A guide to student HMO investments

The sector can be hard to break into

A guide to student HMO investments

The following article was provided by Paresh Raja (pictured), CEO, Market Financial Solutions.

As a new academic year edges ever closer, many landlords will be weighing up the pros and cons of a student buy-to-let (BTL) investments. Indeed, they could be a useful alternative to help diversify one’s portfolio, with plenty of benefits to be had.

For instance, the market for student housing was worth £4 billion in 2021. With this figure expected to increase by 22.7% in 2022, there are opportunities for landlords to profit from this sector.

That said, the sector can be a difficult one to break into, due to the fact that it is largely made up of ‘houses in multiple occupation’. Also known as HMOs, these buildings have a unique set of requirements for landlords – including regulations and tenant expectations – that may dissuade some landlords and investors from getting involved.

So, with demand for HMOs increasing among almost half of landlords (48%), it is important a would-be investor first familiarises themselves with the subtleties of the student housing market if they are to be successful.

Student properties: a good investment?

Firstly, despite generally incurring more maintenance and operating costs than a single-let home, student HMOs frequently generate high renter yields. Landlords who can successfully invest in the student HMO market might anticipate yields ranging between 9% and 15% by renting out each room of a large house separately.

Consistency of demand plays a major role in these yields. Often, in the single-let market, properties can go vacant for months on end, eating into a landlord’s profits. However, in the student HMO market, if the property is located in a popular area, demand will remain high.

Similarly, rental cycles are highly predictable and protect landlords against vacancy issues even further. Due to the nature of the academic timetable, landlords often offer students 12-month contracts without a break clause, and then set about finding tenants way ahead of the end of the current tenancy each year.

Lastly, contrary to popular belief about the ability of students to fulfil their rental payments, rental income can actually be very reliable in the student HMO sector. For instance, by requiring all tenants to agree to a central rental agreement, each tenant will be equally liable to the rent. As such, the rent must be covered even if one of the tenants can’t afford to. Equally, landlords could increase the security of their rental payments by asking their tenants to provide a guarantor to pay their rent should they default.

What kind of properties do students look for?

Many final year, postgraduate and international students often look for extra privacy when seeking out accommodation; they tend to opt for smaller properties and purpose-built flats, which tend to be closer to the university than shared houses and frequently include amenities like gyms or coffee shops on-site.

HMOs, meanwhile, are typically the accommodation of choice for undergraduate students, allowing them to live with their friends or course mates. These properties tend to be older buildings that require landlords to renovate them to comply with restrictions and tenant demands. However, depending on the number of bedrooms, they can generate much higher yields than purpose-built flats, so can easily fulfil any initial investment.

It is also important to note that the majority of students spend their first year in university halls. Today, for the most part, university halls are finished to a modern, high standard, as well as being situated close to useful amenities like shops or bars. Therefore, landlords must offer a similar standard of finish and location if they are to attract tenants.

Gone are the days of university students living in stereotypically scruffy ‘digs’. Driven in part by regulations (more below), and in part by the changing lifestyles and preferences of young people, landlords must ensure they are catering to today’s demands.

Legal obligations and requirements

This is the area that often puts off investors in the student HMO space.

Landlords in England and Wales are required to obtain a license for HMOs with five or more occupants involved – this would be called a ‘large HMO’ license. However, in other regions of the country, local councils may have their own unique licensing regulations or may demand that planning permission is acquired if a property is being converted into an HMO. Thus, in order to avoid the £30,000 penalty for failing to comply with local regulations, landlords must check the specific policies in their property’s area.

Landlords also need to be aware of various fire safety rules that are unique to HMOs. A fire door must be present in every room, and all furniture and decorations must be made of "fire safe" materials. Additionally, a risk assessment must be done to guarantee that every tenant has a direct exit from the building in the event of a fire, and there ought to be a fire extinguisher on every level. The property should also have a central fire alarm system that is wired to the mains and smoke alarms in each room.

Additionally, there are regulations concerning the minimum room size in HMO buildings. For example, single occupancy rooms require a floor area of 6.51 square metres, while double occupancy rooms require a minimum floor area of 10.22 square metres.

Financing a student HMO investment

To ensure success in the student HMO market, landlords must find a lender that can provide them with the best financial solution for their particular requirements. For instance, if they have bought a property at an auction, it is critical that they can acquire finance within the 28-day payment period. Moreover, if they are converting a property into an HMO, their lender must be able to adapt the terms and conditions of the loan to reflect the future value of the property. Ultimately, for any loan in the student HMO landscape, landlords should find a lender that can ensure speed and flexibility.

High street banks frequently shy away from such investment opportunities due to their stringent lending standards. Therefore, landlords may find specialist loans and bridging finance to be more helpful – specialist lenders like Market Financial Solutions can approve loans in as little as three days, while still carefully reviewing each application and taking future income or property value into account. This flexibility allows the landlord to get the right product for their needs.

Paresh Raja is the founder and CEO of Market Financial Solutions (MFS) – a London-based bridging loan provider. Prior to establishing MFS in 2006, Paresh worked as a senior professional consultant in one of the top five management consultancy firms, and also set up an independent investment group.