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The pros and cons of adding an HMO to your property portfolio

Posted by Michelle Niziol on 19/07/2019
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Houses in multiple occupation (HMOs) are a type of rental property ownership which, in the past decade, have drastically increased in popularity amongst UK landlords and property investors.

This has largely been driven by the increased level of income they generate, especially when compared to the more traditional single lets.

Yet, as with many aspects of the property industry, things are not as simple as they seem. In order to become a successful owner and landlord of an HMO, you must first understand the increased level of management and planning they require, as well as the risks and pitfalls that could lie ahead of you.

Should you add an HMO to your property portfolio? Read the pros and cons below to make an informed decision.

What is an HMO?

An HMO is a property in which three or more tenants live in more than one household, where they share a bathroom, kitchen and/or laundry facilities.

For the purposes of HMOs, a household is seen as a single person, or members of the same family living in the same property. For example, four unrelated people in four separate rooms would make up four households, while a property with two couples would make up two households, even though they all reside under the same roof.

There are many different forms and makeups of HMO, however they’re most often a shared property in which the tenants aren’t related to each other, in a single house split into several rooms.

Shared student accommodations are also considered to be HMOs, along with hostels. Essentially, for a property to be considered an HMO, rent must be paid, and it must be the occupants’ main residence.

Pros of Investing in an HMO

  1. Higher rental yields

One of the main reasons investors grow their property portfolio is for the profits they bring in, and when it comes to return on investment (ROI), HMOs are seen as one of the leading investment models in the property industry.

Rental yields for an HMO property can often be as much as three times as high as single lets. According to the Complex Buy-to-Let Index in 2017, HMOs produced average yields of 8.9% – the highest of all buy-to-let property types.

  1. Resistant to market shifts

Over the past decade, the demand for flexible accommodation in the UK rental market has risen significantly.

Aided by both stagnant wages and Brexit fears, the fact is that more and more UK renters are considering increasingly affordable properties for their rental options.

This gives HMOs a natural resistance to these market fluctuations as their flexibility and low cost provides a more consistent demand and return on investment than other buy-to-let models.

  1. Streamlining and simplifying your property portfolio

A simple rule of thumb for property investment is, the more properties you own, the more income you generate. However, owning several separate properties can often be a logistical nightmare, causing you to travel hours back and forth to manage and maintain them all.

HMOs provide a solution to this problem, allowing you to benefit from increased revenue from your portfolio, with fewer properties to manage.

This is due to the higher yield that HMOs bring in, meaning as a property investor you don’t need to have a large portfolio to gain higher levels of income each month.

By including just a few HMOs in your property portfolio you can avoid paying for the management of multiple, lower yield properties.

Additionally, the stress that often comes with being a landlord is reduced by narrowing down to just a few, high yield HMO properties.

  1. Spreading of risk

While every property investor desires high levels of rental income, it is important to consider not just the earning potential of your buy-to-let, but also the associated risk that comes with it. This is why savvy property investors make it one of their key priorities to spread their risk wherever possible.

HMOs help you do this by ensuring that the income generated is spread across multiple occupants. As such, even if one tenant falls behind, you still have other rental income being generated.

With single let properties, you have all your eggs in one basket, that basket being your sole tenant. If that tenant can no longer keep up their rental payments, you have no one else in that property to fall back on.

Cons of Investing in an HMO

  1. HMO regulations and licences

Owning an HMO brings with it more regulations and licensing requirements than single lets. This is mainly due to the increased use of shared facilities and importance of fire regulations. Planning and licensing legislations and fire safety regulations are constantly changing, making it more difficult for private investors to keep up.

As such, the majority of HMO landlords engage property managers who are more knowledgeable on the topic, which inevitably raises their monthly expenses. Also, if you decide to manage it on your own and neglect a new piece of legislation, the potential fines could cost significantly more.

  1. Financing difficulties

Mortgages for HMOs are not only more expensive than those for single buy-to-lets, but also more difficult to get.

Lenders will generally require you to provide a larger deposit, as well as additional funds for any potential refurbishments that may be required. Many letting agents won’t even take on HMOs if you decide to have the property managed by a third party and if they do, their management fees are usually higher than those for traditional houses or apartments.

Many lenders also prefer to work with investors who already have prior experience with HMO ownership. As a result, if you’re looking to purchase an HMO for the first time, you might find it very difficult to find the funding.

  1. Vetting and letting – tenant management

Renting to multiple tenants who are not part of the same family will inevitably lead to a higher rate of tenant turnover. This can often be exhausting for landlords, as with each new tenant comes more work, more risk and extra cost.

Additionally, the types of tenant who usually move into an HMO are young people, such as students, who may have recently left their parent’s home. This often leads to higher maintenance costs after the tenants leave.

While having stable rental income from long-term tenants is always attractive to landlords, as mentioned above, the risk of tenant turnover in an HMO is lessened by the fact that your revenue is spread over multiple occupants.

Now that we’ve analysed the benefits and consequences adding an HMO to your property portfolio, it’s time to decide whether becoming an HMO landlord is the right fit for you. Happy investing!

 

This article was featured on WhatMortgage.co.uk

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