Rent to Rent HMO or SA - What's The Best Strategy?
Which strategy do you prefer SA or HMO? Here I am going to discuss which approach has the edge, the method I favour and what you need to be doing now to safeguard your business during current uncertain times.
Here is my view and opinion it's not advice, and I would urge you to do your research and your due diligence. I'm going to review HMO and SA through six performance indicators; management, maintenance, cashflow, scalability, systems and legislation. I will then run through how I approach my portfolio, why I diversify and how I came to discover and operate a hybrid approach.
Before we get started, for those of you that are new to property, I want to define the difference between HMO and SA.
HMO (House in Multiple Occupation)
A HMO is simply a house share. For example, you may take on a property that has three or four bedrooms. Instead of renting the whole property for £1,000 you might split the property into three or four beds. You can then charge per room at £500, therefore generating a higher return.
SA (Serviced Accommodation)
Serviced Accommodation is offered on a short or mid-term, for example, you can find this offering on platforms such as Air BnB and booking.com. This type of offer is targeting tourism, but also corporate clients and construction workers. A very popular strategy.
Listen to this weeks podcast episode where I run through the six key performance indicators and find out that although there is a clear winner, I still choose to do both.
In this episode, you will learn
The difference between HMO and SA
A review of each strategy considering six performance indicators
How I discovered and why I take a hybrid approach
Is diversifying the right option for you starting out?
To learn more listen to my new podcast and subscribe! Available on iTunes, Google, Spotify and others or click “play” on the player below!
As always, if you have any questions, please don't hesitate to contact me directly. You can direct message me on Facebook or join and ask me your questions within the Creative Cashflow Community.
Podcast Transcript↓
[00:00:56] I'm Simon and welcome to another episode of the podcast where we talk property, Creative Cashflow and how to be financially independent today, not in 25 years. And on this show, we're going to be talking about SA and HMO, which one's got the edge, which one I prefer and which one you guys need to be doing now. I think I'm one of the few people that actually does both. I do rent to HMO.
[00:01:27] I do rent to SA. And then of course, I also own as well. But this is going to be for all people, whether you do rent-to-rent or whether you're purchasing this is going to apply to you. Which one has got the edge? And as I've said, I'm going to explain exactly what I do, what my approach to this is as well. But before we get into that, I just want to take this opportunity to thank everybody for the massive, massive support. I've been looking at the figures and I can see we're going up every single week. The listeners are growing, the subscribers are growing, and it's amazing to hear the feedback. So please feel free to drop me a line on social media. Let me know if there's anything you want me to cover. And of course, if you've not subscribed yet, please hit the Subscribe button so that you get notifications every single Monday when we drop a new episode. So I was thinking of the best way to structure this and I've decided I'm going to measure SA and HMO through six key performance indicators: management, maintenance, cashflow, scalability, systems and then the niggly legislation.
[00:02:37] Because I know that some of you struggle with those barriers to entry and I think it's worth discussing. I think that could be really valuable. So we're going to be measuring HMO and SA on those, I'm going to choose a winner for each category. Then I'm going to summarize, tell you what my favourite is, what I do in my business and what I would recommend. And as usual, there's not a definitive answer here. So these are just some of my views and opinions. It's not advice. And I would urge you to do your research and your own due diligence. Okay, so before we get into this for brand new listeners, I need to define the two principles. So HMO is simply a house share. That means you might take on a property that's three or four beds, and rather than renting out the whole property for a thousand pounds, you might split it into four rooms and rent each room at 500 pounds, thus generating 2000 pounds of income. And then serviced accommodation is literally fully serviced accommodation. And this is normally offered on a short to mid-term basis. And it's like your Airbnb and Booking.coms and stuff. You can do that for tourism, you can do that for leisure, but you can also do that for corporate clients and construction workers, for example. Very, very popular strategy. So now we've got those out of the way I want to go into the contest, so to speak.
[00:04:04] So first things first management. I personally believe that the management of HMOs, because you're dealing with people where it's their primary residence, the management's really important. And as you begin to grow and scale, people get particularly sensitive because it is their home. So I personally feel like the management can be slightly harder in terms of HMO. Serviced accommodation, on the other hand, don't get me wrong, you've got guests to expect hotel-like standards. However, because you're constantly having a turnover of guests and you're doing cleans and you're across things, normally when you hand the property over it's to a very high standard. So the management in terms of, you know, in-stay management is less. And if there are issues, you can usually nip them in the bud more quickly. In terms of actually securing the tenants and stuff, I don't think there's a lot in it. You know, they're both going to come through online platforms. The downside of SA is that they might be sporadic bookings. The downside of HMO is you may have multiple rooms to fill in one property. Once you've let out an essay as an entire unit, you're done, you can move on to the next. But overall, I believe Sas are easier to manage because they intrinsically force you to be more across things and to over-communicate with guests.
[00:05:35] Whereas with HMOs there's this massive responsibility to deliver on management because it is their home. But then there's this illusion, this false economy of space and passiveness which can force you to take your eye off the ball and then you come undone. Second, maintenance. Interestingly, I also prefer SA for maintenance. And the reason is this. Because because you've got constant cleans in between different stages, your cleaner can alert you, right, that taps leaking, or there's a leak on the ceiling below the bathroom and you can be more on top of the maintenance. Whereas sometimes when it's someone's primary residence, you might have a monthly cleaner, but you could miss things and for some reason I don't get this, but tenants don't always report issues. The whole classic leak being missed for six months, you know, going in and out the kitchen all day every day, but never looking up and noticing that the ceiling is about to fall down. Whereas if the same person was in a hotel, oh, they'll notice, they'll be complaining down at reception. You know, there's a leak or there's a there's a stain or there's cobwebs on the ceiling. It's this really sort of funny thing. Walk around today, guys. Go about your business and even in your home, look up and let me know if you've ever looked up at the ceiling before and see if you see anything cheeky because a lot of tenants don't notice these things.
[00:07:08] So in terms of maintenance issues, they can develop and get worse before, you know, those costing you more. And there's more wear and tear on the property as well, because people are living in the property day in, day out. Whereas a lot of my SA bookings, they're at work or they're on holiday or they're visiting and they're the properties aren't getting as used, just to be honest with you. So first two categories, SA has got the edge for me. Cashflow, cashflow. So what I mean by this is, we're trying to get passive income, so which one do I think has the best passive income. Now, HMO, you basically lock in tenants for six months or a year and they pay a monthly rent. So you could know over the next six months this property is generating a thousand pounds per month. With SA, you could have a stonking booking, you know, that might be for three or four grand. My biggest SA booking, by the way, is 25000 pounds. And somebody stayed in this property for a year. Yep, that's right. Somebody brought an Airbnb with me for a year. Crazy. But then to the same degree, you could have a couple weeks of it being empty.
[00:08:25] So the cash flow isn't consistent with SA. You kind of get big lumps of cash, but you don't know exactly when they're going to come. So if you're just getting started and you want to increase your income in a consistent and predictable manner, HMO has got the edge. Onto scalability. I think HMO, particularly if you're in an area that, you know, has demand...and by “has demand”, I mean, you know, has trade, it has industry, has business, has some level of tourism, you know, some attractions, has a big hospital. I think there's probably more consistent and measurable demand for HMO, particularly in these uncertain times, because people need a place to lockdown. You know, you're not going to cut out the place you live. So I do feel like scalability wise, HMO has the edge, especially in these uncertain times. And I'm going to cover a little bit more about this towards the end when I tell you my experience. Point number four is systems, OK? And it's funny because a lot of people say, oh, serviced accommodation is going to be so hard, you've got to let guests in, you've got to make sure you don't double-book people on calendars and you've got to have the cleaners to go in and go out. And you would be right.
[00:09:49] And there's a common sort of perception that HMO tenants, you just move in and leave them to it.
[00:09:56] But you know what? I've kind of, in my business, I kind of felt like with my HMO properties, it almost allowed me to get complacent and neglect the systems initially. And you can neglect the systems in HMOs when you've got three properties, 10 units, when you've got 100 units there's no way you can do it. And that's what I found more recently. So in a way, I like SA because you are forced to implement systems and then my SA portfolio has been more hands-off in many ways than my HMO because you're forced to pre-empt things because you don't want to be letting a guest in at 11 pm on a Saturday night. So systems-wise, even though S.A requires more, especially initially, I'm going to give SA the edge on this. Because it forces you to systemize and therefore can be more hands off. And finally, last but not least, legislation. Now, you do have the 90 day rule in London, and I think that will be expanded into different territories in the UK. However, HMO, the legislation's a lot tougher. We've got what's called Article Four now in a lot of towns, which means there are certain areas where they require you to apply for planning permission before you can apply for an HMO license. And they are seriously restricting and limiting new HMOs to ensure that there's enough residential dwellings for families. And the thing is, there are more health and safety things you need to do for an HMO, such as your fire doors, your smoke alarms and all that stuff. Whereas, SA, as long as the property is to sort of a residential rental safety level, that's about it in terms of the health and safety bits and bobs.
[00:11:50] So, legislation-wise, SA also does have the edge, OK, you don't have to worry about Article Four, you don't have to worry about licenses, you don't have to worry about fire doors, etcetera, on every room because the property will be let as an entire unit. So there are a few more hoops to jump for HMOs. However, once you learn them, you know, it's not the end of the world. And I do feel like at least with HMO, it's legislated or there's legislation in place. So I feel like there's a big, big room for an increase in SA legislation over the next few years. So be aware of that. So I'm just looking at my little tally-chart now, and I can see that SA actually, one four out of the six topics. HMO won cash flow and scalability. SA took management, maintenance systems and registration. But as I said, I actually do both. And it's a godsend. And I'll tell you why. A lot of people don't know this, but after my first rent to HMO deal, I hit a wall. I couldn't find another deal. A lot of people say your first deal will be your worst deal, but my first deal was hard to beat, and even to this day, I don't think I've actually beat it in terms of a three-bed that I've turned into a four-bed mini HMO. So I was looking at properties and I was like, no, no, that can't work. No, that's too small. No, maybe there's three bedrooms, but the fourth is a box room. You know, maybe they want too much money. Maybe there's only one bathroom for six. And I'm thinking, just not going to work for my professional tenant.
[00:13:35] So in the end, I took on my second rent-to-rent as an SA.
[00:13:41] It was a two bed, two bath property. Townhouse. And I just took a hunch. It had parking, it was a lovely property and I thought, you know what, I'm just going to do SA. So my first deal I did as an HMO, rent to HMO, my second deal, was is a rent to SA. And I was forced to learn on a really, really, really, really steep learning curve. But it was the best thing I ever did, because what I did was it meant that it opened up the whole market for me. Because then when I looked at a property, if it didn't work as HMO, I'll do it SA, and vice versa, and there was other advantages of doing both. One was I was getting the consistent recurring income from HMO. The predictable income. But then I would get these huge lumps of serviced accommodation, cash, six grand here, eight grand there, twelve grand here, three grand there, which would boost my cashflow and allow me to reinvest the money into more deals. Another advantage was I noticed that clients that needed short-term accommodation sometimes would go on to move here and needed long-term accommodation. And rather than me having to pass that business on to another operator, I said, oh, well, come and look at my long-term accommodation.
[00:15:00] So I would actually pass business and referrals between the two arms of my business, which meant that I could retain more clients. And another advantage was during covid. Diversification. Diversification was key, I know some SA operators that had fifteen Sas and they got crushed. Because all the online portals, Airbnb, Booking.com, obviously due to government advice, just locked off the whole SA, serviced accommodation, hotel, service tourism market just got killed overnight. So if you had those units, it was really, really scary. But what we were able to do is pivot. We transferred some of our SAs to HMOs. And because we already had the systems in place and a hot applicant list, we just moved people around and we weathered the storm and now we've opened up the SA again. We found a huge demand for corporate and construction clients with our SAs now because a lot of businesses need to make up for lost time. So there's a huge advantage of doing both. So that's why I focus on both now, I do what's called the hybrid approach and, you know, based on those little scoreboards I did, SA in many ways can have the edge if you're starting.
[00:16:31] You know, huge advantages. I do think SA deals can be easier to get. Rent to SA that is, if you know what you're doing, but it's great to have a mixed bag and it can allow you to scale up. So I guess the answer is both. You need to do both.
[00:16:53] Should you try and do both at the same time at the beginning? No, it was a really stressful, steep curve for me at the beginning. But, you know, start with one. Start with which one you feel more comfortable with if you want to get tenants in and just sit on that and just secure an extra five, six hundred pounds a month while you figure things out. Great. Do it if you want to scale quickly and, if you're willing to put time in, SA could be a great option for you, but then long term you need to be doing both. So that's all from me, guys. Hope you found this episode useful. And of course I'll be here next Monday with some brand new content. Hit me up on social media if you've got any requests, and I'll be sure to try and take some of your feedback on board and make sure to subscribe so you get the notifications. Thanks very much. And remember, don't wait 25 years. Get creative. Thanks for listening. For more information, check out Simon Smith online dot com. See you next time.