When it comes to the world of property investment, deciding if you want to purchase a second property and what to do with it is an opportunity that can leave you feeling as though you are at a crossroads. Whether you wish to turn your second residence into a holiday home, rental property, future retirement property or even a seasonal holiday let are just some of the decisions you may find yourself facing.
In this blog post, we will be looking at second home ownership, whether you should rent it out, and if buying a second home is the right financial decision for you.
Looking for a quick answer? Check out our drop-down menu below!
- How many people own second homes in the UK?
- Buying a second home to rent pros & cons
- Can I convert a second home to a rental property?
- Is buying a second home a good investment?
- Purchasing a second home to rent is it worth it?
- Is buying a second home without selling the first a bad idea?
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How many people own second homes in the UK?
A property trend that appears to have been on the rise in recent years is an increase in second homes. In 2021-2022, there were 809,000 second homes owned by households in England. This means that there has been a 13% rise in second home ownership from 2010-11, or just under 100,000 second homes.
What were the motivations?
The Office for National Statistic (ONS) 2018/2019 survey on second home ownership stated that the reasons why homeowners were purchasing second properties were as follows:
- 39% – Were holiday homes or weekend getaways.
- 35% – Were bought as long-term investments.
- 16% – Second-owned properties were previously main residences.
- 9% – Were bought as future retirement homes.
- 5% – Were bought for working away from main residences.
- 3% – Were bought for someone who was living away from home.
- 1% – Were bought as the result of a marital breakup.
- 11% – Other
Buying a second home to rent pros & cons
When it comes to the decision of owning a second home to rent out, there are both pros and cons involved. It is not a decision that you should run into headfirst, you should instead carefully weigh up both the benefits and drawbacks that an investment decision such as this can bring. Over the past few years, the decision to buy a second house has been one that has risen in popularity, with buyers being spurred on by market conditions and the option to earn an extra income.
Below, we are going to take a closer look at the advantages and disadvantages that renting out a second property can bring…
Benefits of owning a second home
As with any investment opportunity, there are advantages to owning a second property, such as:
- You allow your property more time to appreciate in value.
- In the unfortunate circumstances that your circumstances change, the property will still be yours.
- You may be able to pay less council tax on the property if it is not your main residence.
- Income from rent can be used to provide a steady stream of income or can be used to cover mortgage payments.
Disadvantages of buying a second property
However, there are also disadvantages to owning a second home, such as:
- You will be required to take out a buy to let mortgage, which will often need a 25% deposit.
- You will face a Stamp Duty Surcharge of 3% when buying a second property.
- Becoming a landlord can be a time-consuming task.
- You will need to factor in a budget for ongoing maintenance costs. As a rule of thumb, you should put aside at least 1% of the property’s value each year for repairs.
The cost behind owning a second property:
When you own a second home UK, there are extra costs that you will need to factor in, as well as the added responsibility of maintaining the property. Before you start the process of second home ownership, you should consider the following costs:
- Potential 3% stamp duty surcharge may apply.
- Minimum deposit of 5%, increasing to 25% for buy-to-let properties.
- Buy-to-let properties may necessitate a specialized mortgage.
- Stringent affordability criteria will be applied.
- Second mortgages typically come with higher mortgage interest rates.
- Be prepared for ongoing property maintenance costs.
- Capital gains tax may be applicable upon property sale.
Can I convert a second home to a rental property?
Yes, you can typically convert a second home into a rental property. However, there are several considerations and steps you may need to take to ensure a smooth transition. Here are key factors to keep in mind when looking into purchasing a second home to rent:
- Review Local Regulations:The first step that you will need to look into is the local zoning laws and the rules of the local homeowners’ association rules to ensure you are able to rent in your area.
- Adjust Your Insurance:If you are planning to rent out your home, then you should notify your home insurance provider as soon as possible about the change in use. This is because a standard homeowners insurance policy may not cover rental activities adequately. You may need to switch to a landlord or rental property insurance policy to ensure proper coverage.
- Mortgage Considerations: You should next reach out to your mortgage lender and inform the change in use. If you obtained a mortgage for a second home, there might be restrictions on converting it into a rental property. This is because residential mortgages often do not allow you to let out your main home. Some lenders may require you to switch to a Buy-to-Let mortgage.
- Tax Implications: You should also start to get to grips with the tax implications involved with renting out property. As a rule of thumb, your rental income can be taxed, but you may be eligible for certain deductions related to property management expenses.
- Prepare the Property: Ensuring the property is suitable to rent should be the next step on your checklist. This includes making any necessary repairs, conducting a safety inspection, and ensuring that the property complies with local housing codes.
- Screen Tenants: Next you will need to screen any potential tenants in order to find reliable and responsible tenants. This may involve conducting background checks, checking references, and verifying income.
- Property Management: Next you will need to decide whether you wish to be in charge of managing your property yourself, or whether you will hire a mortgage management company. Managing a rental property involves responsibilities such as handling tenant concerns, property maintenance, and ensuring compliance with local rental regulations.
- Set the Right Rent:You should next look into the local rent rates in your area in order to set an appropriate rent for your property. Charging too much may deter potential tenants, while charging too little may not cover your expenses.
- Understand Landlord-Tenant Laws:You will also need to get to grips with the landlord-tenant laws in your area. By understanding the legal rights and responsibilities of both parties involved you stand the best chance for a successful landlord-tenant relationship.
- Document Agreements: Finally, you should clearly outline the rental terms in a lease agreement. You should be sure to include details such as rent amount, lease duration, responsibilities of both parties, and any specific rules or policies.
Should I rent out my property?
You may be wondering if your current property is suited for renting. Below we take a closer look at some of the circumstances were renting out your home may be the way forward:
Market conditions
The property market plays a big role in whether or not you should rent out your property. Good conditions means that you will more than likely fare well and earn a steady income, whilst a poor market could result in rental voids. According to data from HomeLet in 2021, rent reached its highest level ever in the UK. Furthermore, Savills predicted that property prices may continue to rise util 2025.
By renting out a property for even a few years, you will be able to wait until your second home reaches peak price before you sell.
Tenants
Being able to attract good tenants is another aspect that you will need to complete in order to rent out your property. If you live near a city full of young professionals or a student hub, then you should have no short supply of candidates.
Rentability
Exactly how desirable your property is will also play a role in whether or not it is a good idea to rent it out.
It is also worth noting that:
- There has been a 70% increase in demand for rental properties with a balcony in the last year.
- Properties with off street parking have seen an increase of 48%.
- If your property has a garden then you are in luck, as these have seen a rise in demand of 39%.
- Pet friendly rental properties have seen the biggest rise in demand with a 120% grow.
Time
If you are hoping to hold onto your property until the time is right to sell, then renting could be the soloution that you are after. It will allow you to generate income to keep things ticking over, will keep it occupied whilst you wait to seek, or it can give you time to decide whether you wish to move to a new location.
Financially viable
If you are relying on the money that you will receive for the sale of your current property in order to purchase your next home, then renting is not the appropriate avenue for you. But if you are struggling to sell your home, then renting can give you generate you extra income to cover a mortgage.
Is buying a second home a good investment?
If you look back over the history of the price of property in the UK, it shows an incredibly promising trend for those looking for an investment. According to data from the HM Land Registry, during 2005-2022, the average price of property has risen from £150,000 to over £250,000.
Whilst during this time period there was the financial crash of 2007-2009, prices continued to soar after originally dipping between January 2008 to February 2009. Because of this, it is clear that purchasing a second home to rent can be a good long-term investment.
What do I need in order to purchase a second home?
When purchasing a second home, you will need to take a look at your budget. You may be able to afford to purchase right out with cash, or you may need to take out a second mortgage.
If you are still paying off the mortgage for your current home, you will still be able to take out another mortgage to buy a second home.
If you wish to take out a second mortgage, then you will need:
- A decent income – in order to secure your second mortgage, you will be required to prove to your lender that that you can afford the repayments for both your mortgage on your current property as well as the new mortgage.
- Rental income information – If you plan to use this second property as a rental home, you will need to provide your mortgage lender with details of any rental income you may receive.
- A healthy deposit – You will usually be required to put down 25% of the value of the property.
- A good credit score – Mortgage lenders will also wish to see that you are a reliable borrower before they allow you to take out a second mortgage.
Purchasing a second home to rent is it worth it?
Determining whether buying a second house to rent is worth it depends on various factors, and it’s essential to carefully evaluate both the potential benefits and challenges. By renting out your home, you have access to a steady rental stream, however, it is also worth noting that you will undertake a lot of responsibility as a landlord.
Whether or not it is a good idea to rent out your second house is a decision that only you can make. It is critical to weigh up the pros and cons as listed above and evaluate how they may potentially affect your life, income, and savings.
Is buying a second home without selling the first a bad idea?
It is possible to buy a second home before selling your current, however it is not a selling decision that should be made by everyone, and it is one to be taken with caution.
The majority of people will not have enough cash lying around to purchase two properties and will be unable to fund a transaction of this size.
As with any decision like this, there are both pros and cons to purchasing a second home before selling the original…
Pros
- You will become chain free, so some of the stress of selling be relieved for you.
- You will be more flexible as you will not have to tie in your completion date with your buyer and seller.
Cons
- You will be taking a risk, especially if your finances are stretched.
- If you are unable to sell the property in a certain timescale you may have to sell through an auction or cash buyer.
This covers everything you need to know about buying a second home. If you have any questions, queries, or insight into the matter, please feel free to get in touch!
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Alexandra is a junior content producer who enjoys writing articles and finding out more about the property market. Read more about Alexandra here.
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