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HMO investment under the spotlight: what are the pros and cons?

HMO investment is dwindling in some parts of the UK, but the decline is far from straightforward as standards appear to be improving in the sector.

Houses in multiple occupation (HMOs) are a hugely popular investment choice for landlords looking for strong yields, minimal void periods and high tenant demand. However, they have come under more scrutiny in recent years with a tightening of regulation.

According to Octane Capital, which has conducted an analysis of the sector, the added regulatory burden could be putting some off HMO investment. Its findings show a 3% annual drop in the number of HMOs operating in England in 2020/2021, to 497,884.

In London, there was an even steeper drop of 13% over the year, with 11 boroughs in the capital recording declines in HMO numbers.

New rules weeding out the sector?

In October 2018, a new set of licensing rules came into effect for HMOs. It meant that all large HMOs (those occupied by five or more people by two or more households) now require a mandatory licence to operate legally. New minimum room sizes are also in effect.

Additional licensing, or selective licensing, can also apply in certain circumstances, such as if the local housing authority believes there are problems, and also in certain areas.

The cost of obtaining a licence varies between councils, but can range from around £500 to £1,000 per property. Octane Capital believes this is one aspect that has stymied HMO investment; but it has also increased standards in some cases, weeding out the ‘rogue’ landlords.

Jonathan Samuels, chief executive of Octane Capital, said: “We’ve continued to fund a high number of quality HMO deals throughout the pandemic and this sustained level of interest from professional investors is yet to show any signs of decline.

“This includes a large number of refurbishment transactions whereby investors are looking to drastically improve the quality of existing HMOs, so while volume has certainly fallen, we don’t believe this will be a long term trend and should benefit the nation’s tenants in the long run.”

HMO investment remains popular

One of the prime selling points of HMO investment properties is their higher yields when compared to other property types. At the end of last year, data showed average yields were around 7.5% from HMOs, while individual flats yielded an average 5.4%.

The nature of an HMO means that void periods – when a property sits empty and no rental income is achieved – are less likely. This is because each tenant or household has their own contract, and they are less likely to all move out at the same time.

Alongside this is the prospect of reduced risk of rental arrears. Even if one tenant in the property misses a payment, it is likely that the other renters will not, making HMO investment potentially less risky in terms of monthly earnings.

According to Arbuthnot Latham, high demand is another positive of the asset class: “Whether a landlord is letting to students or multiple households, demand for HMOs has never been higher, particularly in cosmopolitan cities.

“An investor must identify the demand and competition before they invest in a property to maximise returns.”

Things to consider

As mentioned by Jonathan Samuels, the current regulations surrounding HMOs are something to think about. Property investors must be aware of their requirements and keep up to date with any licensing or other needs.

Another consideration to take into account before embarking on an HMO investment is borrowing. If you require a mortgage for the purchase, this may need to be obtained through a specialist lender, whereas traditional buy-to-lets have a multitude of options.

Of course, being a larger property, there could also be extra costs involved both in the purchase price and potentially maintenance. While many find that the higher yields and other benefits compensate for this, it is something to consider before purchase.

BuyAssociation has a range of property investment opportunities across the UK, including several high-quality HMOs. Get in touch for more information.

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