Keen to invest your hard-earned money into property, but not sure how? Why not consider making an HMO investment?
Unlike standard buy-to-let investing, this area of property investment is not only growing, but also delivers far greater yields. These two factors make HMO investment an inviting opportunity.
To find out whether HMO investment is the right route for you, we explore why HMOs are such a good investment, their profitability, and the factors to consider before you take the plunge into HMO property investment.
Finally, if you’re keen to add a HMO property to your portfolio of investments, we show you how you can do exactly that with a helping hand from the knowledgeable and highly-experienced team at Mistoria Group.
What is HMO investment?
Let’s break down exactly what a HMO is and why they make such appealing property investments. A house in multiple occupation (HMO) is one that is rented by at least three people from separate households.
While individuals typically rent their own private bedroom, other facilities (such as kitchens, utility areas, dining spaces and bathrooms) are shared with housemates. HMO investment is therefore the process of a landlord purchasing a property to rent out as a co-living home to multiple tenants – most often multiple single professionals or students.
Also called a multi-let or a house share, HMOs can offer more than a standard buy-to-let investment property. Whether you’ve only just let out your first property as a landlord or you have years of experience in this sector, a HMO is an attractive type of investment.
Why are HMOs a good investment?
Offering some of the highest rental yields on the private market, HMO investments with good potential are highly likely to pay off. They offer a range of benefits that property investors can enjoy including tax advantages, less exposure to arrears and fewer rental void periods, to name just a few. The demand for HMO rentals is also significantly increasing too, making this area of investment a promising opportunity for many landlords and property developers.
How profitable are HMOs?
One of the biggest draws of HMOs is the impressive rental yields that can be as much as three times higher than standard buy-to-let properties aimed at traditional families. By choosing to invest in an HMO instead of a typical tenancy, you could stand to generate far larger profits.
Benefits of investing in HMO property
As mentioned above, the considerable profit/higher rental yields can be one of the most appealing aspects of investing an HMO, but are there any other advantages and if so, what are they? Let’s find out!
Fantastic yields
HMO properties provide landlords with the opportunity to make greater profits than a conventional buy-to-let because each tenant has their own income. As a result, the landlord will benefit from having more tenants, creating a higher overall rent than one household would yield.
By way of illustration, a property investor could purchase a three-bed house that would typically cost £1,500 as a single-let property for one tenant or household. If it were to be converted into a five-bed HMO, the landlord could charge rent of £500 per tenant, producing a total monthly income of £2,500 at full capacity.
Research conducted by BVA BRDC found that the average rental yield for a HMO to be 6.8% in Q2 2021. Not only is the rental yield of a HMO already more appealing than typical buy-to-let properties, but it’s still growing too.
Growing demand for HMOs
This leads us smoothly onto our next point – the likelihood that the demand for HMOs is going to continue to rise in the UK. HMOs provide flexible and affordable housing which is currently in high demand given the dramatically rising costs of living and sky-high energy bills. As a result, they’re becoming increasingly popular as single tenants struggle to afford renting and running a household alone. Plus, the demand for affordable housing typically remains stable despite economic change and uncertainty.
Fewer rental void periods
Having an empty property making no money is never ideal, which is why HMOs can be a popular option for landlords. Even if a single tenant decides to move out, the landlord will still receive rent from the other (at least) two tenants while they attempt to fill the vacant room. As a result, it’s therefore unlikely that you’ll have a completely empty HMO sitting there, making no money.
Decreased risk of arrears
If you’re tired of receiving consistently late rent, HMOs could be the right property investment option for you. For standard tenancies, the landlord is wholly dependent on the income of one household. However, for HMOs, even if one tenant falls behind on their rent, the other multiple tenants are still able to pay. This means that it’s unlikely that you’ll receive no income from a HMO unless the property is completely empty.
Some HMO costs are tax-deductible
There are many unavoidable and necessary costs associated with buying a property including Stamp Duty, legal fees and building survey charges that are considered part and parcel of the purchase price. While these costs cannot be set against rental income, other expenses that are incurred wholly for the property business can be claimed back. This includes the license fee for HMOs, for example.
Factors to consider when investing in HMO property
Now we’ve covered the benefits, let’s explore the other areas that you should also consider. While HMOs undoubtedly offer a fantastic money-making opportunity for developers and landlords alike, there are some factors to consider before you begin to invest your money. This includes everything from the additional planning regulations to the greater start-up costs.
Complex HMO rules and regulations
Standard buy-to-lets don’t require the additional legislation and planning regulations that are required of HMOs. As the rules around HMOs are constantly changing, you’ll need to stay up to date with the latest regulations which can be challenging. Plus, the penalties for not complying can be significant, so it’s often not worth taking the risk if you’re not willing to do your research first.
Difficulties obtaining a mortgage
While most mortgage lenders are keen to work with property investors that have a good eye for profitable opportunities and high yields, HMOs are typically harder to get a mortgage for – especially if you’re a new landlord. In most cases, if you want to financially secure a HMO, you’ll require a greater deposit which can be harder to obtain if this is your first property investment.
It’s also worth mentioning that often investors will purchase a home with the intent of converting it into a HMO. However, a HMO mortgage will not be an option until the property has been completely converted, which leaves a financial hole to be covered in the meantime.
Substantial start-up costs
On top of a larger deposit, you’ll also have to consider whether you can afford the significant start-up costs that come with HMOs. Many HMOs come either part or fully furnished as tenants either store their own furniture or don’t have any when choosing to rent a room in a HMO. Not to mention, HMO tenants will typically share communal areas like the living room, so they need to be properly furnished with fire-safe furniture.
Fire safety factors
Implemented due to the nature of this housing, owners of HMOs should also take into consideration the extensive fire safety regulations they will have to abide by. Because the house will accommodate multiple tenants from separate households, they may not necessarily interact with one another and will typically have locks on their own bedrooms.
With more locked rooms, there’s a greater chance that some tenants may not have a safe and accessible escape route in the event of a fire. One example of these additional fire regulations is that there should be at least one smoke alarm on every level of the house where there’s living accommodation. However, there are many more to consider to ensure your HMO complies with all relevant health and safety regulations.
Limited number of HMOs
Unlike single-let properties, the number of properties that are suitable for either immediately letting as a HMO or renovating into a HMO is limited. In certain areas, you may therefore struggle to snap up a HMO for a good price. As of March 2018, there were just 497,000 HMOs out of roughly 4.5 million households (as of 2017) in the private rented sector.
HMOs require more management
With a single-let property, you only have to deal with one household. HMOs, on the other hand, require the management of several tenants at once which can be a challenge – especially for more inexperienced landlords. Despite the additional management work, if you’re willing to put in the hours or employ a letting agent to aid tenant management, you could reap some fantastic rewards.
Decreased capital growth
Once you’ve purchased a property and invested both your time and money converting it into a HMO, the resale market will have instantly decreased. This is because only specialised landlords with a background in HMO property investment are likely to want to take on such an opportunity. Lower capital growth is therefore something to bear in mind if you want to explore HMO property investments.
Do HMOs increase in value?
If we see the current increase in demand for HMOs continue, then it’s likely that HMOs will also increase in value. Add to this the fact that the UK is seeing the average household size decline, there’s no predicting how profitable HMOs could become in the near future.
However, this is, as always, dependent on the local demand for HMOs and council planning regulations. Not to mention, while the value of your HMO may increase, you will be limited by the narrow resell market that’s comprised of other property investors and experienced landlords. Subsequently, it may take longer to resell your HMO if you need to wait for the right buyer.
How do I invest in HMO?
Before you choose to invest in an HMO property, researching local regulations and seeking invaluable advice from property investment authorities is paramount to successful investing. Explore local planning applications for HMOs (whether and/or why they’ve been rejected) and contact your council’s HMO officer to help gauge whether a HMO application would be accepted in the area that you’re interested in.
If you’re interested in learning more about HMO investments or if you need assistance in making the right investment decision, contact us today: