With fewer owners investing in new buy-to-let properties at a time of already limited housing supply, and an ever increasing rental demand,
London’s lucrative HMO market offers great investment opportunities for landlords.
The idea of letting HMOs is appealing to a growing number of landlords who are attracted to the idea of collecting rent from a higher number of tenants and a more efficient way to run a rental portfolio.
Furthermore, HMOs are potentially superb investments: the demand for affordable, flexible housing as offered by multi-let properties has never been higher.
However, as with all things there are downsides as well. Arthur Online takes a look at the cases for and against investing in HMOs.
Many HMO and multi-let investors make fantastic rental returns on their property, compared to a typical single-let rental income. The UK market often sees gross rental yields of 12-15% achieved, with some investors hitting 20%-plus
HMO rental yields are as much as three times higher than more traditional buy-to-lets.
The rental void periods are significantly lower: if one tenant moves out, you still have other rooms tenanted. With a single let a void period will mean an empty property.
Furthermore, HMO landlords are less exposed to the risk of dealing with rent arrears.
With multiple tenants, your are less exposed if a tenant falls behind on their rent as there are still other tenants that are still paying. In a single let, arrears can mean the entire income on a property.
There are some tax advantages to investing in HMOs.
HMOs & Multi-Lets often need refurbishment and structural work to ensure the property has the optimal number of rental units (bedrooms), and is of the right standard for the local market.
Practically, most spending on HMOs is a revenue cost, and so income tax-deductible.
Furthermore, the demand for flexible, affordable housing solutions is increasing. There is a trend in the UK (especially in cities and larger towns) where the average size of a typical ‘household’ is declining. At the same time, the overall population is increasing. This combination is leading to increased demand for HMOs over and above single-room rentals.
The National Landlords Association has recently estimated that more than 400,000 landlords have been forced up into the higher-rate tax bracket since April 2017, as the tax changes have inflated their rental income.
Raising rates may be a viable option for houses of multiple occupation. This is because the 20% average rent increase would apply across all tenancies, meaning the total figure would be divided among the number of occupants.
In 2017 HMOs are definitely great investments that deserve consideration.
It is however important to take in consideration the downsides of investing in houses in multiple occupation.
With HMOs there is more legislation and there are more planning requirements than there are with more straightforward buy to lets
They can be harder to raise mortgages/finance for (especially for new landlords).
Not every property can work as an HMO, so the number of suitable properties in an area might be limited compared to single lets. If demand for these properties is greater than the supply, then it is going to be very difficult to obtain one at a reasonable discount.
Capital growth can sometimes be lower on these properties. This is due to the fact that the re-sale market of a property that been converted into an HMO consists, almost exclusively of specialised landlords.
Furthermore, there are fewer letting agents that are willing to manage HMOs than there are who will manage standard buy to lets. This increases the chance that landlords might have to self-manage the property, which can be very time-consuming.
Additionally, an HMO has higher start up costs than a conventional buy-to-let. There is more furniture that needs to be bought. There are environmental, health regulations, and fire regulations that need to be taken into consideration.
Finally there is the mortgage. A mortgage for an HMO is more difficult to get and a bigger deposit is most likely going to be required.
Ever considered using property management software? Arthur is a one of a kind suite of apps with extensive functionality, providing you with complete flexibility over your portfolio management. It is excellent for multi-unit properties (no matter what size) such as: student accommodation, blocks of flats and HMOs.