50 Connect | Investing in a Holiday Home - Good Investment or a Big Risk?
Investing in a Holiday Home - Good Investment or a Big Risk?
Posted on: 30 November 2016 by Simon Evans
New tax laws on buy to let properties mean that it's more expensive and risky than prior to 2015. Is a holiday home buy to let a better idea?
The buy to let boom, almost fizzled out with the credit crunch…almost. With pensions becoming more unpredictable, many people are still investing in a second property. With new taxes introduced in 2015 for buy to let properties, holiday homes have become an even more appealing investment owing to the fact they escaped the new ruling unburdened.
2015 saw the government put a stop to much of the mortgage interest relief that landlords were previously entitled to - the ‘wear & tear allowance’ was scrapped, and a new stamp duty surcharge of 3% was announced for anyone buying a second property.
So if you were thinking of buying a second property as an investment, is a holiday home a better idea or just more hassle?
Whereas second properties normally cover the average mortgage and the associated running costs, it is possible to generate an attractive income with a holiday property, with larger properties making up to £30,000 a year according to some letting agents (before tax, can’t escape income tax!).
Unfortunately, the costs associated with the upkeep and the actual purchase of a holiday home can be more expensive in most instances. People want to holiday in high-spec, sought after locations that are furnished to a high standard and cleaned to an immaculate standard.
In addition, research the costs associated with booking through a holiday rental agency. If you know how to create a website (with a booking system & database), and get it ranking on search engines, you might be able to avoid the booking fees implemented by third party companies – but it is often much more cost effective to use a third party anyway. Using a booking agent also takes much of the hassle out of letting your holiday home, making it more of a ‘passive income’ than a part or even full time job.
Another consideration is that estate agents and mortgage advisors have reported that it is more difficult to acquire finance for a holiday home. This may be something to research and to discuss with a financial advisor, before getting your holiday-home-hopes up and applying for a mortgage. Mortgages in general are more difficult to acquire, especially second mortgages that depend on tenants (or holidaymakers) to pay the bills.
In the book “Rich Dad, Poor Dad” Robert Kiyosaki discusses the importance of buying ‘assets’ that accumulate value (as opposed to liabilities, such as cars, which lose value) and offsetting expenses where possible to reduce tax. You can follow these rules to a certain extent, with a second property that is a holiday home. Under the “furnished holiday letting” rule, you can offset mortgage interest, as well as other expenses against any income that you generate.
In some very specific instances, normally when you work in the home yourself – e.g. cooking breakfasts etc. it is possible to avoid some elements of inheritance tax that are normally associated with valuable estates and properties. You can learn more about inheritance tax and a holiday-let property here.
Holiday lodges and even static caravans often come with lifetime guarantees these days. These may also serve as viable investments. In fact some investments firms and pension fund management companies have invested in holiday parks, such as Darwin Escapes in the UK, and State Street in America. Again, for individual clients looking at privately owning and investing in holiday lodges and caravans, there are a number of costs to consider. If you are buying a caravan on a holiday park for example, take into account the site fees, any insurance you will need to rent out your caravan and the cost of utilities.
To summarise – a holiday home can be a wise investment if you do plenty of research. There are a number of tax breaks associated with holiday homes that are not (for some reason) given to landlords of domestic properties. Just keep in mind the potential difficulty of obtaining a mortgage, the booking fees if you are not going to handle bookings yourself and any other potential hidden costs!