Which buy-to-let is right for you?
/Understanding property investment opportunities
In this article we outline the differences between three investment types and landlord responsibilities associated with each, so you can make an informed decision about which buy-to-let is right for you.
There are many opportunities available in the UK buy-to-let property market, which is why it remains buoyant.
When considering property investment opportunities, it pays to look at the different options available, so you can make the right choice of investment for your individual circumstances.
In this article, we are going to talk about three different options, residential, student and holiday buy-to-let properties.
So, which buy-to-let is right for you?
Residential buy-to-let property investments
Also known as long term lets, residential buy-to-let properties are usually rented out on six month, twelve month, or even longer contracts.
The initial investment is medium to high, and the level of revenue tends to be lower per calendar month than short term rentals.
Pros of residential buy-to-let properties:
Predictable and reliable return via monthly rental.
Occupancy is constant over the determined length of the tenancy agreement so your property will not be unoccupied for any period during that time.
Expenses incurred for running the rental can be passed on to tenants, such as utilities and council tax.
If using a property management company, maintenance fees may be fixed for the duration of the contract.
You may not have to fully furnish the property if your tenants bring furniture with them, reducing wear and tear costs, or you could advertise it as unfurnished, reducing your initial outlay.
You may have a wider choice of mortgage lenders and deals if you choose this option to finance your purchase.
Properties in larger towns where there is work and therefore a higher demand for property, offer all-year round, high returns on your initial investment.
Residential buy-to-let landlords should consider setting up a limited company to benefit from corporation tax rather than pay capital gains tax and inheritance tax.
Cons of residential buy-to-let properties:
The responsibility of screening tenants falls to the landlord unless using an agency. Tenants should be thoroughly vetted because they can leave without notice, fail to pay rent, cause damage to the property and its contents, and leave you with unpaid bills and costly repairs.
There is a hiatus in rental income between lets.
Growth potential is dependent on the local economy and market trends.
You may not have the opportunity to stay in the house yourself.
Major tax breaks have been decreased during recent years such as the interest on mortgage (now a maximum 20%), and capital gains tax (18% for basic-rate taxpayers and 28% for higher-rate taxpayers.) However, if you sell the property through a limited company, your tax liability may be lower via corporation tax.
Legal responsibilities of landlords are strict and include electrical safety certificates (EICR), fire safety, council health and safety inspections and responsibility for the upkeep and maintenance even when using a property manager.
From 2025, new rental properties will need to meet government energy efficient targets, which may require more investment.
Although you don’t have the hassle of frequent changeovers and small maintenance issues, the legal obligations and risk of undesirable tenants are higher.
In addition, ‘tenants’ have legal standing and rights in law, such as unfair eviction.
New regulations regarding tenancy notice, deposit schemes, and amounts came into effect on 1st April this year.
At Holmeshaw, we take all the cons of owning a long term rental away for our clients.
Learn more about one of our residential developments, Halifax House Apartments or contact us for more information regarding this off-plan opportunity and alternative residential buy-to-let properties.
Holiday buy-to-let property investments
Short term, or holiday, lets can be rented out from as little as three nights up to a maximum of 31 days a year.
To qualify as a furnished holiday let (FHL) by HMRC, a holiday buy-to-let property should be available to rent for 210 days a year, with a minimum 105 days occupancy, excluding personal use.
As FHLs are classed as a business, rather than an investment, they benefit from tax advantages that are not available to landlords of long term rentals.
The initial investment is medium term and rental income per week is higher than long term lets, with significant peaks in the high season.
Pros of holiday buy-to-let properties:
The UK staycation market is currently booming, with rental properties in holiday hotspots in high demand - see more in our article ‘why the UK staycation market is a sound investment’.
Average occupancy rates are 20-24 weeks per annum, however, this can go up to 40+ weeks in some locations, delivering high rental yield. Read more about our Sherwood Forest Retreat.
Expenses incurred for running the rental are normally included in site fees, so no hands-on maintenance is required by the property owner.
Re-sale opportunities are greater via buy-back schemes and property is in high demand in holiday locations.
You can stay in the property yourself, or let friends and family stay for a reduced rental or even rent-free.
Legal requirements are simplified and hassle-free when using an investment company like Holmeshaw.
Capital growth opportunities are high thanks to the boom in UK staycations.
There are potential tax advantages because the HMRC classifies holiday buy-to-let properties as businesses, so you can offset mortgage interest against profits, there is no council tax and equipment and furnishing costs can be offset. See more in our Budget Update blog from March this year.
Cons of holiday buy-to-let properties:
Holiday lets can cost more in maintenance than long term rentals because of the turnover of guests. However, this can all be managed for you by an onsite management team, who will deduct their costs from your gross rental profit.
Holiday rentals need to be advertised, but again this can be taken care of through an onsite management contract.
Rental yields may decrease during a summer with bad weather.
If you would like to know more, you may like to read our introduction to owning a furnished holiday let.
Student buy-to-let property investments
Student buy-to-let property investments normally fall into one of two categories:
Purpose built student accommodation (PBSA) or
House in Multiple Occupation (HMO).
The former is normally found close to the university quarters of major cities, whilst the latter can be outside the city centre where normal housing stock has been converted into small bedroom/bathroom units with shared kitchen/lounge areas to accommodate multiple students in one dwelling.
Pros of PBSA student buy-to-let properties:
ROI can be high as there is a constant demand for student accommodation.
Higher yield per unit because they are designed around the needs of today’s students and can therefore command a higher rent.
Prime city centre locations close to the university means higher demand and greater returns.
PBSA normally has onsite management included, making the investment hassle-free.
Off-plan opportunities bring the benefit of below market rates, so you can expect better capital growth.
There may be an opportunity to rent out the accommodation for summer schools to increase rental yield, or in some cases for the whole year rather than only during semesters.
Cons of PBSA student buy-to-let properties:
There are fewer opportunities for capital growth as student accommodation tends to be priced lower than residential property.
Re-sale market is limited and will normally be to another investor, making an exit strategy problematical, unless there is a buy-back scheme.
It isn’t possible to obtain a mortgage for this type of property investment, so is better suited to cash buyers.
Our latest development opportunity is Vision@Huddersfield, a PBSA development located within Huddersfield University campus.
With investment opportunities starting at just £98,995, the Holmeshaw team is happy to talk you through this exciting new project. Huddersfield is experiencing major regeneration which will see up to £1 bn being invested in 11 schemes during the coming years.
Pros of HMO student buy-to-let properties:
These types of student housing are normally cheaper, so there is a lower outlay.
Rental income is more reliable because when a student moves out, there are still others living in the property and paying rent.
Prime city centre locations close to the university means higher demand and greater returns.
PBSA normally has onsite management included, making the investment hassle-free.
Off-plan opportunities bring the benefit of below market rates, so you can expect better capital growth.
There may be an opportunity to rent out the accommodation for summer schools to increase rental yield, or in some cases for the whole year rather than only during semesters.
Cons of HMO student buy-to-let properties:
Owning HMOs can be complicated as they must be licensed, and the local council should carry out a risk assessment. Find out more here.
There are fewer opportunities for capital growth as this type of student accommodation tends to be priced lower than residential property.
Maintenance costs can be high because the buildings are older properties and students are unlikely to be au fait with cleaning and maintenance!
The-sale market is limited and will normally be to another investor.
Lower rental demand than for PBSAs because students today expect a higher quality of accommodation with more amenities.
Obtaining a mortgage is difficult.
It is a more hands-on investment because there is no building management. Investors will have to fix maintenance problems themselves or employ a property management company.
Although the ROI on all rental properties depends on size, features and the external influences of the property market demand for accommodation (no matter what type), location is the most important factor to consider when thinking about the potential yield and prospects for capital growth.
At Holmeshaw, we would never recommend an investment opportunity that we would not be prepared to invest in ourselves. You can trust our facts and figures because we stand by this client promise and make sure that we carry out due diligence on every development we offer, whether for residential, holiday or student accommodation.
Contact us to find out more about ourproperty investment opportunitiesand how we can help you to determinewhich buy-to-let is right for you, by tailoring your investment to suit your personal circumstances
