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How to build a buy-to-let portfolio: where to start with holiday lets that come with tax perks



Do you want to build a buy-to-let portfolio? In this three-part series, we're looking at how to start your own across three different property types: standard lets, HMOs and holiday lets.

One of the most lucrative types of property to invest in is holiday lets. The market is benefiting from two major advantages: the government's buy-to-let crackdown and Brexit.

First, while the rest of the private rental sector has been plagued by the cuts to tax relief on buy-to-let mortgages, furnished holiday lettings are exempt and they enjoy the old perks.

However, many investors have clocked this and are moving their money over so the market is getting more competitive.

And thanks to Brexit, more Britons are holidaying at home, due to uncertainty and the low rate of sterling.

Sure, the flipside is we will see fewer Europeans, but in Cornwall they make up only 5 per cent of the holiday-maker market, says George Edward-Collins of Cornish Traditional Cottages. The other 95 per cent are British.

So, now could be prime time to start investing. Here's our guide to buying in the parts of the country with the highest holiday let yields.

Where is it easiest to get high holiday let yields?
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The chart has 1 X axis displaying Top ten local authorities.
The chart has 1 Y axis displaying Percentage of landlords earning more than 5% yields. Range: 0 to 100.
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Isle of Wight

On the Isle of Wight, 93 per cent of second-home owners earn yields of more than 5 per cent on their holiday lets each year, the highest proportion of region in the country, according to Hamptons International. Average annual yields are 5.6 per cent and house prices here are on average £218,630. 

The key is that the holiday home market isn’t saturated: only 14 per cent of properties are purchased as second homes here, according to Hamptons, a relatively low proportion for a holiday hotspot. In Torbay, Devon, the percentage is 42 per cent.

The most popular towns with holiday home buyers on the island are Ventnor, Seaview and Bembridge, says Chris Treasure, who runs Wight Holiday Lettings. These are highly desirable places to live with good amenities. 

But they’re not the most popular with holiday-makers themselves, says Treasure. For them, the most searched areas are Ryde, Sandown and Shanklin, which offer “good old-fashioned bucket and spade holidays,” says Treasure, “but are not particularly nice places to live”.

Neither is the most beautiful property the most profitable. A two-bedroom property that lets out for £800 to £900 per week will be booked up for as much as 35 weeks in a year, says Treasure (which would bring in £28,000 to £31,500). 

Meanwhile, there is demand from London and South East renters for large, grand houses, “but only in the school holidays,” says Treasure. 

Short-term rents are much higher: an average property on the Isle of Wight that would rent out for £700 to £800 per month as a long-term let will rent out for £1,000 per week in the summer, says Treasure. But naturally you will have void periods; rents drop by as much as 50 or 60 per cent out of season, he adds.

Local authorities with the highest holiday let yields
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The chart has 1 X axis displaying categories.
The chart has 1 Y axis displaying Yield (%). Range: 0 to 10.
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Treasure recommends building a portfolio in one place, rather than spreading purchases out across the Isle of Wight, in order to keep management costs down.

Visuals are key now that everyone books online, says Treasure; “people expect hotel quality furnishings”. Perks go a long way: activities for kids and welcome packs with basic groceries are “the little details that bring people back,” says Treasure. And, naturally, “everyone wants a barbeque”.

Fylde, North West

Fylde, on the west coast of Lancashire, offers the highest yields for second homes in the country, according to Hamptons. Eighty-six per cent of holiday let owners get yields of more than five per cent, and the average rate is 7.5 per cent. 

It’s close to all the amenities of Blackpool and has a glorious stretch of coastline that includes the resort towns of Lytham and St Anne’s (which is home to some award-winning beach huts).

The market has changed significantly in the last five years, says Wendy Chappell of Red Rose Cottages. There has also been a rise in short breaks with lastminute bookings, she says, and people are after quality, “something that’s better than what they have got at home”.

Where do most people buy second homes?
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The chart has 1 X axis displaying Local authority.
The chart has 1 Y axis displaying Percentage of properties bought as second homes so far in 2019. Range: 0 to 60.
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There’s also been a “massive shift” in who is buying, says Chappell. “Five years ago, it was people buying for their pension,” she says. “Now there’s vast amounts of money coming in, people are setting up investment companies and I had one guy looking to spend £2 million.”

That kind of money can go a long way here. The average property price in Fylde is £186,410, according to Hamptons International, but flats can be picked up for £110,440.

A one-bedroom three-star property will rent out for £395 per week in peak season, says Chappell, but if it’s five-star it can fetch £785.

All of the price difference is in the finishings, she adds. Her key advice is to put money behind major refurbishments. En suite bathrooms, woodburning stoves, good TVs and saunas are all perks that will draw in holidaymakers. And, if you really want to set yourself apart, get “Alexa in every room”.

Cornwall, South West

Cornwall has the second highest holiday let yields in the country at a rate of 6.1 per cent, according to Hamptons.

It's to be expected as it is historic, holiday home heartland. But this also means things are competitive. In 2019 to date, 30 per cent of purchased properties were holiday homes.

Cornwall’s “honeypot” areas, as George Edward-Collins of Cornish Traditional Cottages, terms them, are numerous. Start with Rock, Polzeath, St Ives, Looe, Fowey, Charleston, Falmouth, Padstow (which has the added draws of the Rick Stein and Paul Ainsworth’s culinary credentials) and Port Isaac (home of Doc Marten)... and the list goes on. 

But some of the headline prices will be eye-watering: houses in Rock and Padstow can easily set you back £1 million. You can halve your budget by choosing your location carefully such as heading to the peripheries of Rock, swapping St Ives for Penzance and St Mawes for Portscartho. 

Three- to four-bedroom properties that can sleep four to six people are most rentable on the holiday market, says Edward-Collins, and can let for as many as 42 of 52 weeks. 

Easter to October half term is prime time for bookings. In peak season, a top-notch, three-bedroom property in Rock can let for £3,500 a week, says Edward-Collins. This would drop down to £600-£800 in the winter.

Cornwall’s popularity as a holiday destination has escalated in the last decade, says Edward-Collins. Investors have been flooding in as a result, which has been compounded as landlords with long-term letting portfolios have been selling up and moving into holiday lets for the tax perks. 

This means that when it comes to building a portfolio, Edward-Collins’ advice is to spread out and diversify: buy properties for couples as well as families, inland as well as coastal. Save yourself at least from competing with yourself.

Though naturally not everywhere is a winner. Avoid the inland former industrial land between Redruth, Penryn, Helston and Hayle, around Saint Dennis or the clay pit areas on the edges of Bodmin Moor, says Edward-Collins. Property might be cheaper and they’re perfectly picturesque, but homes here “just don’t let”.

Fees are high: 30 to 35 per cent of your rental income will go on a 20 per cent commission fee (plus VAT) for marketing and bookings, an extra 5 per cent for management, and utilities bills on top.

Details also matter now that didn’t 10 years ago, says Edward-Collins. Pets are fundamental; Edward-Collins estimates that 70 per cent of holiday-home renters in Cornwall are coming with animals, usually dogs.

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