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Goodbye HMOs, hello Flats?

There has been a trend for some time now for converting HMOs back in to single-let properties. Why?

Well, many landlords report that the HMO market in some cities and towns is completely saturated – and they are absolutely right.

For a long time now I have advised people to be very careful when acquiring or developing a HMO. It must be in the right area, there must be a constant demand, and the rental price of a room must be significantly higher than the rental price of a one bed flat.

If not, be warned that you may find yourself with a very difficult under-performing property investment. Add to this the increased regulation in the HMO market and hopefully you can see why investing in HMO’s could have had its day… Certainly outside of its traditional demand areas.

The HMO market has developed rapidly in the past decade and has served a market demand, but rest assured it is now under attack.

For evidence let’s just look at the student market. The institutional investor has entered the student market on a large scale, creating high spec purpose built blocks of rooms, supported by universities and preferred by parents – especially the parents of oversees students.

Consequently, the private landlord letting to students has found their market disrupted massively. In Hull and York this has led to an oversupply of nearly 300 student properties in each area, in turn to many landlords turning their properties back to standard residential lets.

Others have had no choice but to compete in the much more competitive ‘professional’ HMO market, targeting regular workers. This is creating on over-supply in this market too, driving down room rates. And when the room rates hit the same level as a one-bed flat rate… then suddenly tenants start to reconsider their position and letting preferences.

My view on this is relatively simple. HMO’s have their place in big cities, student areas and areas where there is an abundant supply of low income workers (look out for large distribution sheds and companies such as Amazon). When investing you need to choose your location wisely – and check for signs of saturation in the market. Look for Article 4s, get information from the council on multi-lets, and scour spare room and rent a room portals for the number of ads from an area, take-up and turnover of rooms.

For the savvy investor, though, this does represent an opportunity.

If you can identify areas with saturated HMO markets, then you can be certain that the demand for one-bed flats or studios will be there – and will be growing.

It’s worth looking at those areas and consider converting any existing HMOs into studio flats, or acquiring properties to develop into flats to serve the new market.

Source: Simple Landlords Insurance