Are HMOs A Good Investment?
Property investors are always looking to maximise their returns and with living expenses continuing to climb, investment income is always welcome. As buy to let landlords are beginning to look to protect their margins in the face of potential rate rises, many are looking to HMOs.
In this article, we will talk about what HMOs are, provide a breakdown of whether an HMO is a good investment (including the potential returns), the pros and cons of HMO investment and how these properties can be financed.
What is an HMO?
A house in multiple occupation (HMO) is a property that is owned by a landlord and let to 3 or more unrelated parties on separate agreements. The rules state that the tenants must form one or more households (so a husband, wife and child would not count) and share toilet, bathroom or kitchen facilities with other tenants.
HMOs, come in different forms, with some being let to young professionals, others to local workers and some as student lets. Regardless of the type of HMO that you’re operating, you must meet certain standards and obligations before you can let property as an HMO and may even need an HMO licence, depending on the property and rules set by the relevant local authority.
How do I finance an HMO?
HMO finance can be split into two main areas, finance to convert a property into an HMO and a mortgage to finance an HMO once it is let. The former is funded through property refurbishment finance, a type of bridging loan.
Property refurbishment finance is arranged as a short-term loan, usually for 6-18 months while works on the property are completed. Once completed, the property is then usually refinanced onto an HMO mortgage and the property can be let to tenants.
Are HMOs a good investment?
HMOs are a fantastic investment as they produce rental returns far in excess of those offered through traditional buy to let investment. This can provide a real hedge against rising interest rates by ensuring that your rental income is far in excess of your mortgage payments, a luxury that isn’t always possible on single lets.
Demand for multi-let property is increasing and in the right area, assets can end up with very few voids as tenants favour affordable flexible housing.
Yields on HMOs averaged 7.5% in 2021, which is a significant uplift over traditional BTL properties, which averaged just 3.63% over the same period. Of course, rental yields vary across the country, meaning your yield could be even higher if you choose the location of investment wisely!
What are the pros and cons of HMO investment?
While HMOs are an excellent investment, there are several pros and cons to consider, we will cover the main ones here.
Pros
- The biggest advantage is the rental yield, which as mentioned earlier is over twice as high as traditional buy to let investments.
- Rental void periods are also less of an issue as even if one tenant moves out, you will still have rents from the others coming in. For a property with 5 tenants, the loss of one would only be a 20% loss of rental income (assuming all rooms achieve the same rent).
- Demand is increasing across the UK and if this continues, it’s likely to create positive pressure on HMO values and rental values.
- If a local authority issues an Article 4 directive (meaning HMOs can no longer be created under permitted development), then your property value is likely to increase.
Cons
- These properties can be slightly harder to manage as there are more tenants to deal with, meaning you may have to spend more time managing the property.
- Finding an agent who is comfortable managing HMOs may be trickier, although this is becoming less of an issue as more investors and tenants turn to HMOs.
- The start-up costs are higher when investing in HMOs than with traditional buy to let properties.
Are HMOs difficult to manage?
Although HMOs are trickier to manage than buy to let properties, the rewards usually make this worthwhile for investors. If you’re keen to avoid spending additional time and effort on managing tenants, consider using a specialist letting agent who will do the hard work for you.
As you’re receiving a higher rental yield, it may be worth spending some of that extra cash on some additional support to save you time and hassle.
Author: Gary Hemming
Date: 1st of January 2024
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