BTL/HMO vs social housing investment properties

Enhanced Transcribe:

Hey folks, Dr Ro here. I wanted to address a technical style question on property investing. 

It’s a question that has come up a lot over the years as a professional speaker, but actually on a personal level.

My first social housing property that I bought was in 2002, 18 years ago so it is not a new question, but a question that needs addressing for those of you that are sitting on the fence as to which one to do or do you do both? 

The answer to that last part is both but to try and help you I’ve got three things that might help. 

In a nutshell, your buy to let style properties with a private tenant in them or HMO properties with say professionals in them or students in them could be on one side of the balance. 

If you’re weighing up one versus the other versus the question of what about social housing? What about low-income families, low-income tenants supported by the government or asylum seeker type strategies, charities, vulnerable tenants. We’ve got properties with all these different strategies, but if you’re brand-new to this thinking should I expand into that side of the marketplace what are the pros and cons? 

To give you an idea, a social housing type contract or asylum type contract depending which you provide you’re working with can give you three year, four year, five year guaranteed rent potentially up to 10 years guaranteed rent. 

There are contracts that are longer. I was talking to somebody yesterday with regards to nursing homes and we were looking at that strategy and even special needs learning disabilities. 

A typical five, seven-year contract, you would put those tenants in that property, the tenant would be the council or the local housing association or the charity or whoever you are working with. That would be your tenancy agreement with them versus the same property with Mr and Mrs Jones going under a six-month AST a short hold tenancy agreement. 

At the end of each six or 12 months that is renewable. It might be the same tenants going in there or it might be somebody new whereas social housing or asylum seeker contract it would just be that one tenancy agreement with that organisation and they would switch the tenants out whenever is necessary, you just have that and it’s a guaranteed rent as a rule of thumb for that period. 

That is the difference. 

Then the question comes into this, what is your mid-term exit strategy? Mid-term being three to five years. Long-term, maybe 10 to 20 years. 

Over the next three to five years what are you intending to do? If your intention is to sell it, change the strategy on it, do something different with it, and you do that in four, five years’ time, then yes, you can do a social housing strategy for three years, but then you need to keep it to three years. If you do five years, then you’re breaking the agreement. It’s very difficult to extract yourself from a tenancy agreement like that so remember you are locking yourself in. 

That’s the first question, the flexibility of a normal private tenancy agreement is six months, 12 months in and out, you can issue a notice they move out the property you get a vacant property, you can change it to a different strategy. 

Whereas a long-term contract, five years you might classify that as mid in terms of your overall long-term strategy from an investor perspective three to five years is a good period. You’ve got to weigh up am I planning to do anything with this property over the next three to five years if the answer is no, then it makes sense to have guaranteed rent for three to five years or more. 

Refinance plans are another one. When refinancing with a social housing or asylum seeker property be mindful that the lenders are a bit more sensitive to this, you may have a different type of lending or there are less products available. They may put restrictions, you might get a lower loan to value, they might require an interest mortgage again it varies as time goes by.

Speak to your broker and understand what’s available, so that’s another thing to consider whereas a straight refinance to a HMO which is professional let or refinancing into a backend buy to let property generally not be a problem. 75% will use low interest rates. 

Last one is hands-on or hands off? 

This is the ultimate question. 

Are you looking to be an investor who wants to be involved on a regular, consistent basis, where you are in the business and you are involved in the business? You like the changeover of tenants, you like being hands-on, maybe even self-managing your local ones or using a letting agent remotely and you like the flexibility of that and you might argue that there is the potential to earn more money. 

Whereas you might get £50-£55 per week on an asylum seeker property for a room you might, for the same area get £90 a week for a private let. 

So then, that appears to be almost double but then you’ve got to weigh up well with a private let I’ll have more running costs, heating, electric, council tax, maintenance. Whereas if you set it up as an asylum seeker contract they may, with the right contract take all that away from you, so your running costs go down, and you’ve got to weigh the two up. Plus, there’s no voids. 

For example, a Covid type environment. your private let you have a period of two months where there is a reduced number of tenants, whereas an asylum seeker contract you just carry on getting the income. You can start to see the pros and cons. 

This is where if you’re working with a coach, mentor, being educated you can dig back and ask that question but do think ahead. What if you want to exit in the future in which case you might have more restrictions with asylum seeker type social housing contracts, whereas if you actually just want to be more hands off like a passive style of income with no hassle, then that would be the way forward. 

Dr Ro signing out.

Disclaimer: This video or written publication does not offer investment or financial advice and nothing in them should be construed as investment or financial advice. Our publications provide information and education only. The information contained in our publications is not, and should not be seen as a recommendation to use any particular investment strategy. Always seek financial advice from an independent financial adviser around your own personal financial situation.

Leave a Reply

Your email address will not be published. Required fields are marked *