For property investors looking for higher yields, HMOs can prove to be an extremely lucrative option, but they can also require more input.
HMOs (houses in multiple occupation) are a particular type of buy-to-let property that seems to have come back into its own in recent years. No longer largely associated with cheap bedsit-style digs or student accommodation, standards have improved and the property type is growing in popularity.
An HMO involves at least three people from more than one household – with separate tenancy agreements – living together in a property with shared facilities such as a bathroom and kitchen. Also sometimes known as a ‘house share’, they are particularly common in cities housing young professionals.
For the tenant, HMOs come with many benefits, including generally being cheaper than renting your own property. There is also a social element, with tenants often becoming friends with the people in their house share. Having a separate tenancy agreement to your housemates also gives you more flexibility.
Why do HMOs appeal to landlords?
Tenant demand for rental homes is sky-high at the moment, and HMOs can be an ideal solution for individuals or couples – particularly in the current cost-of-living crisis as they can be a cheaper option. This high demand also makes them a good alternative to a traditional buy-to-let for landlords.
Property investors seeking the strongest monthly rental yields will also find that, on average, HMOs provide healthier returns. The latest research from BVA BDRC Landlord Panel in Q4 2022, for example, found that average yields were 6.4% for this property type.
Right now, landlords and property investors are increasingly aware of their bottom line. With changes to how much mortgage interest tax relief can be claimed, alongside rising borrowing costs, it makes sense to seek property that can offer the best monthly returns.
HMOs can also provide a more stable income than a whole property buy-to-let, because each tenant (or couple) has their own tenancy agreement, so even if one tenant moves out, rent will still be coming in from the other rooms in the property.
Another positive is that a growing number of lenders now offer HMO mortgage products, opening up the investment option to a wider number of owners.
Can amateur landlords run HMOs?
While anyone can operate an HMO, they tend to appeal more to experienced landlords with enough time on their hands and expertise to deal with the added complexities that can be involved. There are more regulations to be aware of linked to the property type, as well as potentially more maintenance.
However, the research from BVA BDRC Landlord Panel at the end of 2022 found that the proportion of gross rental income being spent on running costs and maintenance fell to 26% in Q4, compared with 29% in Q1 and Q3 of the year.
In terms of legislation, one of the biggest, relatively recent changes in the HMO market is the licensing requirements. These are constantly changing, too, depending on the area in which you operate, so it is vital to ensure that you follow the licensing rules for your local area.
For large HMOs (where five or more people from more than one household live in a property with shared facilities), the landlord is always required to hold a licence to operate. For smaller HMOs, you must check whether you require a selective or extended licence.
While there are plenty of opportunities for property investors and landlords looking to enter the HMO sector, these are some of the factors to take into consideration. You must decide whether you have enough time to deal with the added complexities, or whether you will appoint an agent to manage it for you.
Either way, HMOs can be a fantastic way of diversifying your portfolio and potentially boosting your monthly rental yields if you invest in the right property.
At BuyAssociation, we can help property investors secure an HMO or a traditional buy-to-let property, direct from the developer. Get in touch for more information.
