Paresh Raja, chief executive of Market Financial Solutions
The new academic year is just around the corner, so many landlords will be thinking about entering the student housing sector to diversify their portfolios – and for good reason.
In 2021, for example, the student accommodation market was valued at £4 billion. In 2022 alone, the market is set to grow by 22.7%; clearly, there is a wealth of opportunities in this space for landlords to capitalise on.
However, the sector can be more difficult to navigate than the regular, single-let market. Largely made up of ‘houses in multiple occupation’ (HMOs), these properties have their own collection of landlord criteria, regulations and tenant demands, which often deter landlords and investors.
As such, with half of landlords (48%) reporting increasing demand for HMOs, it’s important that landlords can invest in student accommodation with confidence and ease. Thus, they must be aware of some of the nuances involved in the student HMO market.
Are student properties a good investment?
To start with, student HMOs can often accrue higher rental yields than a single-let property, despite higher maintenance and running costs. By letting properties out on a room-by-room basis, landlords who enter the HMO market could expect yields between 9% and 15% if run successfully.
Contributing to these yields is the consistency of demand, provided that the property is in a popular student area, limiting the risk of vacant periods that can eat into profits for landlords.
Alongside consistent demand, rental cycles are more predictable than most single-lease properties due to the nature of the academic timetable. Therefore, 12-month contracts without a break clause that start at the end of June are often the norm, giving landlords plenty of time to line up new tenants for the next rental cycle.
Finally, despite many of the stereotypes regarding students’ ability to pay their rent, student lets can actually be a very reliable source of rental income. By getting all HMO tenants to sign a central rental agreement or provide guarantors, landlords can ensure that rent will be paid in full because all parties will be equally liable.
What kind of accommodation do students look for?
For many final year, postgraduate and international students, purpose-built flats in slightly smaller properties provide them with the extra privacy that they often look for. Generally, these properties tend to be closer to the city centre than shared houses and often include on-site facilities like gyms or grocery stores. Thus, these properties are often finished to a higher standard and require less input from the landlord because there is normally a property management company that maintains and furnishes such properties.
For undergraduate students, HMOs – or ‘shared houses’, as they would call them – are incredibly popular because it gives them the opportunity to live with their friendship group or course mates. As older properties with larger rooms and flexible layouts, landlords will often need to spend a little more time and money to get them up to scratch but can accrue high rental yields depending on the number of rooms in the house.
Having spent their first year in modern, well-finished university halls that are close by to amenities like shops or pubs, landlords must ensure that their property is also finished to a high standard and is situated in a good location to attract student tenants.
What legal obligations and requirements must student HMO landlords adhere to?
This is where things get a little more interesting.
In England and Wales, landlords must acquire a license for HMOs with five or more tenants living within it (i.e., a ‘large HMO’ license). That said, in some areas of the country, local councils will have their own specific licensing laws or will require the landlord to seek planning permission in order to start letting a property as an HMO. So, it’s important that landlords explore the policy in their local area to avoid the £30,000 fine that can be charged for landlords without a license.
There are also some HMO-specific fire safety laws that landlords must be aware of. Furniture and furnishings need to be made of ‘fire safe’ materials, and all rooms must have a fire door. Moreover, a risk assessment should be carried out to ensure all tenants have a clear escape route out of the building in the event of a fire, and there should be a fire extinguisher on each floor. Finally, there must be a smoke alarm in every room of the property and a central fire alarm system that’s connected to the mains.
Moreover, there are regulations regarding the minimum room size in HMO properties. For instance, single-occupancy rooms need a floor space of 6.51 square metres, whilst double-occupancy rooms must be at least 10.22 square metres.
How to finance a student HMO investment
For landlords to be successful in the student housing sector, its vital that they can find a lender who can deliver them the best financial solution for their specific needs. Whether they have bought a property at auction and need to pay the agreed fee within the 28-day deadline, or are converting a property into an HMO, it is vital that their lender can act quickly and flexibly.
Due to their strict lending criteria, high street banks often shy away from such investment opportunities, which is when specialist loans and bridging finance can be of assistance. By considering applications on a case-by-case basis, specialist lenders can factor in the future income or value of a would-be HMO property and deliver loans in as little as three days.
To briefly conclude, it is clear that there is plenty of money to be made in the student HMO market, but landlords must be aware of the tenant demands and additional regulations that can impact their property’s profitability.