Buy-to-let vs. Holiday-let: What’s the better strategy?
Investing in rental residential properties is a great way of diversifying your investment portfolio and generating cash flow. That said, not all rental properties have the same risk profile and generate the same ROI. For instance, a buy-to-let (BTL) property generates a stable income, while a holiday let or a short term rental property promises a higher but non-stable income. So, which property investment strategy is the best? This one question has birthed a heated debate over the last few years. So, in this article, we dig a little deeper and compare each aspects of both strategies.
Buy-to-let vs. Investing in holiday rentals: The face-off
Both buy-to-let and holiday rental properties operate in vastly different manners. So, exactly which of the two makes for the perfect choice for rental property investors? To understand that, we broke both strategies down and compared their basic components:
On comparing income potential, it becomes evident that investing in a holiday rental often generates significantly more income than a buy-to-let.
This is because, unlike in the case of a buy-to-let property, guests stay at vacation rentals for shorter periods of time. This allows you to charge them a higher nightly fee. So, as long as you are able to maintain a stable influx of guests, such a property would generate more profit than a buy-to-let property in the long run.
Verdict: Holiday and short-term rentals make for a better strategy when it comes to income potential compared with a standard BTL.
Stability of Income
While a holiday let property has a higher income potential, buy-to-let properties do offer a certain stability of income. This is because tenants usually rent buy-to-let properties for at least 6 months, if not years. So, for the entire duration your property is leased out, it will keep generating a steady flow of income. In the case of holiday let properties, it is difficult to guarantee such stability. There may be weeks and months, especially off-season, when the influx of guests dwindles, which would then directly impact your income. And if there is one thing that the Covid-19 outbreak has taught us, it is that the market can change drastically in the blink of an eye.
But, while the entire travel and vacation industry was massively disrupted due to the impact of the pandemic, it is also true that it recovered rather swiftly too. So, even if your income stream does suffer a blow due to unforeseen disasters like the pandemic, a fast recovery is nearly guaranteed, especially since a holiday let property can recuperate the fastest compared to most other real estate asset classes. If not, there is always the option to convert a vacation rental to a BTL property to ensure greater stability during tumultuous times.
Verdict: Investing in buy-to-let properties ensures that the passive income you generate from your real estate investment remains stable throughout the year.
Adjustment of Inflation
Investing in real estate has always been considered a natural hedge against inflation. You slowly increase the amount tenants pay to rent the property. But buy-to-let properties are leased out for longer periods of time and the rent you charge tenants remains fixed as long as that contract stays in effect. This means you can only adjust for inflation when the contract ends or gets renewed. On the other hand, a holiday rental allows you to adjust rates as and when needed, depending on the market condition. You can, thus, increase your vacation rental’s fee to quickly counter the effects of inflation. Moreover, recent tenant protection initiatives such as eviction bans and rent caps from various governments limit the landlords’ ability to change their income potential.
Verdict: While both types of rental properties allow room for rent adjustment — be it to keep up with inflation or market demand — a holiday let property offers more flexibility.
Repair and Maintenance
A holiday rental property usually requires more effort when it comes to general repairs and upkeep. Every time a guest leaves the property, you have to ensure it is ready for the next guest. This keeps small issues from turning into major problems and keeps the property in the best possible shape through its lifecycle. This in turn, significantly reduces the chances of it requiring heavy repairs and renovation, saving both your time and money.
Buy-to-let properties, on the other hand, are not usually cleaned or maintained regularly. So, smaller repairs and damages are not addressed often until after the tenant leaves, which can mean there are larger, more significant issues.
Sometimes this may mean having to resort to a complete health check and renovation of the property. So, while investing in a buy-to-let property may mean that you do not need to focus on regular upkeep, it may end up costing you more in terms of both money and effort in the long run.
Verdict: Holiday rentals require regular maintenance but this ensures that they remain in the best possible shape and never fall into disrepair.
Operating a buy-to-let property is simple enough. From the moment the contract is signed, you should start getting regular payments from your tenant for as long as the contract is in effect. For those 6 to 12 months, you do not need to concern yourself much with the property even as you generate a steady passive income from it.
But a holiday let property requires more regular involvement on your part. You can hire professionals to help with cleaning and repairs, but overseeing this is still one of your responsibilities whether you use an agent or not. You will need to regularly track the budget as well as guest flow to ensure your property performance is on track.
Verdict: A buy-to-let property business requires minimal effort to operate. Running a holiday let property, on the other hand, can be a hassle since it requires your almost constant involvement.
When you invest in a buy-to-let property, you usually only do it with the aim of generating a passive income. This means that you are not going to live or enjoy the benefits of the property directly. These properties are usually set up to better suit the specific lifestyles of renters.
On the other hand a holiday let property is designed to be enjoyed by you as well as your holiday makers. Everything about a holiday rental — from the location to its amenities — is customized for comfort. This makes it perfect for personal enjoyment as well. Having a holiday villa in a quaint village means that you can take your family and friends there on holidays without having to splash out on resort bookings. Moreover, while others may struggle to find a place to stay during peak seasons, having your own holiday let property means that you just have to adjust your calendar to enjoy your property whenever you wish to.
Verdict: Holiday rental properties don’t just offer financial perks but can also serve as a luxurious personal vacation spot.
Holiday let properties are treated as trading businesses while buy-to-let properties are treated as investments. This creates some obvious tax differences. Holiday let properties give you relief on mortgage interest so you are able to retain more of your profits. This varies to buy to lets which follow different tax procedures. You can also claim capital allowances when it comes to holiday let properties. So, while you do need to spend money on furnishings, maintenance, and upgrades, you can claim most of it as capital allowance and, thus, pay less tax to reap more profits. The income is also classified as NRE or Net Relevant Earnings which means you can make pension contributions that are tax-advantaged. Investing in holiday lets also gives you Capital Gains Tax, Inheritance Tax, and Council Tax relief.
Verdict: Investing in a holiday let property comes with unparalleled tax benefits that allow you to maximize your profits.
While a buy-to-let property is easier to operate and offers a stable income, a holiday rental promises higher returns, greater protection against inflation, multiple tax benefits, long term quality upkeep and an opportunity for you to use it for self enjoyment. As long as you invest in the right market, choose the right property, work with a competent property manager, and track its performance closely, a holiday rental property can be a more profitable strategy.
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