If you’re a property investor, it’s more than likely you’ve heard of the term HMO and you may be wondering whether this is a worthwhile area of investment.
Of course, the main aim of the investment game is to maximise returns on your assets and buying HMO property can be a challenging field to navigate, making them off-putting to some investors as a result. They are, however, a very profitable investment and, financially, worth the perseverance.
In short, HMO properties are worth investing in. They offer high rental yields, a consistent passive income and there’s consistently high demand for them. Their drawbacks include higher maintenance costs and increased regulations.
In this guide, we’ll lay out all the pros and cons for you so you can weigh up whether a HMO investment is the right path for you.
What is an HMO?
HMO stands for a house of multiple occupancy. It’s a residential property that is rented out to multiple tenants at once. Rooms are rented out individually as opposed to the entire property being rented to one party.
HMO properties are rented by at least three people that are not from the same household, but there are shared communal areas such as bathrooms and kitchens. The majority of HMOs are single properties with multiple bedrooms, but they can also include:
- Multiple bedsits in one building
- Halls of residence
- Self-contained cluster flats
How Does HMO Property Work?
Rooms within HMO properties are rented out on an individual basis. For tenants, this is often more affordable than renting an entire property on their own, whilst landlords benefit from multiple income streams from one investment.
Typically, tenants would all have individual tenancy agreements for their rented room. All tenants would have use of communal spaces such as living rooms, the kitchen and bathrooms. Most HMO rent prices for tenants are inclusive of bills but variable elements, such as broadband, vary depending on the landlord’s choice.
Is Renting Property a Good Investment?
In a nutshell, yes, property investment is worth it. Property is still a good investment as it provides a steady, passive income stream. Considered one of the safest ways to invest money, due to the stability of the housing market, rental property investment offers consistent cash flow from rental income as well as continuously increasing capital growth.
Is it Worth Investing in HMOs?
HMOs are a popular choice for property investors; as of 2021, there were 497,884 HMOs in the UK. They are still a highly profitable investment, more so than standard buy-to-lets (BTLs) where the income stream is limited to just one household.
If you’re wondering how profitable HMOs are, the average rental yield in the UK for 2022 is 6.8% versus 3.63% for BTL properties, thus further cementing the lucrative investment status of HMOs.
There is often high demand, especially in major cities or university towns, for multiple occupancy housing. The key reasons for considering HMO investment include:
1. Higher Rental Yields
Rental yields are how HMOs make money as they create profits that can’t be achieved by standard BTLs. Yields are almost twice as high compared to those of standard BTL properties, owing to the fact that, usually, multiple occupancy housing will generate more rental income than single household occupied properties.
As tenant rent is often inclusive of bills, they can be charged a higher amount which often means landlords can often double the figure they make compared to that of a single let. The returns will increase depending on the size of your HMO and, as such, it’s important to develop a well-considered strategy.
2. Reduced Risk of Void Periods
Void periods in rental properties are inevitable, especially if a property is between tenants. HMOs reduce the risk and absence of income that come with void periods, as there will still be rental income from the remaining rented rooms.
3. Less Exposure to Rent Arrears
There is added security from HMO properties when compared with single buy-to-lets in that landlords are not solely dependent on one income. If one tenant fails to pay their monthly rent, it will only be a part of your income from this investment that is compromised.
4. High Demand
The high demand for HMOs continues to rise across the UK, particularly as house prices remain high, generating positive increases on HMO and rental values.
There has been an encouraging change in reputation for HMOs in recent years that has made them a more appealing notion for young professionals; those who are put off buying due to a shortage of affordable housing, as well as those that don’t want to pay higher rental prices for sole occupancy BTLs.
5. Renovation and Extension Potentials
If a property has space to accommodate an extension, this will give landlords the opportunity to further increase their income stream by adding rooms. Investors should look for garages, lofts, and excess garden space for ways to build in further bedrooms.
Don’t forget that there are regulations that need to be adhered to as an HMO landlord, such as minimum room sizes and overcrowding. It would be a costly mistake to overlook these details.
Investing in the property with basic improvements and renovations will add value in the long term as well as reducing short-term maintenance costs and increasing potential rent prices.
What are the Downsides of HMOs?
In comparison to single-let properties, HMO lettings come with an increased number of challenges as there are more regulatory standards. It’s important that investors comply with legislation and understand HMO licensing requirements before committing to this type of investment.
The more challenging aspects of HMO investment include:
Whilst it’s possible to obtain an HMO mortgage, lenders tend to insist on larger deposits. Loan-to-value percentages are usually lower as well.
If you’re purchasing a standard home to convert into an HMO, investors will often require bridging finance to make the initial property purchase and carry out refurb works, with a switch to an HMO mortgage being needed once the work is complete.
There are fewer mortgage lenders available for HMO mortgages and many will only give finance to experienced landlords which further adds to the challenge.
2. Higher Costs
HMO properties often require a higher initial outlay compared to single-let properties but there are other aspects that require consideration (and finance) such as fire and safety regulations.
If the property requires renovation or conversion costs, these can be pricey especially if you run into unforeseen circumstances, so it’s important to budget so that there’s contingency in place to allow for anything not previously anticipated.
Maintenance costs also need to be thought about. HMO landlords often spend a higher proportion of their income on the maintenance of their multiple occupancy properties compared to BTLs.
Research by the Paragon Banking Group showed that 63% of HMO landlords spend over 10% of their rental income on annual property maintenance. The cost of maintenance can add up over time, however, it’s worth keeping a well-maintained property as it adds value in the long term.
3. Increased Regulations
There are more rules and regulations when becoming a HMO landlord and, in some areas such as Leeds, a licence is required for multiple occupancy housing.
These regulations add a complex layer to property investment which is off-putting for many landlords who don’t want that kind of hassle from their portfolio.
As well as the usual environmental health and fire regulations, there are other requirements that need to be met to be granted a licence such as:
- Minimum room size requirements
- Waste collection
- Gas and electrical safety
- Furniture safety and standards
As well as needing to consider licensing, planning permission is also required for some HMOs if there is a change in usage being created or if the property comes under an Article 4 direction.
4. Not All Properties can be HMOs
With more complexity surrounding HMOs compared to standard BTLs, there are some properties that cannot be used for multiple occupancy housing. It’s vital to ensure that the property you plan to invest in is suitable prior to purchase to avoid any costly mistakes. Check for local regulations that may be in place for HMOs in the area you plan to buy, as well as considering minimum room sizes.
Frequently Asked Questions (FAQs)
What is a Good Return for HMOs?
Rental yields will vary depending on the location of your HMO, but you would certainly hope to achieve one at the same amount, if not higher than the national average of 6.8%. Areas that have particularly high demand for HMOs will see better yield rates. Leeds is one such area, where yields average around 8%.
Does an HMO Increase the Value of a Property?
If you’ve invested in an area where there’s high demand for a multiple occupancy property, such as a university town, then having an HMO will increase the value of your investment. It’s important to keep the property in a good state of repair to ensure optimum returns.
The benefits for HMO investments are aplenty, and they make for a fantastic asset as the rental returns far exceed those from a standard buy-to-let property. And although there may be some red tape to get through initially, the hard work will pay off and ensure you have a consistent, passive income stream in the longer term.