Super excited to be contributing to HMO Magazine this month.
If you haven’t checked out hmouk.org you should, because its got some great content whether you’re brand new to HMOs or a bona fide mogul.
I get into what controls rent levels*, but really it’s about maximising your yield, minimising voids and most importantly, creating a win-win for you and your tenants.
*you think it’s the landlord? They’re not as important as you’d think…we need to look at wider market forces!
I’d love to know what you think, and if the theory holds true in your area.
Check it out…
Property is never just a commodity, even to the investor. But, as is the case with commodities, the prices of rental properties (i.e. the rent) are set by forces outside of any individual landlord’s control. HMOs are no different. That might seem alarming at first – but in reality it’s good news.
Understanding the market forces that dictate the rental rates of HMOs let to working professionals can help us minimise voids, maximise returns, and create a win-win for both investors and our tenants.
Supply and demand
Focusing on the HMO market as a whole, as opposed to individual properties, is key to understanding how HMO rents are really set.
In perfect markets, supply and demand are what dictate both the quantity of goods available and the price at which those goods are sold. The relationship between supply and demand explains why sought after, rare goods are expensive and why abundant or undesirable goods are cheap. A whole host of factors influence the supply and demand of housing, but one of the biggest influencers on either side is tenant salaries.
The 33% rule
Here’s the theory.
Across England as a whole, tenants in single lets (apartments, houses; essentially anything other than an HMO) spend around a third of their income on rent (excluding London). The ‘33% rule’, as it’s known, supposedly strikes a nice balance between people living somewhere pleasant, paying the bills and still having enough leftover to enjoy life.
When it comes to single lets, the data suggests it’s a rule that holds. The ONS places UK residents’ average monthly income at £2214. The Valuation Office Agency, meanwhile, places average monthly rent at £727 (again, excluding London) – which is almost exactly one third of average incomes.
The curious case of HMOs
With HMOs, though, the rule folds – and here’s why.
As fresh-faced newbies just beginning their careers, young professionals earn less than most people – about 15% less, in fact. A third of young professional income, then, doesn’t go as far. When looking at single let properties, typical young professionals can either accept something at the lower end of the spectrum or spend a bigger proportion of their (already relatively small) salaries on rent. Clearly, neither are ideal.
HMOs offer young professionals quality and affordability.
As a proportion of salary HMOs typically cost a fifth of the average young professional salary. Not a third, like most tenants pay. A fifth.
Young professionals in HMOs could quite happily pay a little extra in rent without breaking the bank – and yet they don’t. Why?
Creating the win-win
HMO landlords might take in a smaller portion of each tenant’s salary, but, of course, we do so for 4, 5 or more tenants.
With single lets, landlords are letting to a maximum of two wage earners at a time (and often just one). The limited household budget of single lets creates a price ceiling on the rent before the property becomes unaffordable. Setting rent above that market limit quickly increases the chances of void periods.
The HMO, by contrast, has a wage earner in every bedroom, and this is what creates the win-win:
Tenants don’t just pay less rent. For sharing they also pay a smaller chunk of their salaries in rent and thus have more disposable income.
For the landlord, multiple wage earners means HMO rents easily surpass those of single lets.
Despite the popular anti-landlord rhetoric in some parts of the media, HMOs can leave both tenants and landlords smiling and create a win-win.
On the other side of the equation, we have supply. When it come to housing, short supply means more people attempting to live in fewer houses, creating a theoretical bidding war which pushes prices up.
Housing in Britain is in short supply as it is. Add to that things like Article 4 Directions (which remove HMO permitted development rights) and the supply of HMOs can be suppressed further still. S24 tax changes (that harm landlords) arguably mute supply even further. The upshot is fewer HMOs on the market and potentially higher rents for the HMOs that remain.
Striking the right balance
Landlords assume they are in full control of the rent that they charge. However, it’s not that simple.
Inherently, we all know setting rents below a certain threshold will leave us with a property that costs more to manage than it’s worth. Similarly, we all know that setting rents too high prices our properties out of the market.
The upper and lower boundaries are what ultimately dictate the rents we charge, and both boundaries are determined by the wider market forces of supply and demand.
Understanding supply and demand when setting rents can minimise voids while maximising yields… whilst keeping tenants in quality, affordable accommodation. The ideal win-win.
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