HMO vs Serviced Accommodation – Which Strategy Is Best?

First of all, a HMO or otherwise known as a House of Multiple Occupation, is a property in which you rent out rooms to individual people. This is typically for 6 months, or more on an Assured Short Hold Tenancy (AST) contract. If you are wondering who would like a HMO? The tenants might be students, young professionals, or working people. Generally, they are the transitory type of tenant. They might be there for 6 months, after which they could move on.

Sometimes you might have a tenant there that stays for three or four years. They move in and they live in this shared house. The tenants in a HMO property might have their own private facilities such as shower, hand basin, toilet, or they might share a bathroom. But they'll usually share a kitchen and living room.

As people who like to live with other people, the tenants are used to that kind of living. If someone moves to a new city, it is a great way to meet friends. It is also more cost effective living in a HMO, than it is living on your own in a studio apartment. This is because in a HMO the bills tend to be included.

A good HMO should make a £1000 profit per month after all of the expenses. I wouldn't buy a HMO if it made less than £500 profit per month profit. A large HMO could make as much as £2,000 in certain areas.

Serviced Accommodation is very different. In Serviced Accommodation they are short let properties, it might be a house like a HMO or a one / two-bedroom apartment.

The type of person who rents out Serviced Accommodation might be someone going on a city break, or working on a project out of the city - but don't want to stay in a hotel. They want a bit more space to spread out and want their own apartment.

If you are traveling with friends, it can be far more cost effective for two couples to share a serviced accommodation property. This is instead of booking two rooms in a hotel. The short term nature of the tenancy also means the rents you get are very high. So this is again a strategy which creates a really high income, just like a HMO. 

There are a couple of things you need to be aware of, when it comes to Serviced Accommodation property. Firstly, it's probably not going to be fully occupied all the time, so a good estimate to aim for is a 70% occupation rate.

You are also practically running a business. You need cleaners who not only clean everything but also change the bed sheets like a hotel. This is one of the first disadvantages of following a serviced accommodation strategy instead of a HMO - it is more work. You have to have a full infrastructure in place.

You don't necessarily have to be doing the work, in fact you shouldn't be changing the sheets and cleaning the property yourself - you can employ other people. But with employment, there is much more complexity. This is the first reason why I prefer investing in HMO's.

My second reason for preferring HMO property is that you get a more, steady and reliable income. Once the property is full, you know that your tenants are there for at least six months or longer. Yet with Serviced Accommodation, you don't know if people are going to turn up.

There are various scams where people come and stay in your Serviced Accommodation and then claim that they didn't stay. This is where they usually do a charge back on their credit card. This is another problem related to Serviced Accommodation. 

This leads me on to the third challenge with Serviced Accommodation. There are a lot of rules and legislation in place for HMO's, but not for Serviced Accommodation. This is despite it being a concept that has been used for a very long time. 

It is because of this current lack of regulation with Serviced Accommodation that in the future, regulations might be introduced. This could then prevent people who are doing Serviced Accommodation from doing it, due to new legislation. 

Although the HMO standards keep on changing and being updated, compared to Serviced Accommodation, there is not going to be a significant change. 

So for that reason, although I think Serviced Accommodation is great for your property portfolio - I wouldn't use this strategy for all of your properties. It is always a good idea to have a balanced portfolio.

As a whole, I think that both of these strategies are great but my personal favourite is a HMO. It is also what we reccommend most of my students to do. But we also have students who have successful in both, so don't put all of your eggs in one basket.