HMO's v Serviced Accomodation

What should be my strategy for high yields

We recently did a newsletter discussing "The Rise of SA's" serviced accommodation which gives the customer more room to work, cook, relax and sleep and on average you can expect to enjoy 30% more space than an equivalent standard of hotel.

We discussed how this is no surprise why we are seeing many investors making strides to ascertain such commercial buildings (either with or without planning permission) to help cater for this market.

Latest SA Project Earl Howe

Our latest commercial to SA project has now been revalued at £1.5 million once it is proven to have a history of monthly income being generated, as forecasted to the valuers that it will produce in excess of £9,000 per month.

Our client originally looked into turning the pub into 15 bedrooms running as a large house of multiple occupants (otherwise known as a HMO). He then opted to go for 6 flats and this is what the planning permission was submitted for.

We look at what the difference in the two strategies are and when you should opt for which:

A common request from investors is to make a massive cash flow from property investing!

When analysing the best yielding strategy then HMO and Serviced Accommodation should form as part of the conversation above residential rentals. However larger monthly returns will mean larger capital outlays when compared to single lets.

I personally think they are both great property investing strategies that give great monthly rewards but as anything have their advantages and disadvantages. I will give you my opinion on which works best for me and which I see more of on a day to day basis.

HMO's

Hmo's are a property which individual rooms are rented out typically for a minimum term of 6 months on an Assured Short Hold Tenancy otherwise known as a (AST). The ideal demographics for these type of properties include Young professionals, working people and students. They may only be there short term then decide to move on. Tenants tend to be use to this way of life where they may share a bathroom, shower, hand basin or toilet between 2 or 3. And potentially share a kitchen and living room between 5 - 8 people. It's also a great way to meet friends if just relocated to a new city. It is also more cost effective living in a HMO, than your own studio apartment.

I have worked on HMO refurbishments in the past and a good HMO should deliver over £1,000 profit per month after all expenses. As typically the landlord will include bills with the tenants rent paid.

Serviced Accommodation Tenancy

Serviced Accommodation is very different to HMO's. In that Serviced Accommodation are short term let properties, it maybe a house like a HMO or a one / two bedroom apartment.

The demographics slightly change in that it maybe someone away for a short term working contract during the week, a city break and prefer not to stay in a hotel as prefer more space.

If you are traveling with friends, it can be far more cost effective for two couples to share a serviced accommodation property. As the period is short term it means a premium can be charged for the stay per night.

My Opinion?

With an SA's it will unlikely be occupied all year round so it will be good to assume between 70 - 75% occupancy rate will exist. It is also more like a hands on business where cleaners are needed, bed linen, soap etc. It is practically running as a hotel. Which therefore means a lot more work to make your money! Also how will you have the infrastructure in place or will you work with a specialised agency which in turn means they need a share of the profit. With that said I would slightly favour more towards a HMO, however I would still recommend a diverse portfolio and having a Serviced Accommodation within that would still be favourable. In the larger cities such as Nottingham & Birmingham I have also had many conversations with investors that you will still pay a premium for HMO's whether they are up and running or need refurbishing but already have a license. It's just the nature of this market that everyone knows the returns are great. Even a property with potential to be a hMO without a license can still demand a premium price compared to others of the same nature in another area. There is therefore a slight element of risk if a license will be approved once the property has been obtained. However like most refurbishments should the pieces fall into the place then the return will be great.

Here is an example below which has a license as none licensed properties to renovate into a hMO in article 4 areas and most East Midlands cities is very difficult. You would need to be willing to be told the property will not be a HMO and prepared to rent as single lets. Alternatively you will need to pay a premium for a HMO license which means day one capital growth is unlikely but yes you will achieve a yield between 8 - 12% typically. In this scenario we obtained a HMO way below market value. We have also asked for a further two rooms to be created as their is sufficient space for this to happen. As we have worked with the council many times the dealing officer understands the standard we will complete the property to and also the regulations we will clearly abide to.

Here is an example of the numbers with a refurbishment HMO model.

- Purchase Price - £141,000

- Refurbishment & Furniture - £45,000

- Stamp Duty & Other Fees - £6,500

- New Valuation £270k - £300k

- Profit - £77,500

- Scope of works - Create 2 additional bedrooms and an additional bathroom. Creating a 6 bed HMO.

- Monthly Income - £112.50 Per Week x6 Lettable Rooms = £2,700 PCM

- £32,400 PA Income

- Take Home Profit after all expenses and bills - £2,350 Monthly

HMO's = Reliable Income

HMO gives you the steady and reliable income. Once the property is full, you know that your tenants are there for at least six months or longer and a set amount is guaranteed. With SA your unsure who is booking when and if they decide to turn up. In addition SA being more prone to scams such as people staying in your SA and then claim that they didn't stay. Then they decide to do a charge back on their credit card. This is a major problem related to Serviced Accommodation.

Where do we fit as Investment Management Specialist?

As specialist in creating great returns we can provided bespoke consultancy around if a HMO or Serviced accommodation opportunity is worth pursuing which is already up and running. We can also take care of a bespoke end to end service of obtaining a property / plot and look to change the use with planning permission and carry out a full scale renovation in order for you to create both day one equity / profit and a great monthly income / yield. Similar to what we did in the case of Earl Howe change of use in 2018 - 2019.

We have more HMO sites without licenses that are in the process of being renovated and approved by the council. These have great ROI in terms of the initial profit made surpassing any ready made alternative, as the property can be remortgaged allowing the investor to withdraw funds and do the same again.