Why invest in a HMO?
A HMO allows a landlord to draw multiple income streams from a singular property. Some may find it preferable to manage several rooms within one house than multiple smaller houses or flats across different areas.
Homeowners with a much bigger property than they need (for example, those inheriting their parents’ houses) may decide to pursue an HMO licence. A homeowner can have a maximum of 2 lodgers, so if they have four bedrooms, and want to live in one and rent out the other three, an HMO license allows them to cover the costs of the house, and make a profit in the process.
HMOs are also good investments for first-time landlords. Rental income split across several rooms provides a buffer if you are relying on the investment for income. Say you have 4 rented bedrooms, 1 tenant leaves, and it takes a month to find a new one. You might miss out on profit for that month, but the mortgage is still covered by the other 3 tenants.
What are the pros of investing in HMOs?
1. Higher rental income
The biggest and most obvious advantage of becoming an HMO landlord is the higher chargeable rent per property. In 2019, HMOs returned an average rental yield of 6.3%, with the average yield for single-let properties across the UK sitting at 3.53%.
2. Considerably lower risk of void periods
Every landlord’s worst nightmare is a property sitting empty. With an HMO, your tenants often come and go individually instead of as a household. This means that even if you’re dealing with a vacating tenant with no new tenant lined up, the chances are your other rooms will stay occupied, leaving you with at least partial income.
3. Increasing demand
Another big incentive for entering the HMO market is the growing demand for student housing and professional houseshares. University applications remain at an all-time high, meaning no end in sight for student housing demand. With soaring rents across London and the home counties, it’s becoming rarer and rarer for young professionals to rent their own place. Houseshares provide a way for both single people and couples to enjoy a nicer, bigger property at a much lower cost than renting alone.
What are the cons of investing in HMOs?
1. Stricter legislation
With rental yields that have the potential to double those of single-let properties, you might wonder why every landlord doesn’t invest in an HMO! The counter to this increased revenue, naturally, is what you have to do to achieve it. Bedrooms must be a certain size; each bedroom door must have locks; the main door must have a keyless exit in case of fire (i.e. a thumb-turn lock); there must be mains-connected fire alarms and emergency lighting; and there will likely be other requirements to fulfil depending on different local councils. You’ll also need to apply for an HMO licence every 5 years, at a cost of £1,200, and there’s no guarantee you’ll get it granted or renewed.
2. Harder to source
In areas under an Article 4 direction (such as Oxford), landlords must obtain planning permission to convert a property into an HMO. This article, under the 1995 Town & Country Planning Order, prevents whole streets from being turned into student towns, and addresses the knock-on effect HMOs have on localities. Lots of adults in one property means increased demand on parking space and local amenities. This is why an investor can’t just turn any house into an HMO. This combined with the high potential yields of HMO-suitable properties mean there is higher competition to obtain them.
What type of property makes a good HMO investment?
The truth is, there’s no hard and fast rule for the “type” of property that makes a great HMO. As with any property purchase, look for something in a good location with the potential to add value.
When sourcing an HMO, the following qualities can make conversion easier and broaden tenant appeal:
● For anyone over the age of 10, bedrooms must be no smaller than 6.51 square metres. Ensuring existing rooms meet this size will save you undertaking major works.
● Although Millennial and Gen Z renters are comfortable with the idea of sharing, a sense of privacy is a huge draw when viewing HMOs. Regulations only require you to provide one bathroom per 5 tenants, but many renters will want more than the bare minimum. Properties with an extra WC or shower room (or the potential to add one) will boost your prospective tenant pool.
● Big spaces that can be “chopped up” into smaller lettable spaces can maximise profit. Victorian and Georgian houses are excellent contenders for this, as they were built bigger than modern houses. But beware of the temptation to overdevelop. Squeezed-in bedrooms and an unnatural “flow” to the house may deter tenants.
● Find the right numbers for you. Generally speaking, your first 3 tenants cover costs, and further tenants provide profit. So the most profitable, worthwhile HMOs will have 4 beds or more. But higher numbers mean more potential for damage and more turnover to deal with.
A good rule of thumb is to think of an HMO as a home first, and an investment second. If you wouldn’t live there, the chances are a lot of potential tenants wouldn’t either.
Are HMOs a good investment?
In conclusion, there is no doubt HMOs make smart investments. They comply with two key investing philosophies: maximising and diversifying. Single-family houses can be maximised into a group of multiple lettable spaces. The ability to let these spaces individually allows you to diversify your income streams from that one property. The trick is finding a property that you can prepare quickly, fill quickly, and keep occupied for long periods of time. For more info and advice about obtaining your HMO licence, sourcing a property and keeping your HMO profits rolling in, speak to us at Cubix Property. https://cubixproperty.com/contact-us/
Article 3 – Is now a good time to invest in property?
https://sevencapital.com/investor-resources/now-best-time-invest-property/