PASSIVE INCOME GENERATOR: SOCIAL HOUSING

As property investors we are always looking for win, win, wins. So was Sue Sims when she came across the social housing strategy. Could this be the route to truly passive income? She explains more.

Landlord bashing sometimes feels like the true national pastime, particularly when the budget rolls around or various political parties float their latest short-term solution to the long-term housing crisis in this country.

Luckily, most of us have pretty thick skins and are happy in the knowledge that we are providing high-quality, safe housing for tenants.

Furthermore, there are plenty for whom property has been a means to more time for volunteering and contributing to society in an even greater fashion.

For long-time investor Sue Sims there is a property strategy that is a win, not just in a financial sense, but also in providing housing and shelter to those in desperate need.

SUE SIMS - SOCIAL HOUSING EXPERT

Sims, who purchased her first property at just 21 and who has gone on to build a portfolio in the region of 40 properties, settled on social housing as a way to successfully, and if done correctly, enjoy strong and relatively passive returns.

IN THE FAMILY

She recalls how her parents, who were student rental investors in the 70s and 80s, suggested that she purchase a shop with a flat above it. After being told by one bank manager the only way she could get a mortgage was if her dad acted as guarantor, she was determined to find a way to buy it “under her own steam”.

“I went to see another bank manager and put forward to him a business proposal and really, fortunately, he said, ‘yes’ and we’ve sort of gone from there really. It was definitely because of my dad’s influence that I started in property,” says Sims.

For the majority of her early investing career, she focused on buy-to-lets and then later also gained experience working in a letting agency. It was through that work that social housing as a strategy first appeared on her radar.

“I had a director of a local social housing company approach me because one of the properties that we had up to rent was a student HMO which had missed the academic year,” she explains. “He said to me, can you go and approach the landlord? Would they be prepared to rent it to us for three years on a fully repairing lease? And that was when I first started with social housing. They took three properties quite quickly from the same landlord. So then I started to think because at the same time section 24 was coming into play and I needed to find a way that I could make my properties work harder to cover the additional tax that we were paying.”

THE SEEDS OF A STRATEGY

Having seen it work for clients she decided to test it on her own properties.

“So, I converted a three-bed family home into a four-bed HMO and then did that a few times and saw it was working really well. And it was at that point, that I started to talk to landlords to say, this is something that you could do with your portfolio if you want to get something that is as close to being passive in property as it can be.”

The model is taking traditional three-bed or similar buy to lets and then converting them into small HMOs. Those properties would then be leased to a social housing provider who is paid by the local housing authority to house vulnerable or homeless people. The social housing provider would typically offer a longer lease to the owner of the property, typically between three-five years and commit to maintaining the property to a certain standard, cover all bills and return the property in a similar state at the end of the lease.

There are, of course, conversion costs to factor in to turn the properties into compliant HMOs, however as the examples below demonstrate, the standard of renovation does not need to be to the same level as HMOs aimed at professional tenants including no need for en suites.

In fact, it was such a successful strategy that Sims has since become somewhat known for the social housing in and around her native Birmingham having set up Genie Homes which offers landlords social housing management services, as well as HMO and single let management.

Example social housing kitchen conversion

Example social housing bedroom conversion

PASSIVE IS POSSIBLE

“It is passive for the landlords that we work with because we manage the property on their behalf,” she explains, noting that some do question why they need someone to manage a property they are handing over to a social housing provider.

Well, the answer is not all social housing providers are created equal and Sims had to kiss a lot of frogs to find a select group of reliable firms she is confident working with.

“If you don’t go into that property on a quarterly basis, you do not know whether that maintenance is being done right. So as far as I’m concerned, it’s passive for the landlords that I’m working with because we are making sure their houses are maintained.”

As with any property strategy, not everything is plain sailing and you have to adopt a problem-solving mindset if you want to succeed.

“The biggest challenge at the moment is getting a mortgage that will allow it,” she says. “And then secondly, your insurance is probably going to be double what you would pay for a normal house if it was just a family let. ”Sims is also candid about the fact that with rents rising steeply in the private rental sector that immediate financial returns of social housing versus traditional BTLs might not be as attractive as it once was.

“When I first started looking at the comparison on the numbers, a three-bed house in Birmingham would rent for like £700 to £750. Converting it into the four-bed [social housing] HMO would pay £1,125 a month so there’s a big difference and you’d get paid back really quickly on the conversion. That same three single let house now would probably rent for £900 to £950,” she explains.

It all depends on what you want she says and notes that you really need to drill down into the long-term figures as social lets still offer some strategic advantages.

“If you’re renting your house to a private family, over a period of four or five years, you might have two changes of families, maybe three,” Sims says. “So, you’re going to have some void periods and council tax bills to pay. You’re going to have redecoration in between. You’ve got to factor in all of those figures when you do that bigger comparison. That’s where I think some people don’t think long-term. What they are thinking about is, ‘if I do this for 12 months, I’m only going to get an extra say £1,500 over the year, it’s not worth doing the conversion.’ But actually, when you extrapolate the figures over a longer period of time and you put in those void periods and the additional maintenance that you’ve got to allow for, it’s a slightly different picture.”

In addition to that, one extremely relevant benefit is that social providers normally cover all of the utilities during the lease. As the cost of gas and electricity continue to skyrocket and HMO landlords have had to react and evolve their strategy to mitigate this, social housing landlords do not face this issue.

GET STARTED

So, for those who want to consider the handsoffapproach to investing through socialhousing, what advice does the Genie Homesfounder offer up?

“The first thing that I would do would be to speak to a broker to find out whether or not you’re going to easily be able to get a mortgage because that has a big influence on what you’re potentially able to do or not,” she says. “Secondly, find a housing provider that you can work with. Once you know who the provider is and what they require you can then go shopping. You will know what type of property they want, how much they will pay and you can then run your numbers to make sure it will be a viable deal… it is much harder to have a property and then to find a provider.”

If you want to find out more about the social housing strategy, follow@hmosuesims on Instagram or get in contact with her via geniehomes.co.uk

TIME TO PARTNER UP?

Sue Sims is also one of the founders of Partners in Property, a networking organisation that holds monthly full-day meet-ups across the country featuring expert speakers, presentations, Q&As and mastermind sessions. While there is a monthly membership fee, Sims promises there is absolutely no on-site hard sell.

“One of the reasons we set up Partners in Property is because we wanted to have that network organisation where you’re not being sold to. So, people literally come, we have the day - it’s usually a Friday at whichever location and we have the speakers, lunch and we do round tables in the afternoon. Everybody can go away thinking, oh, I’ve had a really good day, I’ve learned lots, but nobody has been jumping on me to say, ‘can I have your credit card details?’”

Find out more at partners-property.com

RUNNING THE NUMBERS

A traditional 3-bed BTL versus a social housing 4-bed HMO

BTL

Purchase price: £128,000 Deposit: £32,000 Stamp duty: £3,900 Legal fees: £2,000 Broker fees: £1,000 Refurb: £5,000 Money in the deal: £43,900 Rent: £7,800 Mortgage £3,840 (4%) Cashflow: £3,960 ROI: 9%

SH HMO

Purchase price: £128,000 Deposit: £32,000 Stamp duty: £3,900 Legal fees: £2,000 Broker fees: £1,000 Refurb: £15,000 Money in the deal: £53,900 Rent: £13,500 Mortgage: £5,760 (6%) Cashflow: £7,740 ROI: 14.3%