The Ultimate Guide: Co-Living Spaces vs HMOs in the US

The student housing market in the United States has long been a dynamic and lucrative sector within the broader real estate industry. For decades, the US student housing market has been a robust and consistent performer, driven by the ever-growing enrollment in colleges and universities. Purpose-built accommodation for students have thrived due to characteristics like proximity to campus, furnished units, and communal amenities, technology integration, etc. as the selling points for the perfect house for students.

However, in the ever-evolving student housing market, two prominent trends have emerged in recent years - Co-Living Spaces and Houses in Multiple Occupancy (HMO) properties. Depending on the region, HMOs go by different names. In the UK, they're known as Houses in Multiple Occupations, while in the US, you might hear them referred to as rooming houses or multifamily housing.

With the private accommodation sector in the student housing market showcasing immense growth as compared to the PBSA or university-affiliated accommodations, HMOs and co-living spaces are expected to boom substantially in the coming years. According to the Amber Student Housing Report 2023, private accommodations stand at 55% of the USA’s market share whereas PBSAs and university accommodations have a share of 23% and 22%, respectively.

Co-living spaces: A Modern Living Solution

What are Co-Living Spaces?

A co-living space, often referred to as shared housing, are innovative and communal house for students designed to cater to the evolving needs and preferences of today's renters. In this type of space, residents rent individual bedrooms within a larger, fully furnished, shared living environment. These spaces prioritize the creation of a sense of community, convenience, and affordability.

Why are Co-living Spaces Gaining Traction Amongst Operators?

These spaces are the new up-and-coming residential option that millennial and Gen Z students prefer. Here are some key statistics to consider:

1. Rising Popularity of Co-Living Spaces

Co-living apartments in the United States have gained immense popularity in recent years, catering to a diverse range of residents seeking community-oriented living environments. According to Grand View Research, the global co-living market size was valued at $6.1 billion in 2019, and it is expected to expand at a compound annual growth rate (CAGR) of 5.2% from 2020 to 2027. The US, in particular, has seen a surge in these kinds of spaces, with cities like New York, San Francisco, and Los Angeles leading the trend.

Fully Furnished Accommodations: They typically provide fully furnished private bedrooms or suites, complete with comfortable beds, desks, storage solutions, and stylish decor.

All-Inclusive Rent: Rent in these spaces often includes utilities such as electricity, water, gas, and internet, simplifying budgeting for residents.

Communal Spaces: These spaces emphasize community, and as such, they offer a variety of communal areas. These might include co-working spaces, kitchens, lounge areas, dining areas, laundry facilities, security, flexible lease terms, and many more.

These features and amenities make co-living spaces an attractive option for individuals and professionals seeking a convenient, community-driven, and well-designed experience in the United States. The focus on creating a balanced work-play-live environment helps residents enjoy the best of both worlds while fostering meaningful connections with fellow residents.

These spaces strategically position themselves within walking distance or a short commute to educational institutions. This proximity eliminates the stress and time-consuming nature of daily commuting, allowing students to focus more on their studies and extracurricular activities.

2. Attracting Student Tenants

Students, a significant market segment, are increasingly drawn to the concept of co-living apartments. A survey by Ernst & Young found that 34% of millennials would consider living in this space for accommodation.

3. Potential for Higher Rental Yields

Due to the ability to charge premium rents for fully-furnished, amenity-rich spaces, these spaces can offer attractive rental yields. Depending on the location, investors can expect profitable rental yields. Moreover, student tenants opt for shorter lease tenures, opening up possibilities of higher rental prices and yield.

4. Lower Tenant Turnover

These spaces often promote a sense of community, which can lead to longer tenant stays and reduced vacancy rates. A sense of community fosters a feeling of belonging and attachment among residents. When tenants feel connected to their living space and the people they share it with, they are more likely to renew their leases and stay for extended periods. This minimizes turnover and the associated costs of finding and onboarding new tenants.

5. Beneficial for Property Operators

Diverse Tenant Base: They attract a diverse tenant base, including students, young professionals, and remote workers. This diversity can reduce the risk associated with a single-tenant demographic and provide property management groups with a wider pool of potential renters.

Reduced Marketing Costs: They tend to attract tenants quickly due to their unique offerings, reducing the need for extensive and costly marketing efforts. Property management groups can fill vacancies faster and with less advertising spend.

Increased Occupancy Rates: They often have higher occupancy rates compared to traditional rental properties. This can result in a steady stream of rental income, reduced vacancies, and more reliable cash flow for property management groups.

HMOs: Traditional Investment with a Twist

HMOs, on the other hand, represent a more traditional form of investment in the student housing market, but they too have evolved to cater to the changing housing landscape. HMO properties typically consist of single-family homes or apartments rented out to multiple tenants, each with their separate lease agreements. Let's explore some HMO statistics:

1. Steady Demand for Affordable Housing

HMOs have long been known for providing affordable housing options. According to the US Census Bureau, in 2020, 36.2% of US households were occupied by renters, highlighting the continuous demand for rental properties.

2. Stable Rental Income

HMOs offer a stable source of rental income, as vacancies are often mitigated by having multiple tenants in a single property.

3. Market Diversification

HMOs can be found in various urban and suburban areas, providing investors with a diverse range of growth and investment opportunities.

4. Potential for High Cash Flow

Depending on the location and property management, HMOs can generate attractive cash flow, with some investors achieving high annual returns.

Decision Dilemma: Co-living Spaces vs. HMOs

Co-living spaces as well as HMOs, offer unique opportunities for investors, but understanding their differences and advantages is crucial when deciding where to allocate your capital. In this comprehensive guide, we'll delve into the world of both types of accommodation in the United States, to help you make informed investment decisions. Let's explore the key factors to consider when deciding between Co-Living Apartments and HMOs:

1. Location

Both types of accommodation can thrive in urban areas, but co-living spaces may have an edge in trendy, city-centre locations, where millennials and young professionals are seeking community-driven living experiences.

2. Investment Capital

Co-living apartments often require a higher upfront investment due to the need for furnished units and communal amenities. HMOs may require less initial capital but can still provide substantial returns.

3. Management Complexity

Managing co-living spaces may involve more complex operations, including community-building efforts and ongoing property maintenance. HMOs, while still requiring management, may be simpler to oversee.

4. Tenant Demographics

Consider your target tenant demographic. Co-living spaces are often popular among younger professionals and millennials, while HMOs can attract a broader range of renters, including families and students.

5. Legal and Regulatory Considerations

Regulations can provide a sense of stability and predictability for property owners and investors. Operating in an area with well-defined regulations can make it easier to ensure compliance with local laws. This can help you avoid legal issues and potential fines related to zoning violations.

In locations where co-living and HMO regulations are less stringent or less enforced, there may be an increased risk of safety concerns. Lack of regulations can lead to properties being overcrowded, potentially compromising the safety and comfort of residents.

Balancing regulations and safety risks is essential. Regardless of local regulations, prioritize the safety and well-being of your tenants.

6. Risk Tolerance

Assess your risk tolerance as an investor. Co-living spaces may offer higher rental yields but can also come with more significant operational risks, such as tenant turnover.

Conclusion: Finding Your Investment Niche in the US Student Housing Market

In the battle of Co-Living Spaces vs. HMOs in the US, there's no one-size-fits-all answer. Your investment decision should align with your financial goals, risk tolerance, and target market. Students can opt to choose co-living spaces if they have a larger initial investment, seek premium rental yields, and are willing to invest in community-building efforts. On the other hand, investors can opt for HMOs if they prefer a more traditional investment model, seek a stable income stream, and are comfortable with managing individual leases and properties.

Ultimately, the success of your investment in either co-living spaces or HMOs will depend on thorough research, smart financial planning, and a clear understanding of the student housing market dynamics in your chosen location. As the real estate landscape continues to evolve, staying informed and adaptable will be key to your long-term success as an investor in the US. So, thrive in the market by listing your property with amber!

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