Text to Speech Voices
Hi Richard,
I've just been listening to your latest podcast with interest - and decided to take you up on your offer to ask you a question!
I am interested to know your thoughts on the strategies for HMO and serviced accomodation. I am keen to add some higher cash flowing properties to my portfolio - but my business partner thinks that both these strategies have been over done and the markets are saturated.
What do you think? Will you be pursuing these strategies yourself?
With thanks!
Justine
My response...
Hi Justine
I will give you a top line response to get you going…
Any property strategy, just as with any other business strategy for that matter, is based around solid fundamentals in the market. At the most basic level I would always start by looking at these two factors:
Supply & demand
Regulation and barriers to entry
After that, there is a whole host of other things to consider but that’s where I start when I consider any market sector or niche.
Let’s look at HMOs first…
They break down into different sub-types: student, LHA / benefits, working (blue & white collar) and boutique (high end or corporate) or variations on this theme.
Student – this is now a space dominated by the unis themselves (directly or via external management arrangements) & larger specialist providers with deeper pockets. Personally, I think aside from some selected towns, that the days for the average investor looking to start a 6-bed student hmo or similar are numbered. Competition is stiff and standards are high. So this one is a no from me.
LHA / benefits – this model is extremely depending on Gov policy and in particular on benefit policy. Recently we have seen the benefit bill being squeezed from all angles and so this reduces the affordability of tenants to pay for their accommodation. There are certain niches that can still work but in the most part the income potential for hmos in this space is being contracted and that’s not a good basis to build a scalable business around. I know that some people make it work with a ‘no frills approach’ but for me it’s too risky to base my business around changing Gov policy so another no.
Working – again it varies but this is an area of growth in my opinion…subject to local area statistics. Singles, especially young singles are being priced out of the rental market and the house buying market and so there has been an increased demand for more affordable housing as a result. However, I am not the only one to spot this and so many an hmo has sprung up to service this market too. So, some areas have become saturated with basic house conversions as a result. I see demand holding up and even growing but at the upper end of this sector, for example with additional facilities added in like en suite bathrooms, super-fast broadband, subscription TV services, cleaning and such like. I am operating in this space and standards are definitely rising. I will come back to regulation later and this is also relevant but based on fundamentals alone, I still think there is some room in the market for this type of hmo.
Boutique – following on from what I said about working tenant hmos, it stands to reason that this is also a growing sector. Think dedicated corporate lets for local company workers, or more of a social / community feel in say London with some of the emerging shared social and co-working spaces added into super-sized hmos and you can probably see the appeal. BUT it is extremely specialist and localised, so not a broad approach. London may see more of these and possibly also some of the major cities like Manchester, Birmingham & say Edinburgh. It’s an area I am interested in but not active in right now as it requires a considerable up-front investment…but you will see this can also be a good thing as a barrier to entry in a sec.
Barriers to entry – right at this minute are quite binary really. Below 6-bed hmos and less than 3 floors require no form of licensing or planning approval and this means pretty much anyone can do it! Tale a standard 3 or 4-bed house, convert the lounge and / or dining room into a bedroom and call it an hmo. It’s pretty easy and so over crowded as a result. However, when you consider that with an hmo the general rule is that you make your money with the 6th bedroom (it varies), you can imagine that small hmos are not typically hugely profitable either. No doubt someone will point to a 5 bed in Burnley that makes a mint…but still. 6-beds or properties over 3 floors need a license currently and 7-beds or more also require planning permission. Add to this the likelihood of obtaining an investment valuation with things like en suite bathrooms and / or kitchenettes (which also has its own issues) and there is another potential barrier to entry. I think the days of the smaller standard hmo are under threat for their long-term profitability and the growth will be with the larger more regulated properties going forward. There is a consultation at present that is aimed at making all 5-bed hmos (regardless of how many floors) licensed, which will at least leave licensed hmos with something of a barrier to entry (along with Article 4 areas, Selective Licensing and such like) and so this is actually a good sign to keep a limit on supply…and so will constrain competition and preserving profitability. So, think larger hmos in the right locations is my advice.
As for serviced accommodation…it’s not a new model but it does have a new name and has been more widely promoted as a result of the sharing economy sites like Airbnb and other online agencies such as Booking .com, TripAdvisor, Holiday Rentals and such like. These days, every man and his dog seems to be on this bandwagon…just look at the course providers to see that. Again, there are certain niche areas…holiday lettings, city breaks, commercial / business guests, worker stopovers and attraction / event stays all being variations on the quasi-hotel or serviced apartment model. Therefore, selecting the right target market and location is absolutely vital to be successful, along with great marketing and developing excellent reviews. It is a job or a business more so than most other rental investment strategies, so you either pay for someone to manage the property or you do this work yourself…either way it eats into the costs. I allow around 30%+ of gross rent for management, cleaning & laundry in my holiday rentals and it can go higher depending on how you market and advertise. I have a few properties that I would class as serviced accommodation and have also had the odd failed experiment too! What has worked best for me is to stick to high demand areas, especially as holiday lets, which also offer better tax treatment too.
Regulation & barriers to entry…this is an interesting one! As this is a fairly new or not clearly defined offering, the regulation around SA is a bit all over the place to be honest. However, things are tightening up…just look at London with its 90-maximun rental cap for short-term lets without planning permission as one such example. Ask different people if planning permission or change of use consent is required and you get different opinions, ask if lenders will lend and ask if insurers will cover if they know it’s intended usage and again you will get different answers. The point being…this will change and more regulation is inevitable. For those that skirt around the rules now this will destroy their model overnight…hence why a number of apartments used as serviced accommodation have been put for sale in London after Airbnb decided to enforce the 90-day rule recently. There are tourist licenses in some places as well, plus many flats are subject to landlord / management company approval and this has been problematic for some as well.
The long and short with SA for me is to carefully pick your location and target offering and then work like crazy to develop the reputation…making sure the place is future-proofed against likely regulation changes. Then it can work in a sustainable way, if not then it could be a bit of a flash in the pan.
In conclusion, neither hmo or sa is dead and buried BUT to have a long-term sustainable business model, there are lots of considerations and specific niche areas that would set some apart from others.
I know that I got carried away in responding to you and you probably didn’t expect that…but I decided after starting to use this as the basis of some content I plan to share either in my YPN column or on the podcast…so I really didn’t mind 😊
Hope it helps!
Feel free to let me know yours and your business partner’s thoughts on what I have to say…along with what you think you may do yourselves now.
Best
Richard