. Just trying to work out operating taxation and liabilities upon ultimate sale.
Any pointers welcome.
If you go down the holiday let route then ensure you can get the weekend turn-around serviced before jumping in.
Around where we are based in Cornwall there is a huge shortage of people to do the turn-around's because of the volume of holiday lets.
The locals don't want to be tied to every weekend in the summer committing to it and/or don't want the hassle of holiday makers complaining about boilers not working.
As a consequence the couple of companies and people that do this have a wait-list as long as their arms and charge a premium.
We have seen a couple of properties flipped fairly quickly when the new owners realised this and that they couldn't get the property serviced.
Around where we are based in Cornwall there is a huge shortage of people to do the turn-around's because of the volume of holiday lets.
The locals don't want to be tied to every weekend in the summer committing to it and/or don't want the hassle of holiday makers complaining about boilers not working.
As a consequence the couple of companies and people that do this have a wait-list as long as their arms and charge a premium.
We have seen a couple of properties flipped fairly quickly when the new owners realised this and that they couldn't get the property serviced.
Thanks all for the replies so far, and I have also been reading the other HL thread with interest. Unsuprisingly, this has led me to investigate more closely than the man-maths to date.
As a broad stroke, I have wondered about gross return for holiday rentals deliberately simply, thus:
£Value of property / £ total expected rental income pa (x100) = % gross return.
To examine this, I looked through some extant HLs and selected ten which had been bought in the past year, with the price of sale seen on zoopla. Comparing this to the average rental return expected (as shown on their price lists, and adjusted for 26 weeks occupancy), I got at best around 10% gross return. That's before the significant deductions of agency fees (around 20% of gross), maintenance, insurance, and tax.
Suddenly, it doesn't look as attractive as some of the outlandish rental prices would suggest. In summary, it looks to make sense if you have scale (i.e. several properties you service yourself and/or very efficiently), or if you are retired, or work part-time, and live very close to the rental itself. None of which apply in my case. Oh well!
As a broad stroke, I have wondered about gross return for holiday rentals deliberately simply, thus:
£Value of property / £ total expected rental income pa (x100) = % gross return.
To examine this, I looked through some extant HLs and selected ten which had been bought in the past year, with the price of sale seen on zoopla. Comparing this to the average rental return expected (as shown on their price lists, and adjusted for 26 weeks occupancy), I got at best around 10% gross return. That's before the significant deductions of agency fees (around 20% of gross), maintenance, insurance, and tax.
Suddenly, it doesn't look as attractive as some of the outlandish rental prices would suggest. In summary, it looks to make sense if you have scale (i.e. several properties you service yourself and/or very efficiently), or if you are retired, or work part-time, and live very close to the rental itself. None of which apply in my case. Oh well!
Light n Hairy said:
As a broad stroke, I have wondered about gross return for holiday rentals deliberately simply, thus:
£Value of property / £ total expected rental income pa (x100) = % gross return.
I think you'll find the calculation is actually:£Value of property / £ total expected rental income pa (x100) = % gross return.
(Rental Income pa / Property Value) x 100
We had a combination of BTL and FHL.
The BTL just didn't give a good enough return whereas FHL was and still is easy money.
As with anything though, you need to choose wisely.
A run of the mill me too FHL will be competing with a million other properties but unusual properties, even cheap to buy can give a good return.
The BTL just didn't give a good enough return whereas FHL was and still is easy money.
As with anything though, you need to choose wisely.
A run of the mill me too FHL will be competing with a million other properties but unusual properties, even cheap to buy can give a good return.
Eric Mc said:
And always factor in the Capital Gains Tax arising on disposal.
Good point, EricWe have had our holiday home for about 8 years now and never rented it out, I thought we could get around the CGT by moving up there for a year or two and having it as our main residence. Do you think we would still have to pay tax if we then sold up?
Grandad Gaz said:
Good point, Eric
We have had our holiday home for about 8 years now and never rented it out, I thought we could get around the CGT by moving up there for a year or two and having it as our main residence. Do you think we would still have to pay tax if we then sold up?
Does your council charge extra for it being unoccupied? I'm pretty sure Rother (Sussex) does.We have had our holiday home for about 8 years now and never rented it out, I thought we could get around the CGT by moving up there for a year or two and having it as our main residence. Do you think we would still have to pay tax if we then sold up?
Grandad Gaz said:
Good point, Eric
We have had our holiday home for about 8 years now and never rented it out, I thought we could get around the CGT by moving up there for a year or two and having it as our main residence. Do you think we would still have to pay tax if we then sold up?
If a property has served a dual purpose - part investment asset and part Main Residence - at different times, the gain is apportioned on a time basis using the number of months it was owned overall compared to the number of months it was a Main Residence and the number of months it wasn't.We have had our holiday home for about 8 years now and never rented it out, I thought we could get around the CGT by moving up there for a year or two and having it as our main residence. Do you think we would still have to pay tax if we then sold up?
In your example, so far you have owned the property for 96 months. Say you ended up owning it for 120 months but of that total time period, it was your Main Residence for 15 months.
HMRC then gives you an additional " free" 18 months you can add to your actual months of Main Residency. In your case the 15 months of genuine Main Residency is increased to 33 months
And say you made a gain on disposal of £100,000.
In that case, the £100,000 gain would be time apportioned 33/120 v 87/120. Therefore the chargeable gain would be £72,500 (£120,000 x 87/120)
That is not the "Taxable Gain" because before you charge any tax, you split the gain between the total number of owners. You are using the pronoun "we" so I assume it is owned by two individuals. If that is the case, the gain is split 50/50.
So your share of the gain would be £36,250 £72,500 x 1/2)
You then deduct your annual Capital Gains Tax allowance - which is currently £11,300.
That would leave you with an actual taxable gain of £24,950 which would most likely be taxed at 28% leaving you with a CGT bill of £6,986.
Of course the other individual would also have a CGT bill which may be the same or maybe even lower - depending on their own personal individual tax circumstances.
Eric Mc said:
Grandad Gaz said:
Good point, Eric
We have had our holiday home for about 8 years now and never rented it out, I thought we could get around the CGT by moving up there for a year or two and having it as our main residence. Do you think we would still have to pay tax if we then sold up?
If a property has served a dual purpose - part investment asset and part Main Residence - at different times, the gain is apportioned on a time basis using the number of months it was owned overall compared to the number of months it was a Main Residence and the number of months it wasn't.We have had our holiday home for about 8 years now and never rented it out, I thought we could get around the CGT by moving up there for a year or two and having it as our main residence. Do you think we would still have to pay tax if we then sold up?
In your example, so far you have owned the property for 96 months. Say you ended up owning it for 120 months but of that total time period, it was your Main Residence for 15 months.
HMRC then gives you an additional " free" 18 months you can add to your actual months of Main Residency. In your case the 15 months of genuine Main Residency is increased to 33 months
And say you made a gain on disposal of £100,000.
In that case, the £100,000 gain would be time apportioned 33/120 v 87/120. Therefore the chargeable gain would be £72,500 (£120,000 x 87/120)
That is not the "Taxable Gain" because before you charge any tax, you split the gain between the total number of owners. You are using the pronoun "we" so I assume it is owned by two individuals. If that is the case, the gain is split 50/50.
So your share of the gain would be £36,250 £72,500 x 1/2)
You then deduct your annual Capital Gains Tax allowance - which is currently £11,300.
That would leave you with an actual taxable gain of £24,950 which would most likely be taxed at 28% leaving you with a CGT bill of £6,986.
Of course the other individual would also have a CGT bill which may be the same or maybe even lower - depending on their own personal individual tax circumstances.
Many thanks. Gives us something to think about (the "we" I was referring to is the wife and I)
Edited by Grandad Gaz on Saturday 12th August 08:41
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