PBSA and HMOs are the most profitable BTL investments

PBSA and HMOs are the most profitable BTL investments

The UK's buy-to-let property market has permanently transformed the country's economic landscape. Following the debut of the first buy-to-let mortgage products on the market in September 24, 1996, the Association of Residential Landlords (ARLA) developed a product especially tailored for landlords in conjunction with a small group of lenders. Due to steady increases in house prices, a niche market that was previously relatively small has grown substantially over time. As of today, this much-needed investment has become a central focus for most UK home buyers, as Octane Capital estimates that the UK's buy-to-let market has increased by £239 billion since 2017, a 16.8% increase.

Considering the number of types, sizes, and potential tenants of rental properties, investors are presented with a variety of financial concepts to swallow. Generally, a landlord will need to determine fairly quickly whether what they are primarily seeking is rental income or capital growth - and whether they can achieve both simultaneously. BTL student housing investments are widely regarded as one of the most lucrative asset classes in the UK. Along with the country's reputation as home to some of the world's most prestigious universities, the demand for student housing has increased by 5% from 306,200 in 2021 to 320,420 in 2022, according to UCAS - despite growing investor concerns that students will migrate and study from their family homes due to the pandemic. Moreover, we are in the midst of an unprecedented rate increase. With more investors looking for ways to protect their profits, HMOs are gaining popularity because they are able to generate among the highest rental yields in the market. We will discuss further why new and experienced investors have found great success in owning student property and HMO’s.

Benefits of Investing in PBSA (Purpose-Built Student Accommodation)

Cheaper than those of other property classes - By purchasing properties in cheaper areas, such as inner-city areas, you can avoid paying as much. Its multi-storey properties require less ground space, enabling them to be placed closer to universities, making the result a great benefit for both students and investors. It increases the convenience of the student while giving the investor a greater opportunity to achieve high rental yields and capital appreciation.

Off-plan purchase options - As an extension of the point above, developers often sell their student properties off-plan - a more cost-effective route than other methods of property acquisition. As an investor, this is a great deal since it offers a greater return at a lower cost than the property's true value.

High-demand service - These types of accommodations are designed to offer a high quality living experience, including the provision of WiFi, kitchen facilities, building management, communal working spaces, and gymnasiums. All of these features are highly attractive to students living both domestically and abroad and are willing to pay a premium price for them. In exchange, the investor can enjoy a hassle-free experience with building management, security and maintenance coverage.

Guaranteed rental and timely payment - Nowadays, a number of reputable developers include a rental guarantee for newly constructed properties, thus allowing investors to rent them out on a retail basis while minimizing the risk of investment. While it may appear that relying on students to pay their rent on time is a pipe dream, there is more hope than you think. Students often receive government assistance as well as financial support from families. This enhances the likelihood that students pay on time and in full.

HMOs - What are they?

A House in Multiple Occupation (HMO) refers to a property rented to more than three individuals. Commonly, this is referred to as house-sharing and the agreement is that tenants are not within the same family, but they do share a bathroom or kitchen. It differs from PBSA, or purpose-built student accommodation, which is typically constructed in the form of multiple flats that are used for housing only university students.

Benefits of Investing in an HMO (House In Multiple Occupation)

High-yielding results - The yield on a property represents the annual rental income as a percentage of its total value. This is relevant as HMOs produce rental returns which are significantly greater than those produced by traditional buy-to-let properties. According to a report by Foundation Home Loans, landlords with HMOs continue to achieve the highest return on investment with an average of 6.8% more than properties such as multi-unit blocks, individual flats, or terraced and semi-detached houses.

Reduced loss of rental voids - When one tenant leaves, landlords can manage void periods more easily since other tenants pay their share in full, reducing the impact on their cash flow. For example, if one rented property to 6 tenants, the loss of one tenant would only be around 16.7% of rental income (assuming that each tenant pays the same rent.)

In high demand - Since the pandemic, there has been an upsurge in the demand for quality HMOs, in a similar manner to PBSA's. The highest demand for HMOs can be found in cities such as Birmingham, Manchester, Edinburgh and Bristol, according to data reporting. If the property is advertised and the rooms are presented appealingly, landlords can expect a high degree of success in capitalizing on this need for high-quality demand for shared housing.

Mortgage lending friendly - If landowners are able to secure the most flexible and cost-effective mortgage, they will have the ability to purchase more properties than they are able to with their own cash, resulting in more profit and capital gains.

Investing in student housing and HMO BTL - What to consider

Historically, student housing and HMOs outperform traditional properties in the UK market, elevating their positions to those of the highest asset classes. When you seek to invest in PBSA’s, you must consider several things, such as location - because students need to be able to reach their universities easily and if the university is multi-campus, the investment potential is stronger. If it is a little more distant, make sure it has good access to public transportation. The amenities that come with the accommodations should also be taken into account. As stated above, this is the perfect attraction for students who wish to live a high-quality lifestyle but will only pay a premium for appropriate amenities. Larger rooms, ensuite bathrooms, quality furniture and even garden spaces allow landlords to charge higher rental rates. A tenancy agreement, whether shared or single, is also crucial to bear in mind as you want to know what will work best for you. For friends renting a house together, a shared tenancy agreement can prove useful. It can make things somewhat easier for the landlord since the responsibility falls on the tenants if one of them leaves midway through the academic year. On the other hand, if renting individual rooms to students who may not know one another, a single tenancy is preferable.

Like many common HMO agreements, you are required to obtain a license from your local council to enter into this agreement. Those who own or manage HMOs must determine whether they are subject to selective or additional licensing regulations, as failure to comply could result in penalties. Furthermore, properties that were licensed after 1 October 2018 or anyone renewing a license since then must meet minimum size bedroom requirements. More information can be found here.

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Novyy is a Community Investing Platform that enables individuals to invest in UK Buy-To-Let, Leading Real Estate Private Equity Funds, and Premium Homes across Europe with as little as £10,000. Novyy users enjoy seamless digital investing like never before, in opportunities that were earlier unavailable to most individuals. This piece should not be construed as tax advice. Please refer to your tax advisor before making any decisions on owning properties through Limited Companies.