The pros and cons of investing in HMOs

by | Jul 6, 2020 | BTL, HMO, Mortgages

Houses of Multiple Occupancy (HMOs) have been rapidly growing in popularity among property investors over the last few years.

 With gross yields higher than a standard buy-to-let property, HMOs can make superb investments where there is high demand for affordable, flexible housing.

Although HMOs demand an increased level of expertise in terms of managing tenants, building work and the long list of legal obligations, the gain in rental yield seems to be worth it for many landlords, when done correctly.

What is an HMO?

HMO stands for ‘houses in multiple occupation’ or ‘houses of multiple occupancy’. This type of housing is also called a multi-let.

An HMO is a property that is occupied by three or more people who are not a family but share the same communal facilities such as bathrooms and kitchens.

The pros of investing in HMOs

  • HMO rental yields can be as much as three times higher than single-let properties.
  • As an HMO landlord, you can let the room on a license which makes things easier if you need to evict a tenant.
  • Less impactful rental void periods. If one tenant moves out, you still have other rooms occupied by tenants paying you rent compared with a single-let where a void period means your property is empty and generating no income.
  • Less exposure to rent arrears. With multiple tenants, if one tenant falls behind on their rent, there are still other tenants paying. In a single-let, arrears can mean you miss out on the entire income of the property.
  • If the property requires significant work in order to make it habitable, many of the costs are tax-deductible.
  • Increasing tenant demand due to a growing UK population and more people looking for flexible, affordable housing in cities and larger town.

The cons of investing in HMOs

  • An HMO has higher start-up costs than a typical buy-to-let property in order to meet health and safety regulations and furnish the property.
  • HMO landlords are responsible for paying and managing bills (which can be recouped through the rent you charge).
  • HMOs demand more legislation and planning requirements compared to a more straightforward buy-to-let property
  • It can be harder to obtain finance / mortgages as a first-time HMO investor and a larger deposit is often required.
  • Less suitable properties. Not every property can work as an HMO, so the number of suitable properties in an area might be limited. If demand for HMO properties is greater than the supply, it’ll be harder to find a property at the best price.
  • Reduced capital growth. When a property has been converted into an HMO, its resale market is almost exclusively for specialised landlords.
  • A tenant is only responsible for their room, not the common parts, which means that if there is damage it may be difficult to prove who caused it.
  • You must have a licence if you’re renting out a large HMO in England or Wales. 

Check local planning

There can be many more elements that come into play when defining exactly what an HMO is and local authorities can have different criteria, licensing requirements and planning regulations.

Before investing, it’s a good idea to speak to a local HMO Housing Officer to find out more about the requirements in your area.

Hire a letting agent

In order to systemise and grow your property portfolio, hiring a letting agent that can manage your property is key. As a property investor, you need to be concentrating on building your portfolio and sourcing new deals, not on the day-to-day tenant management that can take a lot of time.

Establish your finance options

While the rental yield can be significantly higher for HMO’s than typical BTL properties, due to there being more costs involved, it’s vital you get the best finance in place in order for the numbers to stack up and the deal to be worth while. 

At Ramsay & White, we can secure the right deal for your investment and also show you how to enter and exit the deal with the right finance product that offers you speed and momentum to continue on your property journey.

Ramsay & White is a specialist mortgage brokerage serving the specific finance needs of property investors across the UK.

Market-leading rates | Finance from 1 month | Finance up to 100%