Buy To Let Vs Holiday Let In Leeds Which Is Best ?
Are you a property investor in Leeds, torn between whether to invest in buy-to-let or holiday let properties? if so this article is for you.
Buy-to-let properties have been a staple in UK property investment for a very long time, however with rising interest rates and changes in the tax system by the UK government, more and more landlords are looking for alternative ways to maximise the return on their investments through vehicles like HMO’s and now holiday lets, we are going to compare the 2 so you can make the best decision for people with properties in Leeds and surrounding areas.
In this article, we will compare:
Rental yields.
ROI.
Tax relief & VAT.
Insurance comparisons.
Management & Maintenance.
Mortgages.
Regulation.
Let’s get started!
Pros and cons of buy-to-let properties in Leeds
Consistent returns
One of the key advantages of investing in buy-to-let properties in Leeds is the consistent rental income they can provide.
Leeds has a large and diverse population, including:
Significant student population,
Young professionals.
Families,
All of whom contribute to a steady demand for rental accommodation. This can translate into reliable monthly rental payments for the property owner, providing a stable source of passive income.
Strong capital growth
Furthermore, buy-to-let properties in Leeds often benefit from strong capital appreciation over the long term. As the city continues to grow and develop, the value of these properties is likely to increase, potentially offering investors an attractive return on their investment when they decide to sell. This can be particularly appealing for those looking to build long-term wealth through property investment.
Low yields
However, one aspect to consider is due to how high property prices are in Leeds, typically the yields and ROI is quite low, because you have to pay so much for a property that grows fast over the long term, a lot of experienced landlords will say.
“This is why you buy and add value” or
“This is why you have a diversified portfolio”
But is there a way you can have both from one property in this new age ?
High taxes
The UK government rely heavily on taxing the UK property market through capital gains tax and also taxes applied to property rental income, as well as the recent legislation of taking away some key tax advantages of property rental income, our opinion at Stayful is that this is only going to get worse forcing UK landlords to make less and less from their investments.
Pros and cons of holiday let properties in Leeds
Much higher yields
One of the main advantages of investing in holiday let properties in Leeds is the potential for higher rental yields, especially during peak tourist seasons.
Leeds thriving tourism industry, with its vibrant cultural attractions, bustling events calendar, and renowned sporting events, can attract a steady stream of visitors seeking short-term accommodation.
This can translate into higher nightly rates and occupancy levels compared to traditional buy-to-let properties, and as the capital growth will be the same, you can create a situation of having a higher yielding property and a high capital growth property in the same investment, this is something that is not easy to come by in todays UK property market.
If you want to find out how much your property could make, we have some free tools you could use:
Flexibility
Holiday let owners have more flexibility in how they use their property.
They can choose to rent it out during peak seasons to maximise their returns, while also having the option to use the property themselves during quieter periods or for personal use.
This can be an attractive proposition for investors who want to enjoy the property occasionally while still generating rental income.
Higher management & maintenance costs
The management and operational requirements of holiday let properties can be more demanding than traditional buy-to-let investments.
Owners must ensure the property is consistently clean, well-maintained, and equipped to cater to the needs of short-term guests.
This may involve hiring a property management company, coordinating changeovers, and responding to guest inquiries and requests in a timely manner.
Normally an Airbnb management company can provide management and maintenance covering for around 12-20% of your gross revenue, slightly more then a traditional letting agent.
Inconsistent returns
Additionally, the seasonality of holiday lets can present unique challenges.
Occupancy rates and rental income can fluctuate significantly throughout the year, with peak seasons often followed by quieter periods.
This can make it more difficult to predict and manage cash flow, but overall your returns over the year will be higher.
Tax advantages
Because you are running your property as a furnished holiday let, you are able to claim some key tax advantages over buy to let properties, we will cover this in more details later.
Holiday let mortgages vs buy to let mortgages
When it comes to financing a buy-to-let or holiday let property in Leeds, investors will need to consider the differences between the two mortgage options.
Buy to let mortgagees
Buy-to-let mortgages are specifically designed for investors who are purchasing a property to rent out on a long-term basis. These mortgages typically have higher interest rates and require a larger deposit, often around 20%-25% of the property's value.
However, they are much more common mortgages, many more lenders are open to these types of investments making refinancing easier and interest rates lower.
Holiday let mortgages
In contrast, holiday let mortgages are tailored for properties that will be used for short-term vacation rentals.
These mortgages may have slightly higher interest rates around 3%-4% above the base rate than buy-to-let mortgages, and they often require a bigger deposit, around 25-30% of the property's value.
How lenders access the mortgage
One key difference between the two is the way the lender assesses the property's rental potential.
For buy-to-let mortgages, the lender will typically base their decision on the expected rental income from long-term tenants, this is easy to do with buy to lets being so common.
In the case of holiday lets, the lender will consider the property's potential for generating higher, but more variable, rental income from short-term guests, normally lenders will allow much more of a stress test due to the higher risk raising the deposit amount, however our opinion at Stayful is that as more lenders start to offer these mortgages, the requirements for deposits and interest rates will decline due to both the industry becoming more established and the increase in lenders.
Return on investment of buy to let vs holiday let in Leeds
When it comes to the potential return on investment (ROI) for buy-to-let and holiday let properties in Leeds, there are several factors to consider.
Buy to let properties
However, the potential rental yields for buy-to-let properties in Manchester may be lower compared to holiday lets. According to recent data, the average buy-to-let rental yield in Leeds is around 4-6%, which is in line with the national average. While this may not be as high as the potential yields for holiday lets, the stability and predictability of the rental income can be a compelling factor for some investors.
Holiday let properties
In contrast, holiday let properties in Leeds have the potential to generate higher rental yields, especially during peak tourist seasons. The city's thriving tourism industry, with its cultural attractions, events, and sporting events, can attract a steady stream of short-term visitors seeking accommodation. This can translate into higher nightly rates and occupancy levels, potentially resulting in rental yields of 8-10% or more.
Which is better for ROI ?
It is not uncommon for UK landlords to see double in both yields and ROI vs standard buy to let property, however it is very important that you have the right kind of property when taking on a holiday let much more then a buy to let, if you are interested in learning how you can make the best decision we have a free training academy you can access here.
Tax & VAT considerations of buy to let vs holiday letting
When investing in buy-to-let or holiday let properties in Leeds, it's important to consider the tax and VAT implications of each option.
Buy to let properties
Income tax
For buy-to-let properties, landlords are subject to income tax on the rental income they receive. The amount of tax payable will depend on the landlord's individual tax rate, with allowable expenses being taken away by the UK government, forcing landlords out of the market and making property rental income not as attractive as it used to be, especially since taking away tax relief on mortgage interest rates which are on the rise all the time.
Capital gains tax
Additionally, buy-to-let investors may be liable for capital gains tax when they sell the property, depending on the level of any capital gains made. The capital gains tax rate will depend on the investor's personal tax rate, this has also increased over the years greatly and will only rise as the UK government continues to use UK property as the main vehicle for tax revenue.
Holiday let properties
Income tax
In contrast, holiday let properties are subject to different tax rules. Owners of holiday lets can potentially benefit from a more favourable tax treatment, as the property is considered a business asset rather than an investment property.
This means that the rental income from a holiday let is treated as trading income, which can be offset against various business expenses, including:
Mortgage interest.
Utilities.
Cleaning costs.
Furniture and other setup costs.
Maintenance & management costs.
Capital gains tax
As in most cases your holiday let property could also be used as a buy to let property, capital gains taxes are the same when it comes to buy to let vs holiday let’s so here there is no advantage or disadvantage.
VAT
As you will be operating your property as a trading business, you will have to pay VAT on the rental income that you make, however furnished holiday let properties are able to be on a scheme for this called TOMS (tour operators margin scheme.)
Simply explained TOMS allows UK landlords to only pay VAT on the profit that they produce and not the rental income as a whole, as well as raising the threshold.
It is not something to be worried about as you will be required to be making £90,000 per year of profit from your business before needing to look at being on VAT thanks to this scheme which is normally £90,000 of revenue.
To learn more about TOMS from the government website click here.
To speak to a tax professional we recommend riverview portfolio.
Buy to let vs holiday let insurance comparison
When investing in buy-to-let or holiday let properties in Leeds, the insurance requirements for each option can vary significantly.
Buy to let insurance
For buy-to-let properties, landlords are typically required to have landlord's insurance, which provides coverage for the building, contents, and liability risks associated with renting out the property.
This type of insurance policy will typically cover damages caused by tenants, loss of rental income due to tenant-related issues, and legal expenses related to tenant disputes.
Holiday let insurance
In contrast, holiday let properties require a more specialised form of insurance coverage. Holiday let insurance policies are designed to protect the property owner against the unique risks associated with short-term vacation rentals, such as:
increased wear and tear,
liability for guest-related incidents, and the potential for
lost rental income due to cancellations or damage.
Holiday let insurance policies may include coverage for the building, contents, public liability, employer's liability (if the owner employs staff), and even loss of income due to cancellations or damage.
Often this causes holiday let insurance premiums to be higher then standard buy to let property insurance, which does work against holiday let properties.
Important things to note
When booking on every online platform, the booking will have an insurance coverage by the third party for example Airbnb or booking.com, to protect against damage to your property by a guest.
Stayful’s opinion on buy to let vs holiday let
As a leading property management company in Leeds, Stayful’s has extensive experience in the holiday let market.
Based on our observations and insights, we believe that the choice between these two investment strategies largely depends on the investor's goals, risk tolerance, and overall investment approach, we are going to go head to head on the key points we have discussed to see the winner.
Yield & ROI - Holiday let wins here which much higher yields and does result in a higher ROI.
Mortgages - Buy to let wins here, but this can be countered by having higher yield with holiday lets.
Tax & VAT - This goes to holiday let’s which much better tax advantages vs holiday lets.
Insurance - This goes to buy to let’s as insurance premiums are much lower.
Maintenance & Management - Buy to let’s are much easier to manage, but using a trusted holiday let management company can make this much easier.
And the winner is…. holiday let’s
We at Stayful believe holiday let properties are superior in most cases especially when investing in Leeds, holiday lets are location dependant so not all locations holiday let’s win but in the case of the city of Leeds, the yield difference is too great.
Holiday Let Management
If you are interested in hassle free holiday let management for your holiday let property, get in touch and we can provide expertise on income, occupancy & make your investment hands off.