WARNING: Only read this article if you are willing to take the truth, no matter how shocking it may be.
The truth is - Student HMO’s are a thing of the past!
Why is this the case, you may be wondering? There are several reasons as to why HMO property investments are an outdated sector. This article will cover both HMO and Purpose-Built Student Accommodation as well as the key factors of both in terms of investment profitability.
What Is Student HMO?
As of the time this article was written, Houses in Multiple Occupation (HMO) are defined as houses or flats comprising of 3 or more storeys that let to 3 or more tenants who form 2 or more households. There are shared kitchens, bathrooms and toilets. A HMO can also be a normal house converted into bedsits or other similar accommodation to house more than 2 households under the same roof.
Students can rent out a room in an HMO whilst studying if they don’t want to or are unable to live on the university campus. Students choose to live in HMO’s because they may be cheaper or the student may just want to live with friends in a shared property. There are HMO’s for regular tenants and HMO’s exclusively for students. We will be only be covering Student HMO’s in this article.
What Is Purpose-Built Student Property?
A purpose-built property is a development consisting of 1 or more blocks of flats. As the name suggests, these properties are built for a sole purpose – in any case when people say purpose-built accommodation, they usually mean student accommodation. A Purpose-Built Student Accommodation (PBSA) houses students and may consist of 1 bedroom apartments or ‘pods’ which can be studio rooms, or en-suites. These apartments usually have their own kitchens and bathroom facilities, however some may have shared bathrooms.
Over the years, students have raised their standards with accommodation and there has been a shift in the market. Today’s students look for higher specification accommodation with facilities and great location. The small box rooms that students were once forced to live in are being replaced by luxury en-suite rooms with a self-contained kitchen, study room and bedroom. The luxury PBSA has especially been popular with foreign students, who are more likely to spend more for accommodation during their course.
The Difficulty Of HMO Licensing
Every year, there seems to be another added restriction to HMO landlords. Not only do you have to have a HMO license to landlord these types of properties, but there are also other legal requirements depending on the specific type of HMO. These regulations can include a lengthy application process that needs to be approved before you can earn money from an HMO.
It has been announced that in October 2018, there will be a change to HMO licenses. A new rule covered by “The Licensing of Houses in Multiple Occupation (Prescribed Description) (England) Order 2018” was agreed by parliament in February and will come into effect across England. The new rule changes the definition of a HMO under the Housing Act 2004. The new definition will exclude the number of storeys from the criteria. This broadens the definition of a HMO, which will force landlords (with properties that meet the new criteria of an HMO) to obtain an HMO license even if they previously didn’t need one.
A license for HMO’s is mandatory and failure to produce a license means the owner can face unlimited penalty fines. Bare in mind that there are additional or selective licensing regimes for certain criteria of HMO’s that local authorities may introduce. It is the responsibility of the owner to make sure all the documentation is complete and valid.
The Ease Of A Professionally Managed PBSA
Unlike a traditional HMO, there are fewer regulations for PBSA. This type of property has risen in popularity amongst investors in the last 5 years and the market very much relies on the supply and demand. If the supply of PBSA can keep up with the standards of today’s market, then there will be a higher demand.
PBSA is very much ‘set-and-forget’ because you will only need to invest money into an apartment to receive an income. There aren’t any ongoing costs or management responsibilities. You also don’t require a license to own an apartment in a PBSA.
The returns aren’t unpredictable at all. The developer of a PBSA will offer investors a set NET return each year for a number of years. This return will go in your pocket, without any expenses taken for repairs and maintenance. This is more attractive to landlords who have struggled to make a substantial profit from a HMO.
If you are a HMO landlord who is considering investing in a PBSA and ditching your HMO because it is difficult to manage, then you aren’t alone. It is important to note that with any investment as large as property, there will be risks involved whatever you do. The difference is, with a fully-managed PBSA, you and the developer are tied to a contract that states specific returns. This makes investors feel safer, because they know that they will always receive the promised rental return until their term is over.
Some landlords are confident in traditional models of investment and use their expertise to make sure their property runs smoothly and gives them the return they want. Not every investor is going to want to get rid of their portfolio just because there are emerging properties and investment models on the market.
Either way, there are many ways to get a return on a property investment and it is not limited to one sector or property type. Each person will have their preference, so consider all points before you lean towards on or the other.