Before investing in a holiday let property, here are 5 things you should know.
Where once buy to let was King of the Jungle when it came to investing in residential property, Government intervention, through disadvantageous tax changes has somewhat caged this animal and it does not look set to be let loose anytime soon.
Since 2019 many investors have now turned their attention to a different beast, the Furnished Holiday Let (FHL).
1: Tax
Whereas HMRC classes buy to let (BTL) as an investment, it classes holiday letting as operating a business. HMRC call this business activity “Furnished Holiday Lettings” ( FHLs).
This of course is great news for owners of holiday lets, as they enjoy the reliefs available to any other business, whether they operate as a sole trader, Partnership or Ltd Company. So owners are able to obtain full interest payment relief and claim capital allowances.
2: Planning Issues
Some properties are restricted to holiday let use only. In recent times, particularly in the South West, where a planning application is sought, for either a new build or conversion, the Local Authority planners restrict the development to holiday let use only. This is done in an attempt to protect limited local infrastructure resources from the effect of having too many full time inhabitants in the area. It’s important to understand that these Section 106 holiday let restrictions are fully enforceable, no matter what you might have been told.
Properties with these usage restrictions generally sell for 20-30% less than their residential counterparts, because their value is linked to the use to which they must be put. It is important to know what you are buying, because owners who use them for holidays themselves, can actually be in breach of the planning restriction and, of course, any idea of retiring to said property in the future is out of the question. That said, holiday let restricted properties can make an excellent investment, as they are less expensive and income return can therefore be higher in relation to capital invested.
3: Leases
Care must be taken to avoid abortive costs, when purchasing leasehold properties. Leases often specify that the property must be used as a dwelling and not for business purposes. Therefore the lease allows owner occupation and long term letting to tenants, but would not allow use as a holiday let or serviced accommodation, as these are classed as businesses.
These classes are often found in more modern leases and invariably in leases associated with new city centre apartments. In the case of city centre apartments, the restriction in the leases is designed to protect the quiet enjoyment of leaseholder from those that might try and run an AirBnB style business, that attracts noisy “stag and hen” type guests.
4: Mortgages
Buy to let mortgages are not appropriate to use when purchasing or re-mortgaging a property that is intended to be used as a short term let, serviced accommodation or holiday let. There is some confusion out there which may be due to the fact that many years ago, the term “buy to holiday let mortgage” was used, not least by lenders. In addition, some lenders, like Leeds and Principality, used the same products for both, but required that the borrower disclosed the intended use at outset, so that the mortgage offer could be amended to allow the property to be holiday let. Although slightly incongruent, 90% of the lenders offering mortgages for holiday lets, won’t accept properties that can only be used as holiday lets! Most will accept a rental coverage based on projected Holiday Let rental income, however a commercial or business asset is outside of their lending appetite and underwriting expertise.
5: Airbnb
Of course, no article would be complete without some narrative on this subject. Airbnb is an internet platform that allows property owners to rent out their property as a short term let or serviced accommodation.
Owners who use their property as a traditional holiday let can and do use Airbnb to derive some or all of their bookings; however lenders offering loans for holiday lets are cautious about accepting Airbnb income as the sole basis for their loan. This is because the loans are primarily based on rental coverage and should Airbnb cease trading there might be no reasonable means of securing an income level like it again. We have to remember that lenders that lend on holiday lets have based their underwriting on traditional holiday lets in known areas where people holiday.
A Liverpool City centre flat is not in one of those areas, but could still produce a high level of income as serviced accommodation. Airbnb is an ideal platform to secure such bookings.
In order to protect themselves, holiday let lenders require a rental projection from a traditional holiday letting agent, which details income for the low, medium and high season rates. To reiterate, most lenders that offer holiday let mortgages, want the servicing income to be derived from traditional holiday maker rentals. By putting in the requirement for a projection from a holiday let agent, they secure a traditional rental stream , rather than an Airbnb only income. Such agents would not be operating and dealing with a Liverpool city centre flat, which would likely only be a success as an Airbnb serviced apartment.
What type of mortgage do I need for a holiday home?