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In this second part of our 8-part strategy series we’re going to be looking at SCU’s or self-contained units.
The Schrödinger’s cat of HMOs - Self Contained Units or SCUs are exactly what they sound like. Self-contained bedsits or studio apartments. Depending on the set up, SCUs may be considered HMOs. If one or more of the units either shares or lacks access to a basic amenity, or if the conversion to SCUs doesn’t comply with the building standard of the 1991 building regulations and less than 2/3rds of the flats are occupied by long leaseholders, then you’ll be operating an HMO.
What is the SCU strategy?
To operate this strategy, you either buy a building full of self-contained units (think studio apartments or bedsits), or you buy a property that you can convert into SCUs. It is common to convert shared houses or HMOs into SCUs. In the right areas these can attract high rents, and like HMOs they tend to have higher yields.
Pros of the Self Contained Units strategy
If your SCUs aren’t considered an HMO, there are less regulations around SCUs than HMOs.
Smaller units are easier to look after, so when a tenant leaves it’s easier to turn the space around for a new tenant.
SCUs don’t need much in the way of furniture and often basic furniture is fine, so it is a bit cheaper than running a traditional HMO.
It is a good way to maximise an investment and offers a certain level of protection. For example, should one tenant leave, you will (hopefully) have others in the property, so void periods are never complete voids like you would get in a standard buy to let scenario.
Cons of the SCU strategy
You may make less from this strategy than you would from a more traditional HMO.
It tends to be younger professionals who appreciate this kind of living arrangement so turnover will likely be high. Younger people either go on to find a partner or to have children and usually at this point they require more space, so they move on. If you’re managing the properties yourself, a higher investment of time will be needed to advertise your units and get them occupied.
You will need to provide furniture for SCUs. This could be a pro or a con depending on your situation. For the most part cheap and cheerful furniture will work well, but be prepared for a higher level of wear and tear as well.
As we’ve mentioned a few times, in some circumstances Self Contained Units can still be considered HMOs. If this is the case for your SCUs you’ll have stricter rules to follow on room size, health and safety, and you’ll need to get licenced as well.
It is virtually impossible to buy a single bedsit; you have to either buy a whole building full of them or you have to be up for converting a building yourself. You may need planning permission to make this happen.
It is more difficult and more expensive to secure finance if your units come under the classification of HMO.
What’s needed to make self contained units successful?
A property business plan is a must particularly if you’re transitioning from one strategy to another. If you are buying a property to convert, your plan will need to account for any refurbishment costs.
An exit strategy is essential for SCUs because when the time comes to sell, you either need to convert the property into a family house or you’ll need to find a buyer who wants to take on SCUs or an HMO set up.
Finding the right area to set up SCUs is also important. There’s no point converting a property into SCUs if there isn’t any demand for this kind of living arrangement in the area. You’ll be looking for properties close to town or city centres with good transport links, or close to factories in order to attract young working professionals.
You either need to be willing to put in the time it takes to manage an increased number of tenants and a higher turnover, or you need to hire an agent to do this for you. Hiring an agent will eat into your profits and it can be more difficult to find an agent if your SCUs fall under the HMO banner.
When SCU’s go right
If you can set up SCUs that don’t fall under the bracket of HMOs, you’ll have a much easier time with this strategy. If you’ve found the right property and you’ve secured some good tenants, you’ll find that managing the properties is straightforward and you’ll be rewarded with a steady stream of income. If you’ve set up in the right area, you’ll still have voids, but they will be easy to fill.
When Self Contained Units go Wrong
You can end up with Self Contained Units you can’t rent out if you haven’t done your research, and if there’s no growth in the area it can impact your exit strategy. If your SCUs fall under the banner of HMOs, there’s going to be a lot more work involved. If you haven’t screened tenants properly, you could end up with tenants who take a lot more looking after than the working professionals you were trying to attract in the first place.
Who does Self Contained Units suit?
A seasoned HMO professional or student landlord could well benefit from this strategy, especially if you want to look at targeting a different demographic to the traditional HMO.
If you have the money to refurbish an existing property or to buy a block of SCUs and you spot a good opportunity, i.e. an area that has high demand for SCUs, this could be a great strategy for you.
You need to have experience researching an area and reading the market so you can react quickly to economic changes.
If you don’t mind a middling tenant turnover and you have the time to advertise properties and ready an apartment when a tenant leaves, you might consider this strategy.
