If you are a property investor who is buying for the first time or someone looking to expand their portfolio, then you might be considering a House of Multiple Occupation (HMO). These are managed slightly differently compared with traditional investment properties, so it is important to understand exactly how they work and what the demands are likely to be before you put your money into one.
HMOs are currently in very high demand as they offer a huge number of benefits to landlords, so in this article, Pure Investor look at what some of them are to help you decide whether this is the right investment opportunity for you.
What is a House of Multiple Occupation?
A House of Multiple Occupation (HMO) is a single property that is home to multiple tenants from different families who rent individual rooms or spaces within the building but still share some facilities such as kitchens, living spaces or bathrooms.
These tend to be particularly popular for students who want to live near to university in an affordable but independent way. They are also proving to be extremely popular with young professionals in urban areas who want to make the move closer to big businesses but do not yet have the financial ability to buy their own property.
The demand for HMO properties
Any property investor will know that the population of the UK is increasing rapidly, but the levels of new affordable housing on offer are failing to keep up.
This has led to escalating property prices that have made it very difficult for young people in particular to get a foot on the ladder. The combination of this and the depletion of local council housing stock has meant there is now a significant demand for HMO rental properties to make up the gap in the housing market.
HMOs are proving to be particularly popular in city centre locations due to the convenience they offer for commuting to work or university.
There has been a massive growth in HMO properties in London, and this is now being replicated across most major cities in the UK. This has meant that many HMO landlords are finding it relatively easy to attract tenants to their investments.
Are HMO properties profitable?
Any property investor needs to know how much money they are likely to make from their investment. As you might expect, the profitability of an HMO will depend on where it is located, the potential rental yield and the associated costs.
It is important to remember that specialist HMO mortgages come with higher interest rates and fees, and lenders tend to be much stricter on the rental yield requirements, so you will need to factor this into your planning.
Nonetheless, the significant demand has meant that there are often higher rental yields available than standard buy to let properties. In fact, HMOs have been found to return over 7.5% on average, which is much higher than the 3.63% average for buy-to-let properties.
Vacancy rates
One of the biggest fears for any buy to let investor is putting their money into a property that then stands vacant for many months of the year. This leaves them having to cover expenses like mortgage costs without any rental yield to help. With HMOs, this is much less likely to be a problem, as even if one tenant moves out, there are several more who are still providing you with income stability.
If your HMO is designed to attract students, you can also forecast when the property is likely to be in demand and anticipate the fact that it will be empty during the summer when they return home, making financial planning much easier. It also means that you can be confident there will be new students arriving ready to start in September.
Resale values
When it comes to selling your property on, you will want to make sure that you have made a profit with your investment.
Currently, properties which have been converted into HMOs can fetch more on the open market, which means investors not only benefit from immediate income, but also from long-term investment as well.
This is because they are particularly appealing to other HMO investors who can see the benefit of this type of property and will not have to incur the costs of converting the property.
Property conversions
Unless you are buying a property that has already been converted into an HMO, it is important that you understand the cost involved in remodelling a traditional property into a House of Multiple Occupancy.
You will need to ensure that each individual space has been designed properly and depending on your layout, you may need to fit additional bathrooms and plumbing. You will also need to look into whether you are required to install fire doors in the property.
Converting a property into an HMO may also require planning permission, so this is something you should investigate before you make your investment.
You will also need to factor in that there are much more intensive management requirements when looking after an HMO, as landlords are often responsible for the cleaning and maintenance of communal spaces. Levels of wear and tear and accidental damage can also be much higher, so professional property management support can be beneficial.
Council demand
The Right to Buy scheme and the sale of local authority housing stock has meant that councils are now suffering from a severe lack of properties and are starting to look elsewhere for help.
Local authorities tend to prefer renting from the private sector to avoid high maintenance costs, which has created some new opportunities for HMO landlords who are benefiting from government contracts which are long-term and reliable.
This means it is possible to enjoy rental stability and additional security.
Investing in an HMO can be a profitable experience, depending on your own personal situation. There can be a lot more involved, including increased management and HMO licences and regulations, but if you are prepared to handle this, the financial benefits can be significant.
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