Is Investing in Real Estate Still Profitable? Exploring the Buy-to-Let Market and Vacation Rentals
Introduction
The housing market is constantly evolving, and investors who previously found success in the buy-to-let market are now questioning its viability. Recent predictions by a Zoopla expert suggest that house prices may fall by 22% by 2026, leading many hobbyist owners to sell their properties due to harsh tax rules and strict regulations. Landlords feel demonized by the actions of a minority of rogue operators, and they fear that the Labor Party will impose even tougher regulations if it wins the next election. In this article, we will explore whether there is still money to be made in bricks and mortar, and whether real estate investors should consider the growing vacation rental market.
Challenges in the Buy-to-Let Market
Many disillusioned buy-to-let homeowners claim that only one in five make a profit, while a similar proportion admit that they lacked sufficient knowledge when starting out, resulting in financial losses. According to property tax experts at Cornerstone Group International, every month, 35,000 buy-to-let homeowners abandon low-cost fixed-rate mortgages, facing remortgage rates of over 6%. This drop in profits can be attributed to the removal of higher-rate mortgage tax breaks and the addition of red tape, increasing costs for landlords. The consequence is that 65,000 rental properties have been put up for sale in the first three months of 2023, and the number of private rental homes is at a 14-year low.
Impact on Renters
The surge in properties for sale has created a shortage of rental properties, leading to increased rents. According to data from Rightmove, rents have reached a record high, averaging £1,231 outside London and a staggering £2,567 in the capital. This shortage of properties may create opportunities for first-time buyers, as previously rented homes have an average price of £190,000, significantly lower than the UK average price.
Not the Best Time to Sell
While the buy-to-let market faces challenges, homeowners looking to sell may have missed the peak of the market. Recent research by Hamptons International indicates that homeowners in England and Wales are now receiving £10,000 less than they would have a year ago. Nevertheless, owners are still making a profit, with an average of £94,800 more than their initial purchase price after 11 years of ownership. However, it’s important to note that this is not pure profit. Second property sales are subject to capital gains tax of up to 28%, and owners also face a three percent stamp duty surcharge on original purchases, as well as other ongoing costs.
The Rise of Vacation Rentals
Amid the challenges facing the buy-to-let market, there is growing interest among investors in the vacation rental market. Platforms like Airbnb and the stay-at-home trend have fueled this interest, attracting new investors. However, not all properties are suitable for conversion into vacation rentals, as many have restrictive leases. Existing second homeowners should consider short-term leases, as they can contribute significantly more to the local economy compared to empty second homes.
Advantages and Challenges of Vacation Rentals
Vacation rentals offer several advantages over buy-to-let properties. Perhaps the most appealing aspect is that owners can use the property themselves when it’s not rented. However, vacation rentals come with their own set of challenges and requirements, including strict rules and regulations. To qualify as a furnished vacation rental for tax purposes, the property must be available for rent for at least 210 days per year, with a minimum of 105 days of commercial rental. Additionally, owners must comply with fire, electrical, and gas safety regulations, maintain high standards, purchase a TV license, and obtain specialist holiday rental insurance. Deciding between council taxes or business fees can also be complex. It’s important to note that owning vacation rentals can be controversial, with some locals claiming that investors are driving up prices and displacing residents.
Conclusion
The buy-to-let market is facing challenges due to harsh tax rules, strict regulations, and changing political landscapes. As house prices fall and rental properties flood the market, existing buy-to-let homeowners may have missed the peak time to sell. However, this creates an opportunity for first-time buyers to enter the market at lower prices. On the other hand, the vacation rental market is experiencing growth, attracting new investors who see the potential for higher profits during peak holiday periods. Nonetheless, vacation rentals come with their own set of challenges, including stringent regulations and potential controversies. As the housing market evolves, it’s crucial for investors to carefully consider their options and weigh the potential benefits and risks.
Summary
The housing market is experiencing significant changes, leading some investors to question the profitability of the buy-to-let market. However, while challenges in the form of tax rules and regulations are impacting buy-to-let homeowners, there are still opportunities for first-time buyers. Additionally, the vacation rental market is increasingly attracting investors, offering the potential for higher profits during peak holiday periods. However, navigating the vacation rental market comes with its own set of challenges. Ultimately, individuals interested in real estate investment should carefully evaluate their options and consider the fluctuating market conditions before making any decisions.
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Zoopla expert predicts that house prices will fall 22% by 2026
Many hobbyist owners are now selling, citing harsh tax rules and strict regulations. Landlords feel demonized by the activities of a minority of rogue operators and scapegoats for a housing crisis that is not their fault. They also fear that the Labor Party will get even tougher if it wins the next election.
Some are getting out while they can as new investors eye the vacation rental market, which has been fueled by Airbnb and the stay-at-home trend.
So is there still money in bricks and mortar?
Thousands of disillusioned buy-to-let homeowners would say no. Only one in five make a profit, while a similar proportion say they started without sufficient knowledge and lost thousands as a result.
Every month, 35,000 buy-to-let homeowners abandon low-cost fixed-rate mortgages to face remortgage rates of more than 6 percent, according to property tax experts at Cornerstone Group International.
Chairman David Hannah said profits fell to 2007 levels as the higher-rate mortgage tax break was removed and red tape added costs. “Some 65,000 rental properties went up for sale in the first three months of 2023, while the number of private rental homes has dropped to a 14-year low.”
This is bad news for renters as a shortage of properties drives up rents, which hit a record £1,231 outside London and a staggering £2,567 in the capital, Rightmove data shows.
This can offer opportunities for first-time buyers, Hannah said, as the average price of a previously rented home is £190,000. “That’s considerably lower than the UK average price.”
This is also not a good time to sell, with the average homeowner in England and Wales getting £10,000 less than a year ago, according to Hamptons International.
Owners still got £94,800 more than they paid for after 11 years of ownership, up from £105,300 last year. However, this is not pure profit.
Unlike the sale of your primary home, second property sales are subject to capital gains tax of up to 28 percent. In addition, owners face a three per cent stamp duty surcharge on original purchases, as well as many ongoing costs.
Worse yet, one in five failed to make a profit despite all their efforts, while six percent sold at a loss.
As house prices fall, homeowners looking to sell today may have missed the top of the market, Hamptons research director Aneisha Beveridge said. “Some investors are taking solace in record rental growth as new homes coming onto the market continue to command record rents.”
So should real estate investors switch to the vacation rental market?
Specialist vacation rental agents report a growing interest from buy-to-let owners wondering if they can convert their properties, but the truth is that most are not suitable and often have restrictive leases as well.
For new investors, vacation rentals offer some advantages over buy-to-let. Perhaps most tempting is that you can spend your vacation there when it’s not rented.
Owners of existing second homes should definitely consider short-term leases, said Ben Edgar-Spier, head of policy and regulation at Sykes Holiday Cottages. “This boosts local economies as vacation rentals contribute six times more financially than empty second homes.”
READ MORE: Mortgage hell could spell a “grim picture” of the “stagnation” housing market
As with buy-to-let, owners must adhere to strict rules. To qualify as a furnished vacation rental for tax purposes, the home must be available for at least 210 days per year and commercially rented for at least 105 days. This excludes personal visits or free or reduced-price stays from family and friends.
Owners must also adhere to strict fire, electrical and gas safety regulations, plus need to outfit their home to a high standard, purchase a TV license and take out specialist holiday rental insurance.
They must also decide whether to pay council taxes or business fees, and the rules are complex and subject to change.
In Wales, local authorities have been making it more difficult to claim commercial fees, while double or triple the council tax for second home owners. English councils are following suit.
Vacation rentals can generate more income than buy-to-let during peak holiday periods, but may decrease in winter.
They can also be more demanding, with most visitors moving in within a week or two, so the property needs constant upkeep, cleaning, and bedding.
Also, owning vacation rentals can be controversial, as locals say investors are driving them out of the real estate market and killing coastal cities.
It’s not vacation.
England is considering a holiday rental registration scheme and Edgar-Spier said this could be a positive by raising standards and educating “hosts” on their responsibilities.
But he warns that Scotland’s licensing scheme is causing problems. “Licenses can take up to a year to obtain and can be refused for reasons that are not the fault of the property owner.”
The British have a long love affair with bricks and mortar, but today it is being put to the test like never before.
However, the dream of the second property will continue to tempt many. Especially since falling prices offer a buying opportunity for those who can afford it.
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