We are seeing a growing number of existing landlords who are choosing to diversify their portfolio, from letting out property on a standard AST, to investing in an HMO for the first time. If this is a trend you are also experiencing, it’s important to know the key considerations that will factor into your clients’ decision-making.
An HMO (house in multiple occupation) is a property rented out by at least three people who are not from the same household but who share facilities like the bathroom and kitchen.
In England and Wales a licence is required to rent out an HMO if it is rented to five or more people who form more than one household, although in some cases a licence may be required for a smaller property if the council requires one to be in place. This time last year, there was perhaps some doubt about the future demand for HMOs, but reports are that, if anything, there is actually growing demand for reasonably priced, flexible housing near to city centres and key hubs like hospitals and universities.
The most obvious reason why so many landlords are choosing to invest in an HMO is that it can usually deliver stronger returns than a single let property. According to BuyAssociation, research from BVA BDRC shows the average rental yield for an HMO property is 7.5%, which is 1.5% above the overall average rental yield for property investments. And the gap appears to be widening as BVA BDRC says that between Q1 2020 and Q1 2021 this difference has increased by 0.6%.
As well as the potential for stronger returns, earning rental income from multiple tenants means that landlords have less exposure to arrears than they would if they let the property to a single tenant – if one tenant is unable to pay or one room remains unlet, there is still the potential for income from other tenants.
Additionally, an HMO would ordinarily be operated as a limited company as the more complex nature of the investment and multiple sources of rental income make it more suited to this type of structure, and this may have some tax advantages over a single-let property owned in an individual’s name.
There are, of course, additional considerations. For example, there is increasing legislation and regulations that landlords need to be aware of and investors need to be confident that they understand the local rules for the area in which they are buying.
The supply of property suitable to being used as an HMO is also limited and investors often need to convert existing properties, often using short term funding. An HMO is also likely to come with higher start up and operating costs, such as furniture costs, adhering to fire and environmental health regulations, utilities, maintenance and letting agent fees.
Ultimately, and like any other property investment, the decision whether to invest in an HMO will come down to an investor’s own individual appetite for risk and reward, combined with their desire and ability to take on the extra associated work. However, there are new product innovations that can take some of the uncertainty out of an investment in an HMO. For example, a Bridge to Let mortgage can combine a short term loan that can be used to convert the property so it is fit for purpose, with a guaranteed exit route onto a term mortgage at a lower rate, and a product like this can take some of the stress and complication out of diversifying in a new area that has the potential to deliver greater returns.