To best explain why I think short-term lets is so exciting, I would like to draw comparisons between two different industries (the David and Goliath of the property world). On the one side we have “The young one”, “the upstart”, “the new kid on the block” whose name is Serviced Accommodation. And on the other side we have “the old dog”, “the tired champion”, “the backbone for UK property investors” Buy-to-Lets.
Spoiler Alert!! Buy-to-Let takes a bit of a stuffing.
Section 24 is probably the biggest concern facing buy-to-let landlords at this time. If you are such a person, with a mortgage on your property and you don’t know about Section 24, then you should definitely read our in-depth blog post titled SA Tax Benefits – Section 24. It will have all the information you need, with case study examples to easily explain just how damaging this could be on your property’s finances.
The important thing to note about Serviced Accommodation is that Section 24 does NOT apply. Whoop Whoop!! There is in fact specific mention to this in the Finance Act 2015, however, for a lighter read, you can skim through this news story. This means that unlike buy-to-lets owners, SA providers will still be eligible to pay mortgage interest payments as a pre-tax expense, if they qualify as a Furnished Holiday Let (FHL), which you can read about here. If your property is made available to rent for most of the year to guests, then this shouldn’t prove difficult.
Long story short, for the majority of long-term let property owners, profits will get progressively gloomier as the change becomes introduced in tax year 2017/18 and is fully implemented in 2020/21.
Many BTL landlords are now considering the following 4 options:
- Selling up in search of more profitable investments;
- Reducing other costs such as management fees and taking on more responsibility;
- Increasing rent to offset higher tax; or
- Changing to Serviced Accommodation.
One of the most significant differences between short-term lets and buy-to-lets is the ability to claim capital allowances. Depending on the type of business structure you operate the properties through; capital allowances can have a significant impact on the amount of tax payable and therefore the amount of money left in your back pocket.
Unfortunately capital allowances are only applicable to properties that are run as businesses, such as FHLs. Whereas, buy-to-lets are not applicable for capital allowances and are instead afforded “deduction for replacement of furnishings” which accounts for substantially less. Capital allowances can be claimed on assets which you buy for your business such as plant and machinery (which is a very vague term). However, to put this into context, you would be able to claim on the removal and purchase of a new kitchen, bathrooms, furniture and other assets.
To see capital allowances in action and what it can do for you, see our post titled SA Tax Benefits – Capital Allowances for more information.
Other Tax Benefits
There are other tax incentives for operating as FHL such as Gift Relief, Roll-over Relief, Small Business Rates Relief and more. Some of which are covered in future posts, here. All these tax benefits are only available to businesses such as Serviced Accommodation and not BTLs.
“Turnover is vanity, profit is sanity and cash is king”
Someone very wise.
It can be easy to become over-excited by the huge amounts of money a property can make. However, it’s the back-end of any financial statement that is far more important. This is why Serviced Accommodation stands out head and shoulders above most other property ventures. £10,000 a year from your buy-to-let may seem like a really good investment, but how much of that is actually profit that you can spend?
Even though the operating costs from short-term lets can be significantly greater than that of buy-to-lets, it is the money in your back pocket that is most important. In the right areas, you could easily expect to see 100% to 500% more income after tax compared to your buy-to-let.
Furthermore, one of the most exciting parts of short-term lets is being paid well in advance or just after the guest has stayed, instead of being paid in monthly arrears, with no guarantee of payment from the tenant. Giving you piece of mind.
Tenants can be great!! They may pay their rent on time, cause no hassle for the landlord, keep the noise down, be kind to their neighbours and ensure the property stays clean. They might even offer to give the room a new lick of paint. But where there are good tenants, there are also bad tenants and despite all the vetting, no one can guarantee which of the two you will get. Operate a buy-to-let for long enough and inevitably you will experience the latter.
And what happens when you want to get rid of them? Well you have to comply with government legislation. You will have to serve a notice for eviction which could range from 28 to 84 days. That’s a long time!! It could get even more difficult if the tenant doesn’t pay you during this period, on top of any previously failed payments.
However, with short-term lets, you set your own terms and conditions. Strict payment methods and house rules help to deter unwanted guests and allow you to enforce evictions straight away once any contract has been breached, so long as it’s reasonable. Most guests are very considerate with their accommodation, nevertheless, there are the odd few that treat it with less respect than it deserves. Nevertheless, some hosting platforms such as Airbnb offer insurance on your property (Host Protection Insurance) meaning they will cover most damages.
Now this part is up to you. The choice to assign someone else to manage your property is no different whether you operate a short-term let or a buy-to-let. Any good agent in either industry and worth their fee will provide a service that minimises your involvement to a level that you desire. That means, should you only want the agent to find tenants or guests, then that is what they’ll do. If you prefer the agent to be more involved with the day-to-day management, then they will.
However, if there was a choice between being hands-free from a buy-to-let or a FHL, FHL wins hands down. Despite the fact that the fee is likely to be greater for an agent that specialises in short-term lets, the volume and complexity of the work required is significantly higher. Can you imagine yourself running round to check-in guests, cleaning the loo, purchasing replenishables and managing your Airbnb account on a daily basis? Good agents “cough, Eden Burgh” are worth their weight in gold. They minimise your stress and involvement whilst maximising your revenue and freedom.
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