Contents
Investing in vacation rental properties in the UK is a specific, practical form of buy to let that trades liquidity and portfolio diversification for direct operational control and concentrated local risk. The work that follows looks mainly at the economics and practicalities of owning a UK holiday let, including location choices, demand seasonality, operating costs, tax and planning risks, finance and realistic yield examples. After that I compare holiday lets to a plain investment in UK equities so you can see the trade offs bluntly: safety, expected return, liquidity and effort.
What a holiday let actually delivers versus a normal buy to let
A holiday let will often produce seasonal returns unless you are able to buy one in an area that has an active customer base all year round. This might include different areas that are popular among tourists year round. Holiday Lets in London is an example of Holiday Lets that will always be in demand. You will need to price your holiday let with this in mind: a few months of income will have to cover the expenses for the entire year plus your desired profit. This will also affect how much you can pay for a property and still make a profit.
Do not expect to be able to use the Holiday Let yourself during high season if you want to earn a good income from it.
Because income is lumpy the critical metrics are average occupancy percentage, average nightly or weekly rate and the split between nights you use the property yourself and nights you make available to paying guests. Operating costs are also different: you will face higher management and cleaning costs, more frequent repairs, turnover costs and a heavier booking and guest management workload. Insurance and wear and tear are higher. You trade a steadier small yield for the chance of higher headline revenue in peak periods, and you accept more operational work or the cost of outsourcing it.
Which UK locations actually work for holiday lets
Not every place in the UK is equally attractive. Coastal towns with strong tourist seasons Cornwall Devon Norfolk parts of Scotland and the Lake District draw visitors who pay premium weekly rates in summer. Cities with year round demand such as Edinburgh Bath York and parts of London attract different types of travellers and often higher off season occupancy but they also face stronger local regulation and higher purchase prices. Proximity to transport hubs and to attractions matters. The practical advice is to narrow your universe to a handful of postal districts and then test comparable listings to see what a well maintained, well photographed property actually earns across twelve months. Be conservative: count on average occupancy materially below the best listings because the top hosts benefit from stellar reviews repeat guests and professional listing management. VisitBritain and industry trackers show occupancy has been uneven since 2019 and that 2023 and 2024 months often under performed the pre pandemic benchmark, so do not assume perfect summer after summer.
Regulation and planning risk you must model in
Regulation is now central to the economics of holiday lets. English local authorities are increasingly introducing registration requirements and control zones for short term lets; Scotland and Wales have introduced formal licensing regimes in many areas; and some councils enforce limits on the number of nights a property may be let without planning permission. National tax rules affecting so called furnished holiday lets were reformed recently which changes tax treatment and removes some previously available allowances. These changes mean you must check both national tax rules and your local council’s short let policy before you buy because a change in local planning or stricter licensing can remove large swaths of revenue overnight or impose compliance costs. Do not treat a single host’s listing as proof of permissibility. Check the council register and licensing rules and factor a plausible regulatory compliance cost and occupancy haircut into your model.
Tax realities since the FHL changes
Historically furnished holiday letting benefited from a special tax set of rules that allowed favourable treatment for certain reliefs. That regime has been formally altered by recent government changes which remove the special favour for properties that qualify as FHL from April 2025 and thereafter place most holiday income into the standard property business rules. The practical impact is that some previously available tax allowances and pension contribution strategies are no longer reliably available and that for many owners taxable profits may rise. When you run the numbers always model a realistic effective tax rate on net income and do so after allowance for finance costs, because the tax change can materially reduce net yield for highly geared buyers. Get professional tax advice specific to your purchase and tax year.
Purchase costs and transaction taxes
Transaction taxes matter because buying a second home for a holiday let usually attracts higher stamp duty like charges. In England and Northern Ireland Stamp Duty Land Tax applies with an additional surcharge on second properties and you should use the government calculator to get the exact figure for your price band. Scotland and Wales use different instruments with their own rates and bands. Include solicitor fees, surveyor costs, possible immediate renovations and the likely need to buy furniture and safety equipment to meet letting standards. These upfront costs increase your cash requirement and lengthen payback.
Finance and interest rate sensitivity
Most buyers will use mortgage finance for holiday lets. Lenders typically charge higher rates and require larger deposits for holiday properties than for ordinary residential purchases. That means your interest cost and your deposit percent materially affect cash returns. Because most holiday lets depend on short term floating revenue and can be seasonal, a rise in mortgage rates can compress net yield quickly and push a marginal investment from profit to loss. If you intend to borrow, model at least two or three stress scenarios for rate moves and under occupancy conditions and ensure your cash buffer covers several months of mortgage payments during slow season or a repair event.
Operating costs and real yield math with a worked example
Concrete numbers are necessary. Below we are going to look at an example of how it might look. We compute each step slowly so the so it’s easy to follow and the results are verifiable.
Assumptions for a modest coastal 2 bedroom cottage purchased as a holiday let.
Purchase price £250,000.
Deposit 20 percent of price. Compute deposit step by step.
250,000 × 0 . 2 = 50,000. So deposit = £50,000.
Loan amount price minus deposit.
250,000 − 50,000 = 200,000. So mortgage = £200,000.
Assume average weekly rate during bookable weeks is £600 and realistic annual occupancy is 40 percent. Compute weeks let per year.
There are 52 weeks in a year. 52 × 0 . 4 = 20 . 8. So booked weeks = 20.8.
Annual gross revenue weekly rate times weeks booked.
600 × 20 . 8 = 12,480. So gross annual revenue = £12,480.
Allow for platform fees cleaning and management. Suppose management plus platform cleaning and consumables equal 30 percent of gross revenue. Compute management costs.
12,480 × 0 . 3 = 3,744. So operating fees = £3,744.
Estimate other annual expenses insurance council tax repairs and utilities at £2,500. Would leave us with a total operating expense of
3,744 + 2,500 = 6,244. So total operating costs = £6,244.
Net operating income gross revenue minus total operating costs.
12,480 − 6,244 = 6,236. So net operating income before finance = £6,236.
Annual mortgage interest only cost at an assumed rate of 4 percent on the mortgage amount equals mortgage times rate.
200,000 × 0 . 04 = 8,000. So annual interest cost = £8,000.
Net cash flow after interest net operating income minus interest.
6,236 − 8,000 = −1,764. So annual cash flow = negative £1,764.
Cash on cash return equals annual cash flow divided by initial cash invested deposit plus purchase expenses say £50,000 deposit plus £5,000 initial fit out and fees give £55,000. First compute invested cash.
50,000 + 5,000 = 55,000. So initial cash = £55,000.
Cash on cash return negative 1,764 divided by 55,000 equals compute fraction then percent.
1,764 ÷ 55,000 = 0 . 0320727272… That is 0.03207 negative. To get percent multiply by 100. 0 . 03207 × 100 = 3 . 207 percent negative. Because cash flow was negative the return is −3.207 percent. So the illustrative cash on cash return is roughly negative 3.2 percent per year in this scenario.
This example is deliberately conservative on occupancy and deliberately assumes a mortgage cost that many buyers could face. It shows how easy it is for headline revenue to be swallowed by finance and operating costs. If you can buy out right or if you can obtain a lower mortgage rate or if you achieve higher occupancy and higher nightly rates the numbers change quickly. Always run the arithmetic step by step for your own quote and assume lower occupancy than the best listings show.
Management approaches and their cost trade off
You can self manage or use a professional manager. Self management lowers running costs but consumes many hours and is stressful when problems arise remotely. Professional managers commonly charge 20 to 35 percent of booking revenue depending on service level and whether they handle linen cleaning and co ordination with cleaners. The choice affects net yield more than many buyers expect. A frequent practical compromise is to self manage for the first year to monitor realistic occupancy and then outsource only specific functions like check in and key exchange.
Demand seasonality and diversification within property investments
Seasonality makes revenue correlation high within a market. If you own two coastal cottages in the same town you do not diversify booking risk; you concentrate it. Geographic diversification matters. Owning properties in two different tourist zones with different seasons may smooth income but multiplies management complexity and transaction cost. Many small investors prefer to own a single property well run, or to own a stake in a property portfolio through a professional operator, rather than attempt a multi property roll out unless they have systems and capital to scale.
Exit, resale value and buyer demand
Resale value for holiday homes has its own buyers market and can be more seasonal too. A property relying heavily on short lets may fetch a lower price from a buyer who wants assured income from a long let. Mortgage availability for buyers also influences resale liquidity. If regulatory changes reduce the attractiveness of holiday lets in your area the pool of potential buyers narrows and exit can be slow or painful. That risk amplifies the need to plan an exit strategy before you buy and to stress test the case where you have to sell at a loss or convert to a long let.
Major risks to model explicitly
Model the following risks with numbers when you run your case: regulatory change closing down or limiting short lets, a deterioration in demand from weaker tourism or reduced disposable income, interest rate increases, unexpected major repairs, and platform or payment takedowns. For each risk create a plausible worst case scenario and confirm you can carry the mortgage and hold the asset until conditions improve or until you can convert the letting model.
When holiday lets outperform simple stock investments
Holiday lets can outperform stock market investing in cash terms when several conditions align. Those conditions are high local nightly rates relative to purchase price, generous tax incentives or no sudden removal of favourable taxation, low borrowing cost, and reliable occupancy. Where electricity is expensive and demand is robust and where you can buy at a reasonable multiple of net operating income the implied yield can exceed long term equity returns. Moreover property has a leverage effect: a small deposit controls a larger asset and that amplifies returns on the upside. Property also offers non financial benefits like a tangible personal asset and flexibility to use the property yourself. The flip side is that leverage also amplifies losses and illiquidity can force sales at bad prices.
It is also important to remember that a holiday let requires a lot more work than stock investments, which can be largely passive. A holiday let needs to be actively managed, either by you or by someone you pay.
Comparing to investing in UK equities
A clear comparison looks at four variables: expected return, volatility, liquidity and effort.
Expected return: long term UK equity returns have historically averaged roughly mid single digits annualised after inflation depending on the index and time period. For example long run FTSE returns often appear in the five to six percent annualised range before taxes and depending on the measurement window. Past returns are not a guarantee of future results but equities historically reward long term patient holders with growth and dividends.
Volatility: equities swing in price and can produce multi year drawdowns but they are highly liquid so you can usually sell at a market price quickly. Property values are usually less volatile month to month but can fall sharply when funding dries or when local demand collapses. When you need cash quickly selling a property is slower and costlier than selling liquid securities.
Liquidity and effort: equities are liquid and require little active work beyond initial selection or a delegated fund manager. Holiday lets require hands on management or the cost of professional management, frequent bookkeeping and guest handling, and a readiness to solve practical problems at odd hours. If you value free time and a passive portfolio you will likely prefer equities.
Tax and cost differences: owning property attracts transaction taxes and running costs that reduce net return. For equities you still pay trading costs and taxes but you can use tax wrappers like ISAs and pensions to shield returns which is powerful in the UK. Property offers less tax efficient wrappers and the recent removal of special holiday let tax treatments makes that comparison less favourable for small owners than it once was.
A blunt rule for many UK buyers is: if your model for a holiday let shows a stable net cash on cash return after all costs and taxes comfortably above what you expect from diversified equity investments and you accept the operational work and regulatory risk then the property can be the better economic choice. If the property return is marginal or if it relies on optimistic occupancy or on tax perks that may change, equities are the safer, more liquid option.
We asked the expert Tobias Robinson at Investing.co.uk what they thought about this question and they replied.
The stock market is almost always a better investment for individual investors. It requires less work, it’s easier to supervise, and it’s more liquid, making it easier to realize your gains. A holiday let can be a good investment but it requires a lot of work and it’s not suitable for most investors. We would only consider a holiday let if we lived close to the area and has extensive local knowledge.
Who should consider holiday lets and who should not
Consider holiday lets if you have the following: meaningful cash to put down so you can access lower cost finance, willingness to do or pay for hands on management, appetite for a concentrated local asset and the time horizon to hold through regulatory or market cycles. Avoid holiday lets if you need the capital to be liquid fast, if you cannot cover mortgage payments in a poor season, or if you lack capacity to manage bookings and maintenance. For many people a diversified equity allocation in an ISA or a pension remains the simpler long term wealth building path.
Practical steps to evaluate any specific property
First, collect comparable listing data for the same street or town for the prior twelve months not just the summer months. Second, compute conservative occupancy at least 20 to 40 percent below top performing listings and stress test lower occupancy. Third, model all costs including management fees, platform commissions, cleaning, utilities, insurance and routine maintenance and an allowance for major renewals. Fourth, run mortgage stress tests under higher rates and lower income. Fifth, confirm legal permissibility with the local authority and check licensing and dumping grounds for planned rule changes. Sixth, build an exit plan that includes a stress sale scenario.
Final practical point on diversification
If you like property as an asset class but worry about single market risk consider pooled alternatives: buy into a professionally managed holiday let business or a listed property investment fund which gives exposure to the sector without single asset concentration. That preserves exposure to property like economics but gives you the liquidity somewhat closer to equities and reduces the operational burden.