As house prices fall and buy-to-let flops: should you invest in a holiday let? | Personal Finance | Finance

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Many amateur landlords are now selling up, citing harsh tax rules and stringent regulations. Landlords feel demonised for the activities of a minority of rogue operators and scapegoated for a housing crisis that isn’t their fault. They also fear the Labour Party will get even tougher if it wins the next election.

Some are getting out while they can while new investors eye the holiday let market, which has been boosted by Airbnb and the staycation trend.

So is there still money in bricks and mortar?

Thousands of disillusioned buy-to-let landlords would say no. Only one in five are making a profit while a similar proportion say they set out without sufficient knowledge and lost thousands as a result.

Every month 35,000 buy-to-let landlords come off low-cost fixed-rate mortgages to face remortgage rates of more than six percent, according to property tax experts Cornerstone Group International.

Chairman David Hannah said profits have fallen to 2007 levels as higher-rate mortgage tax relief is scrapped and red tape adds costs. “Some 65,000 rental properties went up for sale in the first three months of 2023, while the number of private rental homes has dropped to a 14-year low.”

This is bad news for tenants as property shortages drive up rents which have hit a record £1,231 outside London and a staggering £2,567 in the capital, Rightmove data shows.

This may offer opportunities for first-time buyers, Hannah said, as the average price of a previously rented home is at £190,000. “That’s considerably lower than the average UK price.”

This isn’t a great time to sell, either, with the average landlord in England & Wales getting £10,000 less than a year ago, according to Hamptons International. 

Landlords still got £94,800 more than they paid after 11 years of ownership, down from £105,300 last year. This isn’t pure profit, though.

In contrast to selling your main home, second property sales are subject to capital gains tax at up to 28 percent. Plus landlords face a three percent stamp duty surcharge on the original purchases, and plenty of ongoing costs, too.

Worse, one in five made no profit despite all their efforts, while six percent sold at a loss.

As house prices slip, landlords looking to sell today may have missed the top of the market, said Hamptons head of research Aneisha Beveridge. “Some investors are consoling themselves with record-breaking rental growth as new homes coming onto the market continue to achieve record rents.”

So should property investors switch to the holiday rentals market instead?

Specialist holiday letting agents report growing interest from buy-to-let landlords wondering if they can convert their properties, but the truth is most aren’t suitable and often have restrictive leases, too.

For new investors, holiday rentals do offer some advantages over buy-to-let. Perhaps the most tempting is that you can holiday there yourself when it’s not rented out.

Existing second homeowners should definitely consider short-term lets, said Ben Edgar-Spier, head of policy and regulation at Sykes Holiday Cottages. “This boosts local economies given holiday lets contribute six times more financially than empty second homes.”

READ MORE: Mortgage hell could spell ‘gloomy picture’ of housing market ‘stagnation’

As with buy-to-let, owners must comply with strict rules. To qualify as a furnished holiday let for tax purposes, the home must be available for at least 210 days a year and be let commercially for at least 105 days. This excludes personal visits or free or cut-price stays by family and friends.

Owners must also comply with strict fire, electricity and gas safety regulations, plus they will need to equip their home to a high standard, buy a TV licence and take out specialist holiday let insurance. 

They also need to decide whether to pay council tax or business rates, and the rules are complex and subject to change. 

In Wales, local authorities have been making it harder to claim business rates, while doubling or tripling council tax for second homeowners. English councils are following suit.

Holiday rentals can bring in more income than a buy-to-let in peak holiday periods but can dwindle in winter. 

They can also be more demanding, as most visitors move on within a week or two, so the property needs constant upkeep, cleaning and bed changing.

Plus owning holiday lets can be controversial as locals say investors are squeezing them out of the property market and killing seaside towns.

It’s no holiday.

England is considering a holiday let registration scheme and Edgar-Spier said this could be a positive by driving up standards and educating “hosts” about their responsibilities.

But he warns that Scotland’s licensing scheme is causing problems. “Licenses can take up to a year to obtain and can be rejected for reasons that aren’t the property owner’s fault.”

Britons have a longstanding love affair with bricks and mortar but today it is being tested as never before.

Yet the second property dream will continue to tempt many. Especially since falling prices offer a buying opportunity for those who can afford it.

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