What's the Better Option? Serviced Accommodation or HMO

Nikka Sulton

What’s the Better Option? Serviced Accommodation or HMO

Seasoned property owners and real estate speculators have likely heard of HMOs and SAs, but when comparing Serviced Accommodations with HMOs, which is superior? Both represent high-cash-flow investments with frequent tenant rotation; HMOs and SAs have many similarities but are strikingly dissimilar in other respects. This handbook offers a side-by-side assessment of these two forms of lodgings, primarily aimed at those keen on investment, broadening their portfolio, or deriving their livelihood from such revenues.

What is HMO?

First and foremost, it’s crucial to comprehend each term. An HMO, or House of Multiple Occupation, is a form of property where at least three unrelated individuals reside who don’t constitute a single household. An HMO is regarded as the only, or primary, dwelling of its inhabitants.

If the landlord resides in the property along with more than four other individuals, and the building spans three or more storeys, an HMO license is necessary. Yet, licensing regulations are council-specific – certain councils have ‘additional licensing’ that may also be obligatory. Therefore, before embarking on an HMO venture, gather further information from your local council first, as this certainly distinguishes the HMO from Serviced Accommodation (since councils are often unfamiliar with SA).

Here are several scenarios where individuals might seek an HMO:
University students living in their city of study
Seasonal employees (e.g., those relocated for work)
Professional employees (e.g., those starting a new job)
Contractors Corporate clients

Although a superb long-term investment, HMOs require a significant initial investment and management. A House of Multiple Occupation (HMO) is a category of property suitable for short or long-term rental, typically a minimum of six months.

HMO configurations can vary greatly, such as two couples living together (2 households) or three friends sharing a property (3 households). A small HMO can accommodate up to 6 tenants sharing facilities, while a large HMO can host seven or more tenants utilising shared amenities.

Several unique attributes of Houses of Multiple Occupation include:

Three or more occupants Licence necessity for four or more beds More than one household (either a solitary individual or family members cohabiting) Common facilities Understanding of HMO regulations and compliance: Managers must be conversant with legislations around letting family homes, acquiring licences or Assured Shorthold Tenancies (ASTs), and much more.

What is Serviced Accommodation?

Serviced accommodation, also known as SA, is a type of fully furnished lodging offering services akin to a hotel while providing the comfort and convenience of a home. It’s designed to function as a ‘home away from home,’ and caters to both short-term and long-term stay requirements.

The majority of guests seek serviced apartments as an alternative to expensive hotel stays. While most SAs charge a nightly rate similar to hotels, it often proves more cost-effective for groups of two or more. Some additional features of serviced accommodation include:

Often situated within a residential building
Availability for both brief and extended stays
Round-the-clock helpline support
Regular housekeeping services (weekly or more frequently if needed)
Fully furnished apartments, equipped with a complete kitchen
A lounge area and at least one bathroom
One or more separate bedrooms (or a specific sleeping section in studio flats)
Inclusive of Wi-Fi and all utility bills
Facilities such as television and up-to-date technology.

Serviced apartments bear more resemblance to hotels than houses due to the transient nature of the guests’ stay. The guests have a primary residence elsewhere; hence an SA cannot be regarded as the guest’s sole or main dwelling. However, while providing a comparable level of comfort, SAs are not as pricey as hotels.

Overall, a serviced apartment is a furnished accommodation option that can cater to both short-term and long-term stays.

Where would I make more money? SA or HMO?

Both offer solid revenue streams, yet there’s no one-size-fits-all solution!

Much like any business endeavour, achieving financial success with SA and HMO depends on a variety of factors: the location, nature of the property, whether it’s contemporary or traditional, market demand, local infrastructure, among others.

It’s not just the market conditions and industry landscape that count: your personal objectives also matter. What do you intend to accomplish with this property? There are numerous possible objectives:

Expanding your property portfolio
Swift return on investment
Establishing a reputation in the market
Purely financial gains

Another vital question is whether you plan to self-manage or entrust it to professional managers?

Many individuals mistakenly believe they’ll make more profit by self-managing, but often find themselves losing money due to lack of experience, practical skills, and market understanding.

Furthermore, are you contemplating short-term or long-term growth? Employing a management company can be beneficial, particularly for long-term development – they play a pivotal role in fostering relations with industry partners and aiding your gradual expansion.

House of Multiple Occupation VS Serviced Accommodation:

HMOs and SAs, while both serving as short-term accommodations, differ significantly. SA is more like a hotel, whereas HMOs lean towards the opposite. HMOs experience lower tenant turnover, reducing the effort needed to find new tenants. SAs offer flexible rental durations, ranging from a few nights to several months.

Apart from their distinct management, strategies, and documentation, these accommodations are better suited for particular areas and guest preferences.

Here are some main pros and cons for each of them:

Pros of Serviced Accommodation

Cons of Serviced Accommodation

Easy Entry: Serviced apartments are versatile and can be established in various locations, making them an appealing choice for newcomers in the industry.

Legislative Flexibility: Unlike HMOs, serviced apartments are largely unregulated, allowing almost any property to be utilized as a corporate or holiday let.

Guest Management: You have the authority to remove guests if they don’t pay or if issues arise.

Swift ROI: Serviced apartments often yield high returns, especially when well-managed. Depending on the property’s location, you can charge £80 or even £100 per night, potentially leading to a quick return on investment. In high-demand areas, your ROI can be even faster.

Growing Market Demand: The serviced apartment industry is expanding, driven by the preference for comfort and cost-effectiveness over traditional hotels. Even during economic crises, the demand for serviced apartments remains high. Key workers and those in quarantine require accommodations, and post-crisis, the demand is expected to persist as people resume travel.

Higher Booking Risk: Serviced apartments, typically used for short-term stays, involve a high turnover of guests. Inadequate management can lead to potential losses.

Management Responsibility: You or your manager are responsible for everything, including bills and cleaning. If self-management isn’t feasible, consider hiring a serviced apartment management company.

Increased Tenant Flow: Serviced apartments tend to host more guests than HMOs.

Pros of a HMO

Cons of a HMO

Reduced Booking Risks: When tenants commit to a 6-month or longer stay in an HMO, it naturally leads to lower booking risks, although occasional vacancies can still occur.

Management: While the property remains your responsibility, managing an HMO is notably simpler than an SA. Cleaning is your duty, but limited to communal areas. Regular inspections are essential to ensure property upkeep.

Consistent Income: With a 6-month contract, you can expect a reliable income for the duration of the agreement, which is a significant advantage, unless issues arise with tenant payments, which is always a possibility.

No Weekend Guests: HMO properties typically host guests for weeks or months, as opposed to the common weekend stays in SA properties. This can be advantageous for property owners who prefer using their property on weekends.

Greater Tenant Responsibility: In serviced apartments (SA), you typically manage one to four occupants, while in House of Multiple Occupation (HMO) properties, you can accommodate five, six, or even ten tenants, necessitating ongoing interactions and familiarity.

Complex Regulations and Licensing: The HMO setup involves a multitude of regulations. Initially, converting a property into an HMO may require planning permission if it wasn’t previously designated as such. Subsequently, licensing for the conversion is essential. For existing HMOs, annual inspection fees apply. Additionally, compliance with various safety standards and amenities is mandatory. If you seek to enjoy the advantages of HMOs but lack the time or expertise to handle the associated regulations, a management company can provide valuable assistance.

Tenant Payment Issues: While HMOs offer the advantage of consistent cash flow, the looming concern for any landlord is tenants failing to pay. Unlike SA, HMOs involve a higher degree of bureaucracy, making it challenging to address non-payment issues.

Elevated Initial Expenses: HMOs are typically spacious properties that demand substantial furnishing and additional fees. For newcomers to the property rental scene, the elevated initial costs may not make it the most suitable choice.

Area and Location

An additional crucial element to weigh up before initiating either enterprise is the locality of your property. This aspect is frequently overlooked by many, but it’s often the primary factor that entices someone to rent a property. For instance, if your flat or house is located near a university, your target demographic could be students looking for temporary accommodation (HMO). Thus, understanding the characteristics of your area is key to successful property investment.

If your property is situated in a central district bustling with businesses, employees and their companies might be on the hunt for short-term solutions that are more budget-friendly than hotels (SA). Tourist hotspots also particularly benefit from short-term options, given that most visitors stay for a weekend or less than a week (SA).

The property’s location is among the most pivotal factors to consider. The right choice of location for your investment can have a significant impact on your bookings, pricing strategy, and the probability of maintaining high occupancy rates.

“Why is that?” you might wonder. Contemplate the perspective of the guest or tenant: what would prompt them to book your property? Of course, amenities, comfort, and cost are important considerations. But initially, they are reserving a place to stay in a particular area for specific activities. They might be embarking on a holiday, travelling for work, pursuing studies, or simply seeking a two-day change of scenery.

If you’re keen to learn more about the plans of local councils and how they could influence your investment, check out their respective websites:

Luton Council
Milton Keynes Council
Bedford Council
Stevenage Council
Northampton Council

Regardless of your preference between HMO and SA, if you’re a novice in this field, it would be prudent to reach out to a property management firm and seek their counsel. A solid beginning is key to optimising results and profit.