Is it worth investing in Social Housing?

Social housing is an often overlooked property investment strategy.

Most first time investors either think about Buy-to-Lets for passive income, flips for lump sums of cash or even HMOs for higher cash flowing deals.

Whilst experienced investors will be looking at opportunities around developments, conversions and Commercial Property.

This sometimes misses out the fantastic opportunity for those who want to explore the win/win strategy of Social Housing.

Why is Social Housing a win/win property investment strategy?

Everyone benefits in a Social Housing deal:

• The investor can get a completely hands off income if they’ve structured the deal correctly
• The council will be able to fulfil their obligation to house those that aren’t able to house themselves often in a much more cost effective way than paying for hotels, hostels or BnBs
• The tenant gets a home they can call their own, feel safe in and know they won’t be evicted at short notice

Every party is pleased with the outcome which only leads to more deals of this type being struck between the council and the landlord which in turn allows the landlord to grow their portfolio faster.

Why don’t councils have their own properties to rent?

Councils do have their own properties to rent, but the problem is they don’t have enough.

There isn’t an exact known number of how many properties the government own or manage in the UK but estimates place it at somewhere around the 2.6 million mark which is less than they need by a significant number.

Historically the government did own a lot of housing stock however in 1980 Margaret Thatcher initiated the Right to Buy scheme giving council tenants the option to buy their council owned property at a significant discount to help people get onto the housing ladder who otherwise would not have been able to afford to do so.

This meant that council housing supplies took a nosedive but the government didn’t need to house as many people as they do now.

Unfortunately some Right to Buyers miscalculated how much upkeep a home can be and couldn’t afford to run them personally so ended up selling them to private buyers and ended up needing support from the council who now owned significantly less properties and had to come up with an alternative way to house people.

Right to Buy is still in effect today and gives tenants of council owned properties the ability to buy their home at as little as 30% of the market value so in effect the government are still selling off the properties they own but they have an obligation to do so because of the rules put in place over 40 years ago.

On top of this, the UK is suffering a massive housing shortage anyway. The government says we need to be building over 300,000 new homes a year in order to keep up with demand but the actual number being built is far below that.

We are an island with a limited amount of space and in this limited amount of space there are restrictions on what can and can’t be built on. Greenbelt land for example is heavily protected so the actual areas where houses can be built are quite small.

Also, it would be more expensive for the government to build houses rather than renting them from private landlords, which can be done much faster, therefore is a faster fix for them.

In many parts of the country, it is cheaper to buy an already constructed home than it is to build from the ground up anyway so from an economic standpoint it’s not always the best option to be building properties.

On top of this the UK also has a shortage of tradespeople to be building these properties (which in turn makes the costs higher) so bearing all of this in mind it's quite easy to see why not as many houses as required are being built.

How does the UK solve the lack of Social Housing problem?

The main problem is that there’s not enough housing for those that need it, however the solution to this is for the government to rent properties off private landlords.

The government turns to landlords not only because they don’t have the stock but also for a few other reasons. The flexibility of knowing they have a property from a landlord that they can do with as they like is a huge benefit, they can house people on a short or long term basis depending on what their database looks like at any given time.

Short term accommodation is often expensive so it’s much cheaper for councils to use private landlords’ properties as short term accommodation instead of paying extortionate hotel rates. From a cost perspective it's cheaper for councils to effectively rent off others than it would be to buy for themselves so it’s a double win when it comes to money saving.

Another reason is that housing is becoming far more innovative now than in years gone by; co-living spaces, modular housing or shared ownership type schemes can all be used to bear the weight of the huge demand.

Some of the potential dangers for councils are that many landlords provide sub-standard accommodation. There are many horror stories of slum-landlord style programmes on the TV and the council don’t want to be using poorly renovated properties to house those most in need.

If you can create modern, fresh, safe, clean, water-tight and mould free properties then the council will be desperate to work with you which is why we train our students to do exactly that!

Why should I do Social Housing as a property investment strategy?

There are many benefits including knowing you’ve helped someone in need and put a roof over their head instead of them potentially sleeping on the streets.

Often councils operate by giving the private landlord a fully repaired and insured lease over a medium-term period which means they’ll take care of any repairs and give the property back to you in the same condition as you gave it to them, as well as paying you every single month even if the property is vacant. That means say goodbye to voids, 6-month tenancies and broken boilers!

Typical leases will be for 2 to 5 years but during that time frame it's highly unlikely councils will be buying more housing of their own so they usually want to extend the agreement as it comes to an end.

In the government you’ve got a pretty solid tenant who will more than likely pass a credit check! You can end up getting a higher cashflow as you won’t need to use a letting agent or put money aside in case of repairs.

Social housing when done correctly can take the hassle out of running a property business, allowing you to focus on growing the business. You may have to go above and beyond on the refurbishment and effectively renovate the property to HMO standards to ensure it’s fire safe but the extra money you spend on the refurbishment will pay off when all you need to do each month is check your online banking to make sure you’ve been paid.

What are the disadvantages of investing in Social Housing?

Unfortunately there can be a few potential drawbacks when it comes to investing in Social Housing.

One of the biggest ones is lending. Lenders like ASTs as they can get vacant possession of a property quickly if you default and they need to repossess and sell the property on. With social housing by getting the FRI lease it's harder for the lender to sell if they have to, so some don’t like it.

Also, not all councils will give you guaranteed rent, they may pay the tenant a sum of money each month to cover their rent but you’ll only receive this if your property is tenanted. If the council utilises this scheme then you may still need to be using a letting agent to manage the tenant and collect the rent.

Tenants of this style will probably get paid local housing allowance which is a form of benefit payment from the government and is typically paid to those on low incomes or who are out of work. It's usually paid directly to the tenant who will then have to pass it on to the landlord which makes some landlords wary as if the tenant feels they have more pressing payments to make, then rent can slide down their priority list.

From our experience of dealing with these types of tenants, communication is really important and they can be fantastic long term tenants when managed correctly.

Also, some councils will prefer to work with a landlord who has a larger number of properties rather than one just starting out as it solves their problem faster dealing with portfolio landlords. Many of our students have started to rent their properties out as BTLs until a point before handing over the entire portfolio to the council who then start asking them to buy certain types of properties in certain areas to cover the demand which is a fantastic situation for the landlord to be in.

Is it worth investing in Social Housing?

In our opinion definitely!

The positives hugely outweigh the negatives when it comes to this particular property investment strategy and when implemented correctly with the right education it can be extremely profitable and give the landlord an abundance of time to grow their property business.

Having trained tens of thousands of students over the years and understanding their reasons for wanting to get into property it is very rare to create themselves another job; it’s usually to create time freedom for themselves so they can live a life of choice which is exactly what Social Housing creates.

This slightly niche strategy isn’t going away either as demand is rising significantly which is probably why so many of our advanced students take our Social Housing module to learn it in better detail so they can implement the knowledge and grow their portfolio.

It’s both a fantastic start point or diversification strategy for any investor and we’d highly encourage you to pursue your property goals with Social Housing in mind.

If you are an existing property investor, looking to learn more about the Social Housing investment strategy then simply call our friendly team on 01733 306769.

If you are brand new to property investing and want to learn more, simply reserve your complimentary place on our upcoming kickstart webinar by clicking the button below now.