If you do your homework before beginning the purchase procedure, buying a vacation house to rent may be a wonderful source of investment money. It’s critical to properly furnish and maintain the holiday home once you’ve acquired it.
When looking for a holiday house, it’s important to first figure out who you’re after. Are you searching for a big vacation spot that is suitable for families, a cozy hideaway for couples, or a remote woodland home for hikers?
The answer will help you decide where to site your holiday home, as well as assist with your marketing strategy.
What are the essentials:
If you’re wondering about potential income, consider whether there are adequate public transportation options and amenities in the region, and whether the holiday house will be appealing during all of the seasons.
For tourists, contemporary facilities and high-end features are required. Guests would want modern plumbing and heating, as well as quick internet access.
As a result, it’s critical to conduct routine inspections to ensure that everything is in good working order; a broken thermostat or faulty boiler, for example, might create significant difficulties for visitors.
Another essential aspect of a successful holiday home is its excellent surroundings. Guests will want easy access to transportation options, and there should be plenty of parking.
Find a holiday home that’s near a convenience store, but also near restaurants, bars, and shops for the easiest living possible.
The potential return on investment of holiday homes may be affected by a number of factors, including size and flexibility. Higher rental rates are possible with a bigger property because it can accommodate more people. As a result, the home is more likely to allow bookings throughout the year due to its greater popularity.
Potential homeowners should be aware of any potential expenditures. Using an agency to manage the holiday property might cost you a commission, which lowers your overall profit. Cleaning, travel to and from the house, home insurance, property maintenance, and utility bills are other factors to consider.
If you want to buy a holiday letting for both personal and commercial usage, make sure to figure out your potential expenditures and inflows; compare the two against one another to guarantee that you can profit.
There are a number of legal obligations that holiday homeowners must follow in addition to the financial factors.
You must ensure that your holiday rental meets current standards after you acquire it, and you are responsible for the health and safety of your guests.
For example, you must conduct a comprehensive safety inspection of the house and its grounds, highlighting hazardous drops and possible trip hazards. If the property contains gas, you must have the boiler and gas appliances inspected and certified by a Gas Safe engineer.
You should get a fire risk assessment and install items like a fire blanket, smoke alarm, and carbon monoxide detectors in your holiday home. You must obtain public liability insurance with an adequate coverage limit, usually at least £2 million.
Can I live in my holiday home?
In general, not for very long! Your usual home is defined as your primary residence rather than a holiday house.
Of course, you may stay in your house from time to time – it’s yours after all. However, to avoid running afoul of the Furnished Holiday Let regulations, you should keep track of any usage alongside your professional letting usage.
To be eligible as a holiday let, you must follow HMRC’s guidelines, which are:
- You must let your property as furnished holiday accommodation for at least 210 days a year in order to be eligible.
- Don’t include any days when you’re staying in the home.
- To qualify as a holiday home, you must let the property to the public for at least 105 days per year.
- Don’t count any days when you let your property out to friends or relatives for free or a reduced price, since this isn’t a commercial lease.
What are the financial options available?
When it comes to vacation homes, real estate investing may be difficult. There are a variety of different financial choices depending on the property’s purpose and whether you opt to mortgage the home itself or your primary residence.
If you’re purchasing a vacation property for personal use and intend to rent it out only occasionally, arranging your mortgage will usually be easier. A “second home mortgage” might be a feasible option in this case. If you’re looking to holiday let, however, you’ll almost certainly need a “holiday house mortgage.”
This is a somewhat misunderstood aspect of finance, and it’s not well-known outside the financial community. Such loans are simple to comprehend, but they aren’t available from most high-street banks. Building societies are the primary source for holiday home mortgages (Lenders or intermediaries).
There are far fewer lenders who provide mortgages for vacation rentals than there are for residential houses. Furthermore, lenders will have stringent requirements to fulfill, as well as proof of gross rental income to ensure that the holiday let’s mortgage payments can be met.
Typically, when calculating a stress test at 5.5% interest rates, they’ll want you to produce a rental income that is 14.5% of the mortgage payments.
It’s critical to note that a holiday let loan is not the same as a buy-to-let mortgage. If you already own a buy-to-let property and want to convert it into a vacation house, you’ll most likely have to remortgage it.
A holiday let’s profits are subject to income tax. There is no limit on the amount of mortgage interest you can offset against these earnings, lowering your income tax burden in comparison to buy-to-let properties. This may be a huge savings if you have a mortgage on your cottage.
Holiday cottage owners are entitled to capital allowances for items such as furniture and large fittings that are necessary in the property’s operation. All genuine costs incurred while running and maintaining the holiday let may also be deducted from your gross income.
Capital Gains Tax
If you meet the Furnished Holiday Let criteria when you sell your vacation house, you may be eligible for certain capital gains tax exemptions, such as Entrepreneurs Relief, which would cut the tax on sale to just 10% (according to 2018 and 2019 rules).
It’s also worth noting that council tax will be lower on a second property, with a possible reduction of up to 50%. If your holiday home is available for 140 days or more per year, it will be subject to commercial rates, which may save money over council tax.
Stamp duty land tax
Stamp duty is another consideration to consider if you’re thinking of renting a holiday house. If you buy another property, you’ll have to pay an extra 3% in stamp duty land tax, in addition to the current rates. While stamp duty is calculated on a tiered basis, the 3% premium applies to the entire purchase price of the home.
Take a look at StayCotswold if you want to find out more about buying a holiday home.