The European tourism industry is going from strength to strength. Between 2005 and 2018, the number of nights spent in tourist accommodation in the EU grew by 40%, with the highest growth seen in nights spent by non-resident holidaymakers (59%). Of these nights, around 23% were spent in short-stay holiday accommodation such as holiday lets. Holiday lets are becoming a popular choice with investors, as they can offer a higher yield than residential lets and double as a second home. But there’s a lot to consider before purchasing a holiday let, including how to finance it and where to buy to maximise your ROI year after year.
1. How popular is your chosen location with tourists?
Obviously, one of the primary considerations when choosing a holiday let property is ensuring you buy a property in a location with a strong tourist industry. This is the best thing you can do to make sure your holiday let can get you good returns year after year. Not only does this mean that your property should be located in a popular city or resort town, but think about where in the city or town tourists will want to stay; for example, in coastal resorts, the closer to the beach the let is the more popular it’s likely to be.
Look into where the best yields are if you want to narrow your search down a little. A report from Second Estate recently found that, in the UK, both Wales and Northumberland returned the best yields with 11.7% and 11.5% respectively on holiday lets. This might not be what you’d expect, but sometimes holiday lets in cheaper locations offer a better return than those in capital cities.
2. What type of property should you buy?
It’s also important to put some consideration into what type of property you’ll be letting out; while you can save yourself some money by buying a smaller property, many customers will be looking for holiday lets that will accommodate a family. Flats and apartments might be a good choice in cities, where space can be sacrificed in favour of a more central location, but in the countryside many people will be looking for traditional country homes.
3. How accessible is your property?
Research shows that just one in seven UK tourists drive while on holiday abroad. Some vacationers do rent cars on holiday, but this is by no means the norm. Your holiday let property must be accessible via public transport, unless you want to effectively cut yourself off from a huge percentage of the market. Consider the distance between your property and the nearest tourist hot spots – the town centre, the beach, shops, bars, and restaurants – as well as the nearest transport hubs, including train stations and airports.
4. How will you finance the property?
Financing a holiday let isn’t quite as simple as financing a buy to let property; you can’t finance a holiday let on either a residential mortgage or a buy to let mortgage, because seasonal variations in income mean that most lenders consider holiday lets to be higher risk ventures. Some banks and building societies now offer holiday let mortgages, though in most cases you will need a deposit of at least 25% and a 40% deposit will grant you access to more competitive rates. Other requirements will apply, for example you will have to show that your annual rental income will equal over 150% of the interest payments, and you will also likely need to prove a minimum income of £25,000 a year.
5. Is your property ready to let?
Once you’ve found a property you like, it’s natural to want to get it onto the market as soon as possible. But that’s not always wise; you don’t want to rush things and end up with your first few online reviews being negative. It’s important to look around your property honestly and consider what work should be done to make sure guests will be happy with it; in some cases, this might mean just updating the decor here and there, whereas some older properties may even need heating and hot water systems improving.
6. Are you ready to furnish the property?
You can rent out buy-to-let properties unfurnished, minimising your initial outlay and getting your property onto the market sooner, but this isn’t the case when it comes to holiday lets. You’ll have to budget in enough money to furnish the property before you let it out and make sure that your furnishings match the standard of the property you’ve purchased, too. There’s no point buying a luxury holiday let and furnishing it with IKEA’s cheapest range.
7. How do you plan to maintain the property?
Maintaining a holiday let isn’t quite the same as maintaining a buy to let property; holiday lets will generally be occupied for short periods by many different guests every year, which means that properties will need more active maintenance particularly with regard to cleaning between guests. If you buy a holiday let nearby, you can save yourself a big outgoing by doing this work yourself, but most investors likely use an agency.
8. Does your cost to income ratio stack up?
It’s important to make sure that, after all of your costs have been accounted for, investing in a property is going to make financial sense. While it’s true that holiday homes can earn you up to three times more income than buy to lets, consider first that most holiday lets are not occupied the whole year round, and that there are higher costs associated with letting them, i.e. cleaning costs between guests. Calculate your expected income using average annual occupancy rates for properties in the area, and weigh this up against all of your annual costs to make sure your profit margin is good enough.
9. How will you ‘sell’ your property as a let?
If you want to make the most of your holiday let, it’s often better to get stuck into the action and spend some time building your property’s brand. Taking great photos, maintaining a positive presence on booking sites, and providing excellent customer service no matter where you are in the world will all help to make your property stand out and boost its performance as a holiday let.
10. Where would you choose a second home?
You might also want to use your own holiday let occasionally as a home from home; particularly during off-season, it can be nice to have an overseas getaway to visit without having to pay any accommodation costs. This concern should probably be second fiddle to everything else assuming your primary goal is making a decent income from your investment, but it’s always worth thinking about.