Getting to grips with the property investment business can be a challenge, especially with what’s happening in the economy today. There are differing views on rising utility bills, the cost-of-living crisis in the UK and what that means for the private rented sector (PRS).
As a property investor, you may be wondering what the future holds for HMOs. So you have come to the right place.
- Recession: A looming catastrophe or a golden opportunity?
- What are tenants going to look for in an HMO property in 2023?
- How can you make your properties future-proof?
Recession: A looming catastrophe or a golden opportunity?
In its latest Monetary Policy Report, the Bank of England announced the rise of its interest rate to 3%, the highest increase since 1989, according to the BBC.
With this measure, the Bank of England aims to tackle the current soaring inflation of 10% and high energy costs. And the institution has also warned of an impending recession spanning all of 2023 and the first half of 2024. But what does this mean?
A recession is defined as a period of economic contraction or stagnation, meaning that a nation is becoming less prosperous. During this period of low economic activity, businesses may fail and some investments often lose value.
Should property investors be concerned?
How does this scenario affect rental properties?
Research predicts that the rising mortgage interest rates and utility bills, as well as tighter regulation, are likely to drive buy-to-let investors and lower-yielding landlords out of the market. According to the estate agency Hamptons, these landlords are selling their properties and, compared to 2017, there are now 260,000 fewer privately rented homes in the UK.
But these uncertain times could also be a golden opportunity for HMO investors and landlords. The following problems caused by rising utility bills and interest rates could be good news if you play your cards right:
- Buy-to-let landlords who remain in the game have had to raise rents substantially, making it harder for tenants to afford to rent an entire property.
- There are fewer rental properties and high demand. Thus, tenants are now competing fiercely for accommodation.
- Prospective first-time homeowners are less likely to buy now and more likely to continue paying rent for longer.
- Rising interest rates are encouraging people to save money.
HMOs have a competitive advantage in property investment, as they remain the most affordable option, and their popularity is set to grow exponentially. Just by checking Spareroom, Rightmove or Zoopla, you’ll notice that more people are looking for house shares or flatshares than ever before and fewer rooms are available.
This recession is a good moment to buy property because private landlords with more than 20 years in business are retiring. Simon Zutchi, the founder of Property Investors Network, argues that this situation will give you a chance, as an investor, to negotiate with many motivated sellers and get a good price on a deal.
And tenants will be happier to pay more for a room provided that it meets their standards and needs.
What are tenants going to look for in an HMO property in 2023?
To ensure continuous cash flow and fewer void periods, your product must stand out from the competition. Depending on the location and the type of property, you may find different tenants. Your property has to address the pain points of your tenants. Therefore, you have to know what they want.
In our opinion, the type of tenants that you should focus on in 2023 are students and young professionals.
They indeed require more hands-on management. But the private rental sector is home to a large number of students, including undergrads and postgrads. And international students are increasingly choosing to study at one of the UK’s many world-class colleges and universities.
According to 2020/2021 statistics from the Higher Education Statistics Agency, more than 600,000 international students are studying in the UK, a milestone reached 10 years ahead of schedule. Recent UK government incentives to recruit and retain talented international students will continue to drive this trend.
Hence, HMOs designed to cater to the student’s needs can expect a regular supply of tenants, minimal rental voids and guaranteed cash flow.
You may be wondering what students are looking for in an HMO. So here are some considerations:
In their first year of studies, undergraduate students find accommodation in university halls of residence. Once they make friends, they usually start looking for house shares to rent as a group in the second year.
One of the advantages of students renting together is that a single contract can be drawn up for all students, which guarantees payment of the full rent.
These students and their parents are looking for accommodation of a high standard, as it will be the first time they live on their own. Therefore, for a student HMO to be successful, it should be near the university and be of high quality.
Apart from a good location, here are some aspects that undergraduates will be looking for in 2023:
- Stylish design – Aesthetics are everything to the younger generation and your interior design should stand out in this regard.
- Comfortable common spaces – Students want to connect with peers and are eager to socialise. As such, they will value the presence of communal areas to mingle with others.
Postgraduate students are a little bit older and may have lived in HMOs in the past. They may be working and studying part-time. Postgraduate students may also be looking for full-time job offers after their studies. So, they may choose to rent in cities where there are job opportunities for graduates.
PhD students may spend less time at home, but when they do, they may want to socialise with their flatmates in a fancy kitchen or a living room. These tenants will want more space, double beds and comfortable furniture, as they may spend more time doing research and writing their dissertations and manuscripts for publication at home.
Moreover, they may be more likely to prioritise their mental health. Thus, they will appreciate the presence of a garden, outdoor amenities, and a location that’s near cultural hotspots.
These HMO tenants are in their 20s and early 30s. They’re university educated, have lived in house shares before and like this accommodation.
Young professionals are niche tenants who are starting a well-paid career, are ambitious and have set financial goals. Thus, they want good-quality, affordable accommodation and see HMOs as an opportunity to meet and connect with like-minded people. They are also happy to pay more for a co-living experience.
In addition, young professionals are looking for HMOs with bills included and have the budget to get spacious accommodation that saves them the hassle of paying utilities in times of inflation. They’ll prefer to rent in well-connected areas with good transport links.
But, depending on their occupation, they may look for more specific conditions. It’s therefore essential that you profile your potential tenant so that your property is tailored to their needs.
And here are some examples. Imagine that Andrew and Alice have booked a viewing for one of your properties. Would they be a good fit? Will they find what they are looking for?
What a junior doctor may want
Andrew is a junior doctor in speciality training who earns approximately £49,000 per year. He spends most of his time at the hospital and often works night shifts. He is often under a lot of pressure at work and doesn’t have much spare time. How could your property appeal to Andrew?
A room designed as a personal retreat and haven will guarantee Andrew the sleep he deserves. If, in addition, your property has a mesmerising view for meditation and stress relief and communal areas for meaningful discussions with other hard-working professionals, Andrew will have found his home. And he won’t think twice about signing the tenancy agreement. He may be willing to offer more for the room if he realises he has some competition.
What a software engineer may want
Alice, on the other hand, is a software engineer who works in a company with a hybrid working model and earns £52,000 a year. She often has to design and test software applications and spends some days working from home. Her lifestyle allows her to focus on her well-being and she is passionate about fitness.
In this case, Alice will appreciate an excellent broadband connection. She may not like to work and have business meetings in her room. Therefore, she’ll love an HMO with co-working spaces and private work pods. An ample kitchen for her to prepare her keto meals and amazing outdoor space could seal the deal. Alice will be in awe of your property.
What do all of these HMO tenants have in common? It’s their need for high standards coupled with a sense of community. And in 2023, your rental properties must offer that and be prepared to weather any future economic storms.
How can you make your properties future-proof?
Competition is fierce and to stay on top, you have to lead in design, which will also allow you to create a unique portfolio and brand.
From Bedsits to HMOs to Co-living
Initially, HMO landlords tended to focus on providing tenants with a room with the minimum requirements. For a long time, cramped, dirty and untidy bedsits gave HMOs a bad rap.
Although nowadays there are nicer HMOs on the market, tenants are becoming more and more demanding when it comes to the standards of their accommodation. In addition to spectacular design, they are looking for that je ne sais quoi that gives them a better quality of life. And that’s where co-living experiences have come to fill the gap in the market.
Co-living is innovative, design-led accommodation with a vibrant atmosphere for high-end tenants with a zest for life. These tenants want a sense of community and a support network, especially young professionals.
Co-living HMOs are highly desirable because they offer facilities full of natural light and colour that foster human connections. Given recent increases in energy prices and climate change warnings, modern HMOs must take advantage of resources that won’t run out anytime soon.
Tackling the energy crisis
What’s measurable is manageable. And there are quick fixes to counter rising utility bills, such as investing in smart metres and thermostats, PIR sensors, water-saving showerheads, and appliances with eco-setting options.
But sustainability and energy efficiency are key to future-proofing your HMO property. The use of sunlight, natural ventilation, and investing in insulation, among other long-term solutions, will contribute to the comfort of your tenants and save you future financial headaches.
Even with rising interest rates and the threat of recession, there is a bright future for HMO investors and landlords who can adapt to changing circumstances.
Creating a profile of your ideal tenants and catering to their needs will ensure that you secure high-quality tenants who will guarantee a steady cash flow. It’s essential to understand what they need as well as their pain points.
Young professionals in particular are niche tenants willing to pay more for accommodation that suits and enhances their lifestyle. An innovative, design-led co-living HMO is the product that will differentiate your service from the competition.
Our architects and interior designers can ensure the success of your HMO conversions and help you create a distinctive look and feel across your property portfolio with sustainability and energy efficiency in mind.
At HMO-Architects, we’ve consulted on the design and conversion of more than 960 projects across the UK and helped convert over 100 HMOs in the last year alone. We’d love to assist you too. So please don’t hesitate to contact us if you have any questions and get a 100% free no obligation quote today.