Houses of Multiple Occupancy (HMOs) have been rapidly growing in popularity among investors. For landlords, gross yields are higher than a standard buy-to-let property and, while they demand a level of expertise in terms of managing tenants, the buildings and the plethora of legal obligations, the financial yields add up. Statistics from Mortgages for Business show that since Q2 of 2018, the gross yield of an HMO has increased from 8.6% to 9.6% in Q2 of 2019, whereas a standard buy-to-let has increased by 0.3%.
The demand is there. The UK’s population is continuing to grow. The Office for National Statistics reported that England’s population alone grew by 358,000 in 2018 (up 0.6% from mid-2017). With a rising number of people in the UK seeking city accommodation, the shortage of housing stock is another key driver of growth in this market.
Average incomes have long been out of step with house prices and it appears that individuals (like young professionals) are embracing HMOs in order to save money for a deposit – especially in crowded cities such as London.
Spareroom.co.uk showed that only 31% of adults in the UK living in shared accommodation could afford to rent on their own if they wanted, and only 12% could afford to buy a property. Renting properties in London averagely drains around 50% of tenants’ monthly income, sharing has become the more attractive option.
The research found 57% of tenants share for financial reasons, 37% for social and financial reasons and 3% for social. With people remaining single for longer in their 20s and 30s, there is more desire to be mobile, social and have more disposable income. By sharing a house they can save money on rent and save for a mortgage. At the other end of the demographic, more older people are divorcing and living alone, further increasing the demand for one person households.
HMO’s provide flexibility for younger renters
HMOs provide significant flexibility for younger renters but also for younger families whose primary earner has to work away from home. Rather than relocating their life and family to cities, employees often rent a room during the week and return home on the weekend.
It’s easy to see how HMO is of interest to investors, tenants and lenders. But it is not a silver bullet solution to our overcrowded cities. Many investors will pursue this route but licensing, legal and financial risks are significant. HMOs do not all serve the same geographies, demographics or income brackets. They come in varying states of quality (including dilapidation). It is important when considering lending strategy that lenders should not fear HMOs but approach with the caution they would reserve for any other market.
Source: Mortgage Finance Gazette
Author: Paula Matthews
Date: 6th of February 2020