Why now is the time to invest in a holiday home & expand your portfolio

Residential buy-to-let used to be the staple of the UK investment property niche. It’s still popular, and for good reason. Many investors, however, are moving into commercial property. Sometimes they are switching from residential property and sometimes they are diversifying. Holiday homes are especially popular. Here is what you need to know about them.

Holiday homes work to unique rules

Part of the appeal of holiday homes is that they combine the most attractive elements of both residential property and commercial property. Residential-property investors have full control over their investment. They also get the full benefit of the equity as well as the income.

Outside of holiday homes, most commercial-property investors work through third-party management companies. They do not run their own investments, nor do they benefit from any equity. They only get the income.

Holiday homes allow investors to build up equity while earning an income. Investors also have total control over how the property is managed. Legally, however, they are viewed as commercial property. This means that they are exempt from the various regulations applied to residential buy-to-let.

Purchasers of holiday homes do have to pay the Stamp Duty surcharge. The income from the property is, however, treated differently from income from residential buy-to-let. In particular, it is still possible to deduct mortgage interest. On that note, you will need a commercial-property mortgage and insurance.

Holiday homes have broad appeal

Holiday homes were growing in popularity long before COVID19 (and Brexit). There’s nothing to suggest that the overall progress of the sector will be halted (or even just slowed) any time soon.

Firstly, holiday homes can be let to both international visitors and domestic ones. Secondly, they can be used for both main holidays and short breaks. What’s more, “short breaks” doesn’t just have to mean “weekend breaks”. There is a market for midweek breaks too.

The international market is currently in limbo. Brexit notwithstanding, it is very likely to return. In addition to its many natural and historic attractions, the UK has huge cultural/pop-culture appeal.

It’s home to world-renowned musicians and authors plus the setting or filming location for several major franchises. Some of these may have been tarnished over recent years (e.g. Game of Thrones). Notwithstanding, they still have a massive fan following.

Holiday homes need to be in the right location

Location is, of course, hugely important in residential buy-to-let. It is, however, almost everything in holiday homes. The “almost” however is vitally important. Even with the perfect location, you’re going to need to make sure your property is appealing to visitors.

Remember, if a location looks good to you, then it probably looks good to other property investors. This means that there can be a lot of competition. This doesn’t actually have to be a problem. It does, however, mean that you need to think about your market and do everything possible to appeal to it.

One way to do this is by “theming” your property. You can do this in a way that references the local area. It is, however, advisable to check out the competition before you commit. You may find that a lot of other people have had the same idea.

If they have, then consider choosing something unrelated to the area. It can, literally, be anything just as long as your research shows that enough people are interested in it. Whatever you choose, you should usually present your property as being on the lux end of it. Remember, a holiday is a time for people to enjoy the best of what life has to offer.

Holiday homes come in two main sorts

Some holiday homes can only be used for part of the year. Nowadays, these tend to be the exception rather than the rule. It is, however, important to check to be sure. Most holiday homes are converted residential properties. As such, in principle, they can be used all year round. There are, however, a couple of caveats here.

Firstly, some residential properties may have restrictions on how they can be used. This can make it complicated to impossible to turn them into holiday lets. Secondly, even if they don’t, local authorities may not authorize a change of use.

There are two main reasons why local authorities are likely to deny an application for change of use. One is that they’re under pressure for housing. The other is that they are concerned about the impact on full-time residents (“party flats”). It’s therefore advisable to keep these considerations in mind when looking for a property.

Holiday homes can be very seasonal

Some holiday homes can be let all year round. Others have a clear season. This doesn’t have to be a problem. It should, however, be a consideration for two reasons. Firstly, you need to be realistic about the income a property can generate. Secondly, you need to think about the practicalities of opening and closing your holiday home at the start and end of the season.

You’re also going to have to decide what you’re going to do if there’s more than one season. For example, some areas have a summer season plus various “mini-seasons” at other parts of the year. You’ll need to think about whether or not it's worth reopening for these events. If you do decide to reopen, then you’ll need to decide what rates to charge.

On that point, deciding what to charge for a holiday home can be a lot more complicated than deciding what to charge for a residential buy-to-let. With residential property, you’ll probably review the rent once a year or so or when you sign new tenants. With holiday homes, you may have different rates at different times of the week as well as different points in the year.

Holiday homes require a lot more effort

Holiday homes basically need to be run along similar lines to hotels. This includes effective marketing and the highest levels of presentation, functionality, and customer care. Of course, you don’t have to do everything yourself. You do, however, need to make sure that all this is done. You also need to budget for the cost of having it done.