We’re fresh into 2024 and the year holds a wealth of opportunity for ambitious property investors. Judging from the economy, market predictions and over two decades of personal experience, here are the three strategies that we believe you should be implementing in 2024 if you want to face rapid success in your property business.
A house of multiple occupation (HMO) is a property when both of the following apply: at least three tenants live there, forming more than one household. In addition, you share at least one of the following facilities with other tenants – bathroom or communal kitchen.
The reason we think HMOs are an ideal strategy in 2024, is for the following eight reasons:
In our own business, we experienced a strong demand from tenants for flexible, affordable housing accommodation, in the second half of 2022, which continued into 2023.
SpareRoom.co.uk confirmed that demand for shared rooms is at an all-time high, while supply has hit a nine-year low. SpareRoom says: “UK room rents rose by 16% year on year, when compared to Q3 of 2022, with the average monthly room rent hitting £721 – another new record. The average rent in both London and the UK as a whole, is now at an all-time high.”
We expect the demand to pick up further in 2024, leading to higher rents, which will help to offset increases in monthly mortgages.
Landlords have finally received a big win. The NRLA (National Residential Landlords Association) led a brilliant campaign, single banding of HMO rooms and we are really pleased that the government listened.
Previously, tenants in HMOs that were single banded, were liable for as much as £1,000 a year each, in council tax. It was widely reported that the Valuation Office Agency was approaching landlords of large properties and demanding multiple council tax payments.
Now HMOs will not be re-banded and existing HMOs with individual banding, should be removed by 1st April 2024
With HMOs, rental yields can be up to three times the yield of the same property as a buy-to-let, dependent on the location within the country. HMOs allow Investors to achieve a better return on their capital employed and is a great stepping stone towards financial freedom.
For example, if you take a 3-bedroom house, let to a family under one tenancy agreement, you may achieve £1,500 per month in rent (area dependent). However, if you rent those three bedrooms on an individual basis, in an HMO at £650 per month, your rent is now £1,950 per month.
Here’s the game changer – build a rear extension and loft extension to create three additional bedrooms, which will help you achieve 6 x £650, equalling £3,900. Inevitably, this is dependent on the property you are looking to buy, renovate and convert into an HMO investment. Which is where research into your property and potential extension opportunities become vital.
When we started investing in HMOs over ten years ago, there was limited choice when it came to financing them. But today, it is completely different and it has never been so easy to obtain HMO finance. Following the rate scares from late 2022, it appears that rates have stabilised and we are seeing mortgage rates falling month on month.
We believe an independent mortgage broker is an important person for access to HMO finance. Your broker needs to completely understand what you are doing and what you want to achieve, for example, are you looking for a ‘bricks and mortar valuation’ or a ‘commercial valuation’? The biggest mistake investors make is assuming that all mortgage brokers are the same.
With inflation falling sharply, we believe that the bank base rate will start to fall in 2024, making HMOs even more attractive!
HMOs have fewer void periods compared to buy-to-lets. In a typical 6-bedroom HMO, if one tenant moves out, you still have five others paying their rent, while you find a replacement tenant for the vacant room.
We find that 3-4 rooms would cover the mortgage and the running costs for an HMO, meaning the remaining rooms are your profit. Therefore, not only is your HMO likely to have less voids than a buy-to-let but it’s also likely to be more profitable over the course of 12 months.
HMOs often require refurbishment and structural work to optimise the rental capacity of the property. Frequently, most spending on HMOs may be regarded as a revenue cost. Meaning it qualifies as either a corporation or income-tax deduction. Capital items, which are added to the acquisition cost, for capital gains tax purposes, are usually easily identifiable, e.g., adding an extension, knocking down walls, building an annex etc.
Where work is a combination of capital and revenue expenditure and carried out simultaneously, the HMRC accepts that is allowed. Therefore, it is important to have detailed records of any expenditure, summarised and receipted. Our suggestions would be as follows:
Take photographs of any work carried out at its various stages.
Ask your tradespeople to provide a breakdown on their invoices. For example, 'build extension' or ‘decorate existing property' etc.
Keep a copy of the property survey report.
Though every investor wishes to generate income, it is important to consider not just the earning potential of an investment but also the associated risk that comes with it. Where possible, spreading the risk associated with your investments should be one of your key priorities.
HMOs help you do this by ensuring that the income generated is spread across multiple occupants. So, even if one tenant falls behind, you still have multiple other occupants providing revenue. With single let properties, you have all your eggs in one basket and that basket being your sole tenant. If that tenant happens to have a change in circumstances and they can no longer keep up the rental payments, you have no one else in that property to fall back on.
HMOs are very much ‘in vogue’ at the moment. During our time within the property industry, we cannot think of a time that HMOs have been so popular with landlords and tenants. Twenty years ago, HMOs were associated with DSS (Department of Social Security, now called LHA (local housing allowance)) tenants or students, however, fast forward to today, HMOs are now vital for housing working professionals and are considered socially acceptable places to live.
There are now dedicated platforms, like Spareroom.co.uk, for landlords and tenants to connect. With the rise of social media, more people are witnessing amazing bespoke co-living HMOs, with amazing rooms and communal areas. The future looks bright for HMOs!
On 19th August 2022, The Times published an article titled: “Why Landlords Are Banking on Posh Houseshares” which the Savoys team contributed to. The article highlighted the demand for higher end HMOs and how the demand is set to increase.
The Savoys team have been converting commercial buildings to residential since 2013. If you see our socials, you will see this is one of our favourite strategies and a hugely profitable one at that.
At Savoys, the reasons we think C2R is an ideal strategy in 2024, is for the following seven reasons:
Many businesses are embracing homeworking since the pandemic, what were once thriving offices, are now empty spaces. This has significantly reduced demand for commercial premises, while the demand for residential housing is at an all-time high.
Offices and retail buildings are often spacious and ideal for development into unique new homes, which have valuable sale or rental potential.
In 2021, the government made amendments to the permitted development rights, provided for by the general permitted developments order (GPDO). That included buildings within use class E (commercial, business and service) to be converted into homes, without the need for full planning permission.
If you want to convert commercial property into residential homes, you now just go through a prior approval process and can expect a decision within 56 days as well as lower planning fees.
The high street has been under threat for a while and has already been a casualty of out-of-town supermarkets and internet shopping, however, it was hit even harder by the pandemic. This resulted in many local shops and businesses being forced to close but never reopened.
Converting empty high street commercial properties into residential homes, is a way to bring people back into town and city centres, promoting the regeneration of local communities and economies. People living in central parts of towns and cities create a greater need for local amenities, such as cafes, bars, shops and cinemas, which reinvigorate and restore life to our high streets.
Many office spaces, retail units and commercial properties are in central locations, close to restaurants, parks, schools and public transport links. This puts them in popular, prime locations for people who want to live in the heart of towns and cities, with everything they need on their doorstep.
The need to minimise the environmental impact of new homes has never been so urgent. Vacant commercial properties are brownfield sites.
Converting them, as opposed to building on untouched greenfield land, has huge benefits for the environment. Investing in brownfield development projects, reduces the need for greenfield development, helps protect wildlife and reduces energy emissions. Small-scale projects to unlock potential and repurpose commercial properties, are an opportunity for a far more considered, creative and sustainable approach to property development.
Since we have been working with commercial properties, we have been able to double, triple and some cases, quadruple the value of the property, by changing the use to residential. Prices of commercial properties are often more competitive, compared to those of residential properties in the same area. Because they’re in a prime location, converting them to residential homes means they have profit-potential and provide an opportunity to add value.
Converting a commercial property can be a chance to be creative and make the most of original features, or a blank canvas with the freedom to adapt the space into a unique design. Some of the most stunning and imaginative homes are born from commercial conversions because, when designed with thought and ingenuity, these desirable buildings have unique charm and personality.
The government is planning to scrap the need for planning permission for property owners who want to convert a house into two flats. Chancellor, Jeremy Hunt, announced the plan in the autumn statement, as part of a package, aimed at slashing red tape and increasing the number of new homes. The new rule, known as a ‘permitted development right’, will apply, so long as the external appearance of the building does not change.
If this new permitted development right comes into play in 2024, it will be a game changer for many in the property industry and will be adopted by the Savoys team.
Malkit Purewal and Sanjay Kumar are multi-award-winning developers from Savoys Properties, who have been in property for 23 years, specialising in HMOs for 14 years and commercial to residential for 11 years. The duo has featured in The Times newspaper, appeared on BBC Radio 4, won two international property awards and have won three awards at the Property Investor Awards.
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