With the increase in tenant demand for flexible and affordable housing on the rise, the opportunities for investors in HMO properties is at an all time high in the UK. But what makes these properties so enticing for budding investors? And what should you be wary of when diving into the world of HMOs? Today we’re taking a look at both the potential risks, and rewards of investing in houses in multiple occupation.
HMO, often referred to as a “multi-let property” is a house in multiple occupancy. These are properties which are tenanted by three or more separate people (i.e not a family) that share communal facilities such as bathrooms, kitchens and living room spaces. Whilst this is a generally accurate definition, very often different governing authorities will hold different criteria and qualifications for what a HMO is in their districts. So be sure to check out your local specifications before investing in property.
The most obvious benefit of investing in a HMO is clear however, multiple occupants equals multiple streams of income, meaning rental yields can be as much as three times higher than the same property marketed as a single household or occupancy. Along with this comes an increase in rent security in two major ways. The first being if a tenant decides to move out, you are still receiving rent from the properties other occupants. Whereas in a standard rental set up, investors would be earning nothing, whilst that property sat empty. The second way HMO offers rental security is that if a tenant fell behind on payments, you would still have other occupants rent to fall back on, in a single let, that often means the entire property suffers. Another benefit of HMO properties is that there is currently a huge and increasing demand for them. With the increase of population sees the rise in single person ‘households’ causing people looking for properties (in the right areas) that cater to these new needs. University towns and cities are an example of ideal areas for these HMO style properties, where people searching for affordable and communal living spaces are on the rise. As campus’ expand and university numbers rise every year, it is clear that when executed well, HMO properties can be a lucrative and successful method of investing your money.
That being said, these properties are not without risk, and the drawbacks and dangers should definitely be considered before jumping on this housing market. With the increase in tenants comes the increase in legislation, planning requirements and paperwork. On top of this, they can often be more difficult to raise mortgages or finance for, and will often require a larger than average deposit, especially if you are a first time landlord. If you were to end up personally managing your HMO and the tenants within it you must weigh up the potential benefits versus the risk of it being a drain on your own time and resources.
Considering this, you may want to look into hiring a letting agent, a process that comes with its own work and debunking. Because of the increased risks,you may find that fewer letting agents are interested in managing your HMO than a more standard property. Another crucial risk is that capital growth is sometimes lower on these properties, as once a property has been converted into a HMO, your resale market is narrowed, as only landlords who already have experience managing these properties may be interested.
As with any investment it is vital you do as much research into the benefits and drawbacks, but generally HMOs can make brilliant long term reliable investments.