What You Must Know About Student HMOs Before Investing

Each year, hundreds of thousands of students seek accommodations that feel like a home away from home, creating a vibrant market for HMO investments. But what does it take to successfully meet this ever-growing demographic’s housing needs? Gain detailed insights on the requirements, opportunities, and strategic considerations for investing in student HMOs and build your portfolio to stand the test of time.

WHAT IS A STUDENT HMO?

This is the quintessential shared-living arrangement; when people think of HMOs (Houses in Multiple Occupation), the first association is with the student community. Student HMOs are shared properties where three or more students live together. Typically, each student has their own bedroom, while common areas remain for general use. Each unit may have a private bathroom and even a kitchenette in more modern settings. 

Like other HMO types, the student HMO meets three crucial conditions: they have an affordable price tag per room compared to the price of a comparable property rented as a whole, and they’re occupied by three or more unrelated tenants who share areas such as kitchen and living room. This includes both student houses and flats (under a single address) qualifying as HMOs.

Student HMOs are not just any HMOs. They are designed with unique features that cater to the needs of student lifestyles, from robust internet connectivity to flexible lease terms. They are strategically located near universities and colleges and in reasonable proximity to key transport links. Their distinctive attributes make student HMOs equally appealing and a lucrative investment for property enthusiasts.

WHY INVEST IN STUDENT HMOS?

Investing in HMOs for student accommodation is a significant opportunity for high returns. While this venture isn’t without challenges, it remains a favourite among property enthusiasts for good reasons.

– University enrolment means there’s consistent and high demand for student HMOs, especially in university towns, making it a lucrative investment opportunity.
– The student rental market tends to remain stable even during economic downturns.
– Due to the room-by-room rental model, student HMOs have the potential for higher yields than a single-family let, amplifying the profits per square metre.
– Within the room-by-room rental market, student HMOs typically require a moderate initial outlay compared to up-market alternatives such as co-living rentals, aparthotels, and serviced accommodation.

FACTORS INFLUENCING STUDENT ACCOMMODATION

The UK student housing market is experiencing significant pressure. The 2023 UK Student Accommodation Report by Cushman & Wakefield showed that our student population seeking accommodation has reached nearly 1.5 million. The same data indicated that 96% of students across 74 major UK cities need housing during their studies. 

According to Higher Education Student Statistics (HESA), graduate programs alone recorded an 11% enrolment boost. Likewise, international student numbers have grown significantly, reaching over 750,000 in 2022/23, with an increase of 25% in non-EU enrolment —which follows a 33% surge from the previous year. 

With only one bed available for every 2.1 students on  average¹, there’s evidence of ongoing solid demand. This steady increase in market demand can lead to reduced vacancy periods and potentially higher rents. Keeping track of trends such as university enrolments can help you anticipate changes in demand for student housing and adjust your strategies accordingly.

STUDENT PREFERENCES AND NEEDS

After more than 16 years of designing and adapting properties for the student market, I’ve watched student expectations evolve dramatically. Today’s students look for more than just a place to sleep; they seek accommodations that support their educational needs but also their social life and well-being. Factors influencing their preferences include:

– Location: Proximity to university, college, social centres, and transport links.
– Quality: Modern amenities, including high-speed internet, well-maintained living spaces, and energy efficiency measures.
– Safety and Security: HMOs with robust safety measures in place and offering above the minimum standards can be a property’s strong selling point.
– Environment: While HMOs offer a sense of community, many students prefer spaces that enhance comfort; this balance can be achieved with well-designed communal spaces and private areas like ensuites or single-use bathrooms.

Well-managed and efficient HMOs can become highly attractive to ideal tenants; this, in turn, allows for a sustained occupancy rate and profitability. Understanding and catering to evolving preferences can help landlords improve rental yield and make their investments more resilient against market shifts and economic changes.

Pro Tip #1 

The higher the degree, the larger the room. The minimum legal requirement may be 6.5 sqm per room, but that’s barely enough. To keep tenants renewing and raving about your HMO, we always aim to design with a minimum of 8.5 sqm per room—remember, ensuites don’t count towards room size. This extra square footage creates the “live, work, play” space that modern students expect. Larger, well-appointed rooms communicate that you value their comfort and are willing to invest in their experience.

By exceeding the bare minimum standards, you can future-proof your HMO and make it more appealing to students year after year. Plus, satisfied tenants are more likely to renew leases and refer their friends – boosting your occupancy rates long-term.

LEGAL AND REGULATORY REQUIREMENTS FOR STUDENT HMOs

Any property that qualifies as an HMO must adhere to stringent regulations. These regulations cover everything from tenants’ safety to property management and community welfare. Understanding and complying with these standards is crucial for landlords to maintain the licence conditions and to prevent legal liabilities.

COMPLIANCE AND SAFETY STANDARDS

Compliance with safety standards not only protects tenant safety and wellbeing, but it’s also vital to maintain the licence conditions and prevent legal liabilities. Key regulations include:

– Fire Safety —part of the building regulations involving the installation of smoke alarms on every floor, the provision of fire extinguishers, and adequate escape routes (e.g. they must be clear and accessible).
– Minimum Room Sizes —Bedrooms in HMOs must meet minimum size requirements (e.g. 6.51sqm for one adult). Shared spaces like kitchens and bathrooms also have specific size criteria.
– Maintenance and Facilities —Common areas, such as bathrooms and kitchens, and amenities, from heating systems to refrigerators, freezers and storage, must be in working order and suitable for the number of occupants.

It’s worth noting that large HMOs (7-bed or more), classified as Sui Generis, will have additional controls to consider, some of which may be mandatory, for example, acoustic requirements, management plans and transport assessments.

Pro Tip #2 

Beyond just government regulations, each university has its own standards for approved student housing. If we factor these into your HMO design to meet these specific criteria, you open the door to getting on the university’s official accommodation list. This can be a game-changer for occupancy rates and profitability. With university-vetted housing, you’re likely to see consistent demand and faster move-ins compared to going through a third-party agent, helping you get reliable tenants at a lower cost.

HMO LICENSING FOR STUDENT ACCOMMODATION

HMOs in the UK might qualify for mandatory licensing under certain conditions. Generally speaking, this requirement is determined by the size and location of the property and not solely the fact that it houses students; these are the rules:

1. Size and Number of Occupants: HMOs rented to five or more people need a mandatory HMO licence. This includes student HMOs.

2. Local Authority Regulations: Some local councils have additional schemes, known as additional licensing or selective licensing. This enhanced control means smaller HMOs shared by less than five students may require licensing, depending on their location.

One crucial aspect of the rental market is that councils retain the authority to enforce further restrictions, such as Article 4 Direction, which effectively limits HMO investments in certain areas. Lastly, we must consider impending amendments, such as energy efficiency requirements, which are expected to increase the minimum EPC from an E to a C rating. Of course, the licensing process includes property inspections by council officers, which can also vary between regions. 

If you lease a property for shared accommodation or intend to do so, you must verify the requirements with the local council to determine whether your property qualifies as an HMO and is subject to licensing. As with any other HMO model, operating without a licence —when one is needed— carries significant financial and legal risks.

You can explore the compliance framework in detail in our HMO regulatory handbook, but these are the essentials.

FINANCIAL CONSIDERATIONS OF STUDENT HMOS

Investing in student HMOs involves initial property investment costs and the potential for significant returns. An effective financial plan should account for:

– Initial Costs: These may include the purchase price —either acquisition, rent-to-rent or a property conversion, expenses to meet HMO standards and licensing fees.
– Ongoing Costs: Regular maintenance expenses, from utility bills to management fees (if a property manager runs the property).
– Returns: Typically derived from rental income, which can be higher per room than renting out a non-HMO property. A detailed profitability assessment can help investors understand the break-even points and project long-term financial returns.

Pro Tip #3

Student HMOs often face empty rooms during university term breaks. But with some creative thinking, you can potentially lease those vacant units to other tenant profiles to keep your cash flow steady. For example, consider renting to English-language students during the off-season. This can help bridge the gap, provided your tenancy agreements allow it. Just be mindful of any additional management required. 

Better yet, try to get students in at the start of their studies. This sets you up for potential multi-year renewals rather than constant turnover. Securing 3+ year leases can dramatically improve your HMO’s profitability. 

TAX IMPLICATIONS FOR STUDENT HMOS

Student HMOs offer a unique benefit concerning tax. Properties occupied solely by full-time students are exempt from council tax, which can significantly reduce the overhead costs for landlords. To qualify, all residents must be students, and landlords must submit proof of that status to the local council.

STUDENT HMOs CHALLENGES & HOW TO MINIMISE THEM

The cyclical nature of academic years can be challenging when managing tenant turnover. However, there are effective strategies to mitigate high turnover and the pressing concerns of higher wear and tear, management and compliance. These are essential approaches to ease the work:

– Regular inspections and preventative maintenance to address issues before they escalate. This helps keep the property in top condition and reassures students that their living environment is safe and well-maintained.
– Establish a responsive maintenance plan to address repair requests. While tailored design helps improve efficiencies —like selecting suitable materials— quick fixes to problems enhance tenant satisfaction and compliance with health and safety standards.
– Implementing initiatives that make the living experience more enjoyable for students, such as clear tenant rules and effective communication lines. Plus, by  fulfilling their responsibilities and raising the standards, landlords can reap the benefits of an upstanding reputation.
– Leveraging social media and student forums to keep upcoming vacancies in the public eye well before the current tenants move out. And remember that establishing good tenant relationships and a first-rate landlord reputation can go a long way and help keep vacancies to a minimum.
– Using automation tools such as property management software simplifies the day-to-day operation and ensures all processes run smoothly. These are particularly useful for tracking maintenance schedules, expenses, tenant requests, and paperwork like flexible tenancy agreements. This technology can help in keeping the operation aligned with regulations.
– Developing a clear strategy to streamline the transition between tenants. Landlords with sizable portfolios can benefit from a  managing agency’s services, which should allow not only saving time but also reducing errors.

STUDENT HMO CASE STUDY

Exploring real-life examples can offer tangible insights into what makes certain student HMOs stand out. The success of these projects is the result of efficient assessments and strategic decisions.

Our Liverpool project is a notable example by HMO Architects, where we transformed a property into a highly desirable student accommodation. The success of this project was primarily linked to innovative design solutions and a keen understanding of the local market demands. After 6 months of renovation work, the converted 6-bed HMO offered a 600% increase in rental income and an 182% higher valuation (commercial).

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5 FUTURE TRENDS IN STUDENT ACCOMMODATION

The student accommodation model is evolving, driven by changes in student preferences, innovation, and advancements in the education system. Here are five emerging trends to watch:

1. Smart home technologies are making their way into student living spaces. Features like app-controlled lighting, heating, and security systems are becoming standard expectations for tech-savvy students.
2. Environmental concerns are prompting the development of eco-friendly accommodations. This includes buildings with better (above minimum) energy ratings, recycling facilities, and spaces that promote a smaller carbon footprint.
3. As students seek more balance between studies and social life, accommodations offering versatile spaces, such as convertible desks or communal areas suitable for social and academic activities, are becoming more desirable.
4. With more institutions offering remote learning options, students might no longer need to live close to campus. This could change demand patterns, such as preferred student housing locations.
5. Hybrid models of living. Future accommodations may need to be more flexible, providing spaces that are conducive to both living and online learning, incorporating, for example, quiet zones and high-tech study areas. Could your HMO meet the demands of the evolving market and, say, easily transition from hybrid learning to hybrid work?

DECIDE IF A STUDENT HMO IS RIGHT FOR YOUR PORTFOLIO

Investing in a student HMO can be a lucrative venture, yet there’s some work to be done before deciding if it’s a good fit to start or to grow your investment portfolio.

– Do your research: Understanding the local student market is essential, including the presence of universities, their remote learning policies, and other influencing factors.
– Get on top of legal compliance: Any HMO investment must comply with local licensing requirements, especially those concerning safety and housing quality.
– Consider your investment goals: Student HMOs often yield high returns due to constant demand but require active management and compliance with rigorous policies.
– Apply a business approach: The risks and potential returns must be accurately weighed—for first-time property investors, a feasibility assessment is crucial.
– Future-proof your investment: Consider how adaptable the property is to future trends, such as remote learning and sustainability.

Pro Tip #4

Treat your tenants like customers, not just renters. Speak with them regularly to learn about their career paths and future living situations. For example, if a tenant is graduating, see if they plan to stay local. They may be a perfect fit for your professional HMO, co-living space, or even a traditional BTL property. If they’re moving away or receiving family, that Airbnb in your portfolio might be just what they need. This approach can unlock tens of thousands in additional revenue with minimal effort. Happy to jump on a strategy call to help you implement it for your portfolio.

GET TO A GOOD START WITH HMO ARCHITECTS

While investing in student HMOs is an attractive opportunity, these properties require a well-thought-out strategy. Give your projects the best chance for success with comprehensive support throughout all stages, from superior interior design to project management, planning and urgent compliance solutions.

Let’s discuss your investment strategy or reach out to start exploring your options. 

Reference 

¹ Cushman & Wakefield’s 2023 UK Student Accommodation Report

Disclaimer

The information provided on this blog is for general informational purposes only and should not be considered legal, tax, financial or investment advice. Please note that laws, regulations, and market conditions change. Verifying the information’s accuracy and relevance before making any decisions is crucial.