The Best Rental Investment for Landlords is…

Hello again,

This blog will be looking at the rapidly growing professional HMO market, why you should get involved and how to do it.

In short that 4 bed house you have in Hove which is getting £1,750 PCM could easily be achieving somewhere around £3,000 PCM. The 2 bed house you have in Southwick could be extended up and out to create a 5 bed and go from £1,250 to £3,250 PCM. You get the picture, read below to look at the detail:

The market research bit

Demand for rental property has remained high since the Credit Crunch in 2009 with would be property owners unable to buy, now in the 35-45 year old bracket. Millennials are struggling to pay rent and to save for a deposit as well as passing mortgage affordability checks, also locking them out of the housing market. As a result rents have been increasing 3-5% year on year which is further compounding these Tenant’s position. Many now do not see home ownership as a realistic target.

At the same time due to legislative and tax pressures from the Government many highly geared Landlords are exiting the market reducing supply, which will push rents up further and reduce the competition for remaining Landlords.

There is a gap in the market to provide rental property which is centrally located for the 35-45 year old Tenant and with proximity to transport for the Millennial Tenant. This Multi-let (house share) product combines the developing social trend of co-living, the demand for a higher standard of living generally as well as high-end rental property for the more mature Tenant. The gap is being filled by canny Landlords and Build to Rent corporates so you need to get your skates on!

Having worked in this industry since 1999 I have a good understanding of what Landlords and Tenants want as well as how the market has changed and likely will change. The current climate is turbulent with reducing rental property supply and strong demand from Tenants. Many under 35 year old (Millennials) and 35-45 year old Tenants are renting as they cannot afford to buy in this area (click to view housing calculator – scroll to bottom) or have a sufficient deposit. The rental market is overcrowded with families and professional Tenants affected alike.

On-going Brexit negotiations are having a negative affect on confidence resulting in a growing list of unsold stock. Any Brexit strategy has been predicted by the Bank of England to reduce housing values by up to 30%, although I feel that is excessive and 5% – 10% is more realistic. Salaries are likely to be affected negatively by Brexit meaning buying a home will be even further out of reach for many of the approx. 12 million UK Tenants. This does also mean it could be a great time to buy property, if you have the means. Think back to 2008/9 after the Credit Crunch.

At the same time the Government has been attacking UK Landlords such as removing tax relief on mortgage interest in annual increments since APR-17 and losing the wear and tear allowance. This is affecting an estimated 20% of Landlords who have mortgages, out of the 2.5 million UK Landlords. Due to higher Stamp Duty Land Tax (SDLT) overseas property investment is also dropping off, reducing supply/competition.

The Government are also attacking letting agents with the Tenant Fees Bill being implemented on 1-JUN. This has pushed agents fees to Landlords to make up the 20-40% loss of revenue. The combination is resulting in some Landlords choosing to increase rents and some exiting the market, reducing supply/competition.

Despite all the pressures being placed upon Landlords, Tenant demand is predicted to continue to rise to 24% of the population (16 million) by 2021, a recent RICS report predicts a strong year for lettings in 2019 which has been accurate so far.

Build to Rent developments such as The Collective or Livly offering a ‘Co-living’ or ‘Shared Living’ approach to renting is an idea which came across from the US and has become popular in London in recent years. This new format caters for the desire to have areas to socialise rather than exist, a straight forward single monthly cost, low deposit and flexibility with most Tenancies offered at 6 months.  While Brighton does not have much available space for such large buildings due to its proximity to the sea and the Downs (national park) there is a strong demand for a professional sharer product at all prices ranges in central locations from both local & commuter professionals.

With two universities, a mini-silicone valley and employers such as Amex and Legal and General encouraging graduates to remain in the city, 7 hospitals and 2 universities attracting employees and those moving from London for a different lifestyle there is a strong on-going demand for rental property.

Tell me about HMOs

House of Multiple Occupation (HMO) licenses are required to let to more than 2 single Tenants and are difficult to obtain East of Brighton Station due to over-application of student HMOs. However it is much more straight forward Westward, which also happens to be the most desirable location for local and London commuter professionals. Permitted Development of property under 7 bedrooms also means that extending up and out to increase a property size is generally straight forward within certain parameters. A word of warning though, Brighton & Hove County Council (BHCC) are progressing talks on a city-wide requirement for planning permission when applying for an HMO, so the sooner the better.

With high rental demand and straight forward planning & licensing (for now) in the desirable locations there is an opportunity to purchase existing large flats or houses, convert 2/3 bedroom houses to 5/6 bedrooms or convert commercial units to residential to cater for this growing market. Not to mention the long-term capital gain to be made on property:

South East 2nd strongest increase in UK since 2004 – scroll to point 6. House Price Index by region

UK house price inflation average of 6% since 1984

There are 1,128 large HMOs (3 beds or more) in Brighton & Hove. Using the data provided by BHCC they do not state which are for students and which are for professional multi-let sharers. We are just focusing on professional HMOs here of course, the student market is already saturated.

In Central Brighton & Hove house share room prices will range from £450 – £950 PCM inc bills targeting those Tenants searching in similar price brackets for studios, 1 beds, 2 beds & traditional long term 3+ bed house shares.

House-share market

Professional HMO properties will work in most locations, you’d be surprised. Looking at the BHCC map of HMOs you can clearly see the heavy use of HMOs in the East side of the city, which mainly caters for the student market. The central area West of the middle red line is the prime location for professional house shares.

Target Tenant market

What would you prefer – a pokey studio in town centre for £650 PCM + bills or a well apportioned double bedroom in a smart 4 bed house-share in the same location for £700 inc bills? There are a lot of Tenants looking for the former because there is not enough of the latter.

Or how about being locked into a 12 month Tenancy with 3 other house-mates in a house that is not designed for sharing. The hassle involved in swapping one Tenant is considerable and expensive.

Working culture is much more flexible and as a result people move around a lot more so in turn flexible contracts are a selling point.
Finally the modern consumer buys ‘the experience’ not ‘the product’. How does a Tenant buy an experience renting a property?

Professional HMO house-shares solve these modern demands.

What about the money bit?

Don’t worry, we are looking at that also and I think you will like it.

Ideally the more bedrooms the better, lets take that 4 bed house in Hove from earlier as an example. For argument’s sake the long term Tenancy will be using Bishop Sullivan’s all-inclusive Fully Managed service and the HMO will be using our all-inclusive ProShare service (essentially just one monthly fee including all referencing & admin from start to finish). OK! Enough of the sales talk! Anyway…

Long term family let:

£1,750 PCM

– 14.4% Fully Managed fee

= £1,498 return PCM

HMO let with ProShare:

Bed 1 £750 PCM (en-suite)

Bed 2 £750 (en-suite)

Bed 3 £700

Bed 4 £650

Total £2,850 PCM

> Expenditure per month (estimated)

Bi-weekly clean of communal areas – £100

Gas/elec – £80

Water – £50

C-Tax – £157

Wifi – £20

TV license – £13

Total £420 PCM

> Return

£2,850 rent

– 14.4% ProShare fee

= £2,440

– £420 utilities

= £2,020 return PCM

= 35% increase in return compared with long term rental, and bearing in mind the room rates are at the lower end of what is achievable.

The more bedrooms the better the return of course and as an example a 6 bed Hove house with similar rents would achieve approx £3,175 after deductions & a 48% increase in return.

The mortgage

Bishop Sullivan works closely with experienced mortgage broker Emma Palmer because she specialises in BTL mortgages, just like the fantastic product below designed for HMO Landlords. If you need mortgage advice to the get the most out of your equity feel free to contact her on +44 (0)1273 933743 or Emma.Palmer@sjpp.co.uk . Just be sure to quote BISHSULL19 and you won’t be charged a brokers fee – great!

What next?

If you have got this far and are interested in learning more then feel free to contact us. If you have a residential or commercial property which you think may fit the bill or if you have fluid equity or equity in a property which could be released with the right mortgage then we can give you the best advice and connect you with the best people to make that professional HMO a reality.

By contacting us we can also discuss in more detail:

What makes a suitable property 

Is it the right size, can it be changed, is the demand strong enough in the area?

How to investigate planning and obtain the HMO license

Before setting up his own business our City Planner contact used to run the BHCC Planning Dept for 5 years. He advised while working there it was uncommon to see professional HMO planning requests, which are looked upon favourably by BHCC. They are planning to change the regs for HMOs across the city soon so time is of the essence. This is just the tip of his knowledge, we can connect you.

Utilise Bishop Sullivan’s connections 

You have found the right property but who can do the drawings for the extension and then carry out the work? Luckily we work closely with an architect, builder, discount flooring supplier & Landlord insurer who can take you from empty shell to gleaming HMO using cost effective product & processes. We can connect you.

What house-share Tenants look for

Tick the right boxes with the property finish and layout and those initial 6 month Tenancies will be renewed, not ended. The trick is to keep the voids down, we are experts at that.

Marketing and managing the Tenants, Tenancies and property

With very different demands to the traditional long term rental market from where to advertise through to how to choose Tenants Bishop Sullivan can add value to your professional HMO property.

Conclusion

You made it to the end, well done! I hope this blog has been an eye opener, the market is there for the taking and is growing rapidly. If you are looking for the next big thing in lettings then here it is, we’d love to help you make it a reality.

If you need a letting agent to manage your professional HMO property we are the only local agent with a bespoke service, called ProShare.

 

If you need any assistance letting your property in Brighton, Hove, Kemptown and surrounding areas or if you just have some general queries please feel free to contact us on +44 (0)1273 646426 or lettings@bishopsullivan.co.uk

Best Regards,

julian-sig

Julian Bishop

Leave a Reply