Buy-to-Let vs Holiday Let – Which is Right for You?

Whether you’re gearing up to make your first property investment or you’ve inherited property and you’re trying to figure out how to make money from it, the most important decision you face is choosing the right type of rental business for you. Will it be a short-term holiday let or a traditional buy-to-let?

The most common way of making money from property is to invest in a buy-to-let to rent out to tenants for long-term residential use. However, the rise of platforms like Airbnb has made holiday lets an increasingly popular choice over recent years.

Each of these investment strategies has its pros and cons, and understanding these is crucial to determining which option is best for you and your investment goals.

In this article, we’ll explore the pros and cons of each strategy, providing tips and insights to help you figure out which route to take.

How do buy-to-lets work?

Buy-to-let properties are traditionally rented out to tenants on long-term leases. Unlike properties rented out as holiday homes, these are leased to tenants who use them as their permanent residence. In the UK, most long-term leases are at least 12 months, though a property can qualify as a long-term let with a minimum lease of six months.

Given the UK’s current rental shortage, investing in a buy-to-let ensures a fairly reliable income, and tenants are willing to pay more in rent to secure a high-quality home.

How do holiday lets work?

A holiday let is a type of short-term let. For a rental property to be classed as a short-term let, it must offer leases of under six months. Most holiday lets are rented out by tourists and holidaymakers for a week or two at a time. However, longer stays aren’t uncommon. Holiday lets are meant to be used as temporary accommodation for people visiting the area for a short period.

Online platforms like Booking.com and Airbnb have made it easier than ever for property owners to market their holiday lets effectively to a global audience. The ease of access to the market has contributed to a 40% increase in holiday lets across England in just three years.

The pros and cons of buy-to-lets

It’s easy to see why a buy-to-let is the first choice for many aspiring property investors. Managing a buy-to-let offers long-term stability and a steady income. However, like any investment, It comes with its own set of challenges. Let’s find out more about the pros and cons of managing a traditional buy-to-let.

Pros of buy-to-lets

• Easier to get a mortgage – Many lenders don’t offer mortgages on short-term lets. Obtaining a mortgage for a buy-to-let property is generally much easier because of the investment’s perceived stability and lower risk.
• Consistent rental income – Buy-to-let tenants usually sign long-term leases lasting 12 months or longer, offering landlords a regular and predictable income stream.
• Less upkeep required – With a long-term rental like a buy-to-let, you only need to carry out routine property inspections and maintenance tasks; the tenant takes care of the day-to-day cleaning and maintenance. In comparison, short-term rentals require regular cleaning and maintenance between each visitor you have to stay.
• Reliable tenants – Buy-to-let landlords use thorough tenant screening processes to secure reliable, long-term tenants who are more likely to look after the property, reducing issues and tenant turnover.
• Lower advertising and marketing costs – Because buy-to-let tenants stay longer, there is a lower tenant turnover with this type of investment, helping to reduce the costs associated with advertising and marketing the property.
• Lower management fees – If you don’t have the time to manage and maintain your investment property yourself, the fees for property management services are usually significantly lower for buy-to-lets than they are for a holiday let.

Cons of buy-to-lets

• Property access – Buy-to-let landlords must adhere to legal requirements to respect their tenant’s privacy. This can make accessing the property for inspections or maintenance more challenging.
• Inflexibility in selling – If you want to sell your property but you have tenants living in it, things can get complicated. Having tenants in situ limits your ability to sell the property quickly or might require the sale to be subject to existing tenancy agreements.
• Tax limitations – Since 2015, tax relief on mortgage interest for buy-to-let properties has been restricted to the basic income tax rate.
• Higher Capital Gains Tax – The Capital Gains Tax (CGT) on buy-to-let properties is notably higher, currently at 28% for higher-rate taxpayers. In contrast, selling a holiday let might qualify for lower CGT rates through capital gains tax relief or entrepreneurs’ relief, offering potentially significant tax savings.
• Stringent regulations – Buy-to-let investments are subject to a huge number of regulations that can affect everything from tenant screening to eviction processes. These regulations can be complex, requiring landlords to stay well-informed and compliant to avoid legal issues.

The pros and cons of holiday lets

Over recent years, holiday lets have become an increasingly popular type of property investment. Offering a different set of opportunities and challenges compared to the traditional buy-to-let, holiday lets cater primarily to tourists and short-term visitors. They have the potential to provide investors with higher returns but also require significantly more active management. Let’s explore more about the pros and cons of managing a holiday let.

Pros of holiday lets

• Potentially lucrative – The average turnover for a UK holiday let in 2023 was £24,500, markedly higher than the gross annual rental income of around £8,256 typically seen with buy-to-lets.
• Better property access – Because holiday lets are let on short-term leases, it makes it easier for the property owner to access their property regularly between bookings for maintenance or personal use.
• Flexibility in selling – Holiday lets can typically be sold at shorter notice and with less hassle than buy-to-lets.
• Reduced regulations – Fewer health and safety regulations apply to holiday lets compared to long-term rentals, reducing complexity and the risk of running into compliance issues.
• Tax advantages – Significant tax benefits include the ability to offset an unlimited amount of mortgage interest against profits, potential eligibility for Capital Gains Relief and Entrepreneurs’ Relief, and exemption from inheritance tax since they are considered business properties.
• Marketing platforms – Popular platforms like Booking.com and Airbnb provide owners of holiday lets with the tools they need to easily and effectively market their properties to a wide audience.
• Personal use – A major perk of owning a holiday let is the flexibility to use it for personal holidays. You may choose to use the accommodation yourself or offer it to family and friends for free or at a reduced cost during off-peak times.

Cons of holiday lets

• Intensive management – Managing a holiday let requires a much higher level of upkeep because of the frequent turnover of guests.
• Customer service responsibilities – The success of your holiday depends on your ability to earn positive guest reviews and ratings online. Therefore, you need to dedicate time and resources to providing a high standard of customer service and going the extra mile for visitors.
• Inconsistent income – Depending on where your holiday let is located, demand may be seasonal and fluctuate throughout the year, unlike long-term rentals, which typically provide a steady revenue stream.
• Risk of damage – Short-term stays may lead to increased wear and tear and potential damage.
• Furnishing costs – Holiday lets must be fully furnished to a high standard, incurring initial costs and ongoing maintenance expenses.
• Financing challenges – It is often more difficult to find lenders willing to finance properties intended for short-term letting.
• Location dependence – The profitability of holiday lets is highly dependent on their location, with properties in tourist hotspots like the Cotswolds, Lake District, Dorset, Cornwall, and Peak District seeing the highest returns. This geographic limitation can be a significant barrier if you’re not based in or near these areas.
• Higher management fees – Managing a holiday let often incurs higher management fees than traditional buy-to-let properties. If you are unable to manage the property yourself, expect to pay approximately 12-15% for holiday lets, which is significantly higher than the 8-10% typically charged for long-term rentals.

Which is more lucrative – buy-to-lets or holiday lets?

Generally, holiday lets provide better returns than buy-to-lets. However, the profitability of your investment property, whether buy-to-let or holiday let, depends largely on the type of property you’re letting, the location it is in, and the service you’re providing. The right holiday let, in the right location, can be highly lucrative and significantly outperform the typical returns of your traditional buy-to-let, particularly during peak seasons.

Because holiday lets are classified as a business, they have several financial benefits over a buy-to-let. Owners may be able to benefit from capital gains tax relief and entrepreneurs relief. Additionally, the ability to offset mortgage interest against profits can substantially reduce tax liabilities.

However, the potential for higher earnings must be balanced against the additional maintenance demands of a holiday let. Additionally, the location of your property will significantly influence its profitability. If it’s located in a tourist hotspot, it could yield higher returns but may also experience seasonal fluctuation. In comparison, a buy-to-let in the same area may have a lower rental yield but bring in a steady stream of rental income with minimal void periods.

Which is right for you – buy-to-let or holiday let?

When determining the right property investment strategy for you, there are many important factors to consider. However, perhaps the three most important questions to ask yourself when deciding between a buy-to-let or a holiday let are:

Is my property in a touristy location?

The location of your property, or the area in which you plan to invest, plays a crucial role in determining its suitability as a holiday let. Properties located in popular tourist destinations or areas with high seasonal visitor traffic tend to make the most lucrative holiday lets. If your investment property is not located in a tourist hotspot, then it may perform better as a traditional buy-to-let.

Do I have the time to keep up with the management demands of a holiday let?

Managing a holiday let requires a substantial time commitment. Management tasks include handling guest communications, marketing, and regular cleaning and maintenance. Think about whether you have the time to dedicate to these tasks or whether you would need to hire a management company to help out. If you don’t have the time yourself, don’t forget to factor in the cost of hiring a management company when determining whether a holiday let is a viable option.

What are my property investment goals?

What do you want to achieve with your property investment? Are you looking for short-term gains and high potential income or a steady, long-term investment? Define your investment goals to help you determine which strategy aligns best with them.

Other factors to research and consider include current market conditions and trends in the area where you plan to invest and the financial implications of each type of investment. Don’t forget to consider how each investment strategy would affect your overall tax liability.

So, before committing to either strategy, think carefully about how much time you can invest and the location’s potential to attract tourists or long-term tenants. Ultimately, the right choice for you depends on your personal circumstances and investment goals. With the right mix of knowledge, research, and planning, both strategies have the potential to be rewarding investments.