Professional vs Student HMO
What's your favourite type of HMO tenant, Student or Professional?
Join me in this weeks episode where I run through six key performance indicators to help you decide which option is right for you….
One of the most frequently asked questions I get; Professional vs Student HMOs, what would I recommend. I am going to run through six key performance indicators; rental income, expenditure, length of tenancy, occupancy rates, management, and analyse the risk of each method during a recession.
I need to point out that I have personally diversified into a combination of student HMOs and professional and I am going to explain why I have chosen to do this at the end of the episode along with the type of tenant I feel has the edge.
Listen to this weeks episode below or if you don't have time to listen right now, scroll down to see my analysis of the top three key performance indicators from this weeks episode.
In this episode, you will learn why
What is my preferred HMO tenant
Analysis of six key performance indicators
Why I have decided to diversify
Which tenant carries the most risk during a recession
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Find below my analysis of the top three key performance indicators
Rental Income
Historically professional tenants would have delivered a higher rental income; they have full-time jobs and disposable income. However, from my experience, this is no longer the case due to the inflated prices in student halls of residence. In my area (The Midlands) Universities are charging up to £150 per week, which is the equivalent of around £650 per month. Freshers are spending large amounts of money on their first year of accommodation. Meaning that although they do want to reduce costs in their second year, they still have large budgets. In my portfolio, analysing rental income, they are neck and neck, although some professional tenants can favour a more premium offering.
Length of Tenancy
When considering the length of tenancy, students have the edge, but this has a lot to do with timing. The reason for this is if you can catch students at the right time, they may stay for not only that year but also their third and possibly their fourth year!
Professionals can come with more uncertainty; there are generally on short-term or temporary contracts. Often they are looking to try the area before they buy so they will usually stay with you for only three to six months.
Occupancy Rates
Analysing occupancy rates, I believe students are the most consistent; you are generally working with a group that will occupy the entire house, which means no voids for the length of the tenancy. Comparing this to professionals, they usually come individually, and they are only renting one room. Your room occupancy will be staggered, and you will need to backfill the rooms.
One important point, however, to consider is the professional tenants are looking for rooms all year round. The window to attract student tenants is small and seasonal if you focus solely on students and miss the academic year you could be left with an empty property.
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Podcast Transcript↓
[00:00:56] Hey, Simon here. Welcome to another episode of the podcast where we talk all things property, Creative Cashflow and of course, how to be financially independent today, not in 25 years. And if you missed it, guys, I held a special rent-to-rent lockdown masterclass last night live in my Facebook group. It was absolutely epic. So many amazing questions and contributions.
[00:01:26] And it was just great to go on a deep dive of how I've managed to do 16000 pounds worth of rent-to-rent income in October alone. This is a great time, huge opportunity. So if you missed it, I'll post a link in the description of this podcast. Please go watch it back. And any questions you've got, you can post them in the feed and I'll respond personally.
[00:01:52] So today's podcast episode is a big one. It is professional versus student HMOs. It's a question I always get asked. Which one's the best, which one's got the edge, which one's more headaches? So I thought I would just speak on this. It doesn't matter whether you're doing rent-to-HMO or if you're just purchasing HMO. It's essentially the same and I'm going to talk about it.
[00:02:21] So I've decided to measure them both through six key performance indicators: rent, expenditure, the length of tenancy you might expect, occupancy rates, management and then recession-proof. I.e., which one I think's best in the current climate. Now, before I go any further, I should say that I personally have diversified into a combination of student HMOs and professionals. And I'm going to explain at the end of the podcast which one I think's got the edge and why I do what I do in my business. So stick around for that.
[00:03:02] So first things first. Rental income, who delivers the highest rent? Traditionally speaking, I would have probably of thought the professionals, you know, they've got full time jobs, they're no longer sort of, you know, having to scrimp and save and live that sort of cliche baked beans, student lifestyle.
[00:03:24] But that's not really the case anymore. The reason being, you've got all these new student accommodations, halls of residence, and they're charging as much as a hundred and fifty pound per person per week, which is the equivalent of around six hundred and fifty pounds per month in my area. The Midlands this is, guys. If you're down south, it's probably more, if you're up north, it might be a little less. But the point being, freshers are spending a lot of money on their first year's accommodation. So what that means is second year they want to come down in cost to a degree, but their budgets are still quite large. And that's a really, really interesting one, so I think in terms of rental income, they're about neck and neck. Some professionals will want to, you know, spend for quality and they'll want to go high-end and have a budget of six hundred, five fifty, six fifty once again in my area. But I'm seeing students in my portfolio paying the same rates.
[00:04:32] Number two, expenses. So this is when students start to have the edge for me because students are exempt from council tax, which means in an HMO generally you would cover all the bills, utilities, internet, council tax, water, etc.
[00:04:51] So if you get 100 or 200 pounds discount because you're not having to pay the student council tax, then that is a nice extra boost in cashflow for you. So in terms of expenditure, I think on the face of it, students would be a little bit better in terms of the maintenance and the wear and tear on the property. It's tough, you know, normally what I found in my student properties is because they often take the properties as groups, you know, they do like a party here and there. And, you know, they can be a little bit more wear and tear on the property. But then again, I've got professional house-shares where they're a little bit like that as well. So no definitive answer here, but, black and white expenses, students are less because you don't have to do council tax.
[00:05:40] Length of tenancy. I'd have to say overall, students have got the edge. Why? Because once again, they often come from freshers. So they're going into the second year. And if you catch the right group at the right time, they would not only stay for their second year, but they'll also stay and extend for their third or maybe even fourth year. So you're looking at at least a year guaranteed from the start of term, which is September. Sometimes they like to move in over the summer until the end of the following June, but potentially you can add even longer onto that.
[00:06:17] So you don't have to worry about the house. You know, you don't have to worry about them. You know they're going to stay and sign up, whereas professionals, there's a lot of uncertainty. Sometimes they're on short term or temporary contracts. Sometimes they want to try before they buy. So they're only going to stay with you for three months and then they want to get an apartment or, you know, they'll stay with you six months and then they want to try and buy somewhere. So in terms of length of tenancy, I think students have also got the edge, if I'm honest. Number four, occupancy rates, occupancy rates, I think students may also have the edge simply because, once again, they often take the whole house. So if you've got a five bedroom property and a group of five take the whole house, then you're laughing, you're sorted. You've got no voids. You don't have to bit and bob. Whereas professionals, usually they come individually and they're renting out one room. So if you've got five room house, you need to let all them rooms out individually. And that will normally be staggered on the way in. But also on the way out, you'll have different professional tenants moving on at different times and you'll have to backfill them.
[00:07:36] Now, an interesting point to consider here is that professionals are looking for properties all year round. Whereas your students, generally speaking, if you miss that academic year, you will be in limbo. So I know a lot of landlords that miss the student academic year and then they're stuck. So this is something, you know, this is a downside. This is something to be aware of with student HMOs. If you miss the academic year or if you don't make the cut, you could be left with an empty property for the entire year.
[00:08:13] And if that property doesn't also work for the professional market, you're going to be stuck. So I always consider these things every single time I'm taking on a property.
[00:08:25] Onto management now. Which one tends to be harder? And the only way I can really do this is look at my sort of easiest professional property to manage versus my easiest student property to manage, and I've got to be honest, I've got some professional houseshares that maybe I've heard from them twice in 12 months. Most of my student properties I'm hearing from more often. So I would probably say professional houseshares are a tiny bit easier to manage in terms of the ongoing issues, but then there's more paperwork, there's more to do and there's more to manage because you've got tenants coming in and out. Once you've once you've moved in a group of students, there will be teething problems for four to six weeks once you get everything right. But then they'll be settled. You won't have to worry about it until the next academic year.
[00:09:29] Which brings me onto an interesting point this week. What happens, guys, at the end of the year, students start to look for their residence for the following academic year so for the last three, four weeks, student applications have been a...I won't say an all time high, but they've been very high for people looking for their accommodation for July. So it's cool because we've actually locked in about 18 tenants for next July that we'll do the application for now, we've taken reservation, holding rents. And then what we'll also do is we'll send out the tenancy so that it's all signed and sorted. So you have got a bit of a lead time where you can get organizing. You know, that you've locked in the cash flow.
[00:10:20] Last but not least, recession proof, which one is best for now, so I know a lot of people have struggled over lockdown, but at the very beginning I said overcommunicate with landlords, overcommunicate with your tenants, and just make sure that if anyone's struggling or if you need a bit of support as a rent to renter from your landlord, whatever it is, your overcommunicatign, and you'll get in on it early. And we did that across the board. And to be honest with you, our occupancy rates have been really high and we haven't really had any rent defaults. We've had people that we've given payment plans. But generally speaking, most people have managed to pay their rent on the professional side. On the student side, because they've got student loans and they're backed by the government, but then also their parents also we've had no real defaults. So in terms of that, it's tough to call. But I do think around the corner, what might end up happening is as more and more people lose their jobs and become made redundant or have uncertainty, I think the professional market will take a bit of a hit.And you need to make sure that you're focusing on the right end of that market and delivering a really high quality accommodation.
[00:11:44] Students. I think there's always going to be a huge demand. Parents are going to want their kids to get great education and the government are going to want to back that. So I think student accommodation moving forward is going to be pretty strong. And interestingly, guys, even the students that have decided to spend lockdown at home or, you know, during covid when, you know, they was in two minds of whether the students were going to come back, a lot of them needed to get out of their home because, guys, even though we're in a lockdown and you might not be able to go out and most of the studies are from home, they still want to hold on to as much of their student youth life as possible. And that isn't just living at home the whole time. For most students, I would say, you know, 95 percent are enjoying being in their student accommodation with their mates.
[00:12:42] So overall, which one has got the edge? I think..I'm just looking at that. So rents was neck and neck. Expenses, students had the edge. Length of tenancies, students had the edge. Occupancy rate, students had the edge. Management, maybe professionals. And recession-proof, it was almost as if the students had the slight edge there. So therefore, guys, I do think that overall student HMOs have kind of they've got it going on right now. In my business, I've diversified and I do both. The reason I do both is because we don't know what's around the corner. And let's say studies do go fully online. I want to make sure that I've got my professional tenants. But to the same degree, if my professionals are getting furloughed and struggling, I want to make sure that I've got the student market to fall back on because then I can also help whichever tenant needs the help. And that's the thing I think a lot of people miss. Yeah, you want to specialize in one strategy to master it, but if you spend too long doing that, then you'll miss the opportunity to diversify and you might not make it. That's the hard reality of it. In my business, due to circumstances, I was forced to learn HMO and SA very, very quickly, and if you follow me, you'll know I not only diversified in terms of HMO student and professional, but I also diversify in terms of HMO and SA.
[00:14:22] And that's really key, and I did a podcast episode, I think I've done several, in fact, on how I do the hybrid approach and how I do a combination of SA for the chunks of cash and HMO for the recurring income. So go back through the archive and check those out. So, guys, moving forward, I'm going to keep my portfolio pretty evenly spread between the students and the professionals. I would urge you guys to seriously consider if you're just in one, as discussed in terms of lockdown and covid. I did a masterclass last night. Please go and check it out. There were so many golden nuggets in there and everybody contributing was amazing. Any other questions, you know what to do. Hit me up on social media. Simon Smith online Instagram. And I'll see you guys next week. Take care.
[00:15:27] Thanks for listening. For more information, check out Simon Smith online dot com. See you next time.