Whenever you imagine someone standing on two boats at the same time, you say the person is headed for a disaster. This is not the case in the property market. Riding two boats will help you surf instead of causing you to sink. Let’s discuss the pros and cons of owning a second home in the UK.
A 2018/2019 revealed that 3% of UK householders also own a second property. Depending on the situation, owning a second home can be a wise investment.
What Do We Mean by a Second Home?
A second house is technically any property that a homeowner purchases to live in, in addition to their primary residence. When the owner lives in their primary residence most of the time, buying a second home frequently refers to buying a vacation home or a home to live in when travelling for work.
Occasionally, homeowners will purchase a second property for the residence of other family members.
The term “second home” is also used to refer to a residence purchased for investment motives, such as buying to let. But an accurate term for that would still be owning an ‘investment property’ instead of owning a second home. You should be aware of the pros and cons of owning a second home in the UK.
The Pros and Cons of Owning a Second Home in the UK
Now that you understand what a second home is, it’s time to move on to the pros and cons of owning a second home in the UK.
Appreciation of Assets
Your second home’s worth can rise over time, and you’ll be able to make money when you sell it. Consequently, investing in a second home in a location with potential for high demand is a smart option. And value growth extends beyond the property itself. Your entire neighbourhood is probably going to benefit as well. This is because as the population grows, so does the need for homes.
The rate of the property’s appreciation is also influenced by several other factors. For instance, increasing salaries allow people to purchase homes that are more expensive, while improvements to the local economy or aesthetic appeal may cause values to rise.
Additionally, if the market is tight and there are not many houses for sale, homebuyers may be more likely to pay more for one already available.
Benefits in Terms of Tax
In the UK, having a second property can be quite advantageous tax-wise. It can firstly assist you in lowering your taxable income. Depreciation and interest expenses may be deductible if you use the property as your principal residence. A portion of the income from the second residence may also be exempt from your taxable income.
Another advantage is that any capital gains from the sale of your second house can be deducted from any earnings from the sale of your primary residence. This can save you a lot of money, especially if you’ve owned your primary residence for a while. Speaking with a professional is crucial because there are numerous rules you must go by.
Since you cannot live in both of your properties at once, it is wise to rent out the second one and earn additional income from it. Leasing out your second house to tenants who will remain for longer stretches of time is one strategy to generate passive income from your second home.
As an alternative, you can provide short-term rentals via an Airbnb management firm like Houst, which is the biggest in the world. This choice is best suited for houses that are situated in tourist-heavy areas.
Finally, you may hold events at your house and charge visitors a fee. Whatever method you use, you must accurately price your rental and use effective marketing to increase earnings. Hence, there are more pros and cons of owning a second home in the UK.
Bringing diversity to investments
A fantastic approach to diversify your investments is to own a second house. By diversifying your risk across two properties, you are not putting all your eggs in one basket.
Knowing that you still have a second house to fall back on if one real estate market fails can help you sleep better at night. People will always take holidays, making vacation rentals one of the greatest property types to invest in as a hedge against economic downturns.
A second home might be the perfect place to escape for a weekend getaway or a longer vacation, particularly if it’s close by so you don’t have to go far for your trip.
A significant benefit is being able to find secondary lodging near to where you live. This makes it simple to visit for a weekend trip or a longer vacation without having to worry about staying. Additionally, it’s a terrific method to stay in touch with neighbouring friends or relatives. On top of it all, you are free to utilise your property however and whenever you like.
Initial costs for purchase
In the UK, you often pay more than the original purchase price when purchasing a second house. What causes this? You must first pay a higher rate of stamp duty. Then there are the additional expenses for law and money, which can mount up rapidly. The right guidance in this case, however, can be helpful because many homebuyers choose to buy their properties under a company structure to enjoy specific reliefs in this kind of circumstance and much more freedom.
It’s not for everyone because owning a second house may be pricey. That is why many people choose to rent rather than buy. So, if you’re considering purchasing a second house in the UK, plan on spending more than the initial asking price.
If you live in the country and work in London, taking the train and bus often throughout the week and on the weekends would be necessary. When you consider how exhausting travelling is, you might decide it is not worthwhile to own a second house.
Frequent travel can be expensive, which is another factor that makes it uncomfortable for those who own two houses. The expense of travelling between the two homes must be considered in addition to the cost of purchasing and maintaining the two homes. People who are trying to manage two residences may find this to be a big burden.
You oversee carrying out all necessary upkeep and repairs when you own a second home. You will be responsible for covering the cost of repairs if a window or a roof leaks. If you don’t live close to the property, this can be a major nuisance. You’ll have to spend money hiring a maintenance provider to handle the situation.
Furthermore, there’s always a chance that something will go wrong while you’re away and you’ll have to leave to fix it on your own.
High Resale Taxes
You should be aware of the substantial resale taxes you might later incur before deciding to sell your second house. You must pay capital gains tax on your profits when you sell a property that isn’t your primary residence. The entire profit, not only the portion that exceeds the original purchase price, is subject to capital gains taxes. Therefore, even if you purchase a home for £200,000 and sell it for £300,000, you will still be required to pay taxes on the full £100,000 profit.
This tax may differ from a flat 28% and may rise over time. So, if you plan to sell your second house within a few years of purchasing it, you’ll probably have to give the government a portion of the proceeds.
The Difficulty of Finding Tenants
Finding tenants can be difficult, particularly if you are new to the real estate industry. You’ll face a lot of difficulty unless you’re willing to let your property sit empty for months on end. Even then, there is no assurance that you will locate a renter who is qualified and affordable.
You must advertise your rentals on booking websites like Booking.com, RightMove, or Airbnb to attract the best visitors or tenants. To draw potential guests, you’ll also need to stage your rentals. Therefore, it is important to understand the pros and cons of owning a second home in the UK.
All in all, a second home can be your anchor in the storms of the economy and your weekend cushion after hectic weeks, if you are able to manage its purchase, taxation, and maintenance the right way.
Here’s a quick glimpse:
Appreciation of Assets
Initial costs for purchase
Benefits in terms of Tax
Bringing Diversity to Investments
High Resale Taxes
Difficulty in finding tenants
How Many Residences am I Allowed to Own Simultaneously in the UK?
In the UK, there is no restriction on the number of properties you can own at once. You can own as many rental houses as your budget will allow, either with your own money, a mortgage, or with some other form of finance, according to CIA Landlords.
What Expenses are Associated with Owning a Second Home?
The obligation to maintain the house and grounds in excellent condition, which has management and financial ramifications, is one repercussion of owning a second home here in the UK. Before we discuss the pros and cons of owning a second home in the UK, take the following factors into account.
- You could have to pay an additional 3% in stamp duty.
- Minimum deposit is 5%; if buying to rent, it is 25%.
- If it is a buy-to-let, a specific mortgage applies.
- Strict criterion for affordability
- Second mortgage interest rates are typically higher.
- You’ll have to pay for property upkeep.
- When you sell, you can be required to pay capital gains tax.
Why are People Buying Second Homes?
According to the ONS 2018/2019 survey, 772,000 more homeowners have gained second homes since the previous second home survey in 2008-2009. Owning a second residence was justified by:
- 39% of them were vacation homes or weekend retreats.
- They purchased 35 percent as long-term investments.
- 16% of second-owned homes were formerly primary residences.
- 9% – Purchased as potential retirement residences.
- 5% of people bought to work away from their primary residences.
- 3% of purchases were for on behalf of someone staying away from home.
- 1% – purchases happened because of a divorce.
- 11% – Other reasons
What finances do people usually employ to buy a second home?
People mostly buy a second home through personal resources, borrowing against a mortgage, or getting a personal loan.
What key things should I consider before buying a second home?
Before buying a second home, you should take into consideration the proportion of the deposit, interest rates, the location, taxes, fees, and other related costs.
All in all, the pros of owning a second home in the UK can be: a steady appreciation of your assets, some benefits in terms of tax savings, passive income generation by renting out the property, a diversity in your investments to cushion you at times of economic volatility and the undeniable utility of a second property.
On the other hand, the cons you must be vigilant about are the initial costs for purchase that you incur, the factor of having to travel to and from the property which can be nuisance for many, a constant responsibility to upkeep the property, facing high resale taxes and trouble finding tenants.