Spotlight on Investing in HMOs… The Good and The Bad

As an investor, you’ve probably heard experts say that renting a house or flat to a group of individuals, rather than to one family, is profitable and can give higher rental yields than standard buy-to-let properties.

Especially if it’s in a high demand area.

That’s why HMOs (Houses in Multiple Occupation) are becoming more popular.

The question is… what are the advantages and disadvantages of investing in HMOs?

First…

What is an HMO?

The definition of an HMO is a ‘multi-let’ rental property that has three or more tenants, not from one household/family, that share amenities. This can include:

• A house which is split into bedsits or units
• A house, or flat share, where each of your tenants has their own tenancy agreement
• Students who live in shared accommodation

Before you buy an existing HMO or convert your current property, consider the facts…

Where are HMOs Located?

London has 40% of the country’s total HMO market, with recent research by Glide, a UK multi-tenant billing company, finding there are 122,000 HMOs in inner London and 92,000 in outer London.

The boroughs of Hackney, Brent and Southwark had the highest density of HMOs, compared to the central districts of Kensington & Chelsea. Interestingly, Wandsworth, an affluent inner London borough, has many HMOs – almost comparable to the number in Hackney.

After all, with 1.8 million young professionals living in the city, research shows that the demand for HMOs – particularly in inner London – is unquestionable.

The Advantages of Investing in HMOs

One of the most significant advantages with investing in an HMO is that it will generate a rental income increase of three to five times a standard buy-to-let home.

What’s more, the property will help provide more people with affordable accommodation.

Other advantages include:

• Cash flow is better as you won’t have as much impact during rental void periods. Why? Because when one tenant moves out, you will have the other rooms tenanted.
• You have less exposure to arrears, even if one tenant falls behind on rent – if the other tenants are still paying on time.
• The demand for this type of housing is strong and growing in many areas. The reason for this is that the accommodation is typically close to excellent transport, restaurants, shops, pubs… which suits young professionals.
• There can be tax advantages when setting up and operating an HMO.
• Tenants are often easier to find, especially when landlords offer to make bills inclusive of the rental rates.

The Disadvantages of Investing in HMOs

One of the largest disadvantages is the requirement to have an appropriate HMO licence and ensuring the property complies with the licensing conditions.

To find out more about the HMO rules, read our blog.

Other disadvantages include:

• If investors buy a family house with the goal of converting it into an HMO property, then they need to have the budget for the conversion and must be aware of the requirements to comply as an HMO property.
• Some lenders will not provide mortgages on HMO properties. For those that do, they may charge higher interest rates or demand a higher deposit.
• Turnover in tenants is generally higher because HMOs are often rented to students or mobile young professionals.
• The right property in the right neighbourhood must be selected. Not all houses can be converted cost-effectively, and not all locations are in a high demand area.
• There is a higher level of paperwork involved in managing the individual tenants.
• Fewer letting agents are willing to manage HMOs. This means you need to find the right agent. Otherwise, you may need to self-manage the property which can be very time-consuming.

The Next Steps…

If you are considering buying an HMO or converting an existing property, then here are the next steps to consider.

Firstly, research the location. Look for large towns or boroughs with high populations. Ideally, find an area that is close to transport, schools, shops, pubs, restaurants, etc.

Next, find out if the property can be converted into an HMO. We recommend hiring a specialist HMO agent that can advise you on the planning, licensing and health & safety requirements so that you can get your HMO licence.

If you are buying an existing HMO property check that the HMO licence is transferable. If not, you will need to organise the licence after you purchase the property.

Finally, we recommend hiring a specialist HMO agent to manage your property. Agents will charge a management fee; however, they deal with any maintenance problems and have a good network of plumbers, electricians and builders.

Best of all, they supply quality tenants for your property.

If you’d like to find out if HMOs are the right buy-to-let investment property for you, then call us on +44 (0) 203 286 6468 or email us at HMO@RekaProperty.co.uk to book a complimentary appointment.

Together we can provide ingenious, innovative solutions to ease the housing crisis that provides a good investment for you.

Doug

P.S. Please share your comments below. Do you own an HMO? Have you considered a buy-to-let investment HMO property? I would love to know your experiences and thoughts on this topic. I hope our paths cross again soon.