Houses in multiple occupation (HMOs) are known for their high yields and more reliable income, and the current climate could mean more property investors are favouring this property type.
Property investors remain extremely active in the UK property market, despite the slightly different backdrop compared with a few years ago. Although house prices are returning to growth, capital appreciation may not be as much of a focal point as high yields at the moment for property investors.
Mortgage rates also play a part when it comes to this focus on high yields, as buy-to-let mortgages – just like mainstream residential ones – have become more expensive. Again, while the outlook in this respect is improving, maximising your monthly income is more of a priority right now to offset this cost.
These are some of the reasons why a large number of property investors are looking into and investing in HMOs. The property type has always been known for its high yields, offering on average between 8% and 12% depending on the location and size, which tends to be considerably higher than a standard buy-to-let.
High yields depend on location
One recent study by Octane Capital, for example, put average UK rental yields at 8.1% for HMOs, compared with an average of 4.4% for a single occupancy property (where the whole property is rented out on one tenancy agreement, rather than as individual rooms on separate tenancy agreements).
However, the research also found some fairly significant regional disparities, with the north east, the north west, and Yorkshire and the Humber bringing in the best returns for investors, compared with the likes of London where the gap between HMOs and standard rentals was much smaller.
Tenant demand is one of the most important things to factor in when selecting a location to invest in an HMO, and this is very much linked to location. City centres, commuter towns and areas close to places of education, job opportunities and cultural activities, for example, tend to be places where investors can fill their HMOs.
Should I invest in an HMO?
As mentioned above, the high yields that tend to come with this property type are one of the biggest advantages to running an HMO, provided you invest in the right area.
A wide range of tenant types will choose to live in HMOs, which is another plus-point from an investment perspective. This can range from young professionals who want to live in a sociable space in perhaps a more desirable location than they could otherwise afford; to older singles and couples who might want to share their living costs and live in an urban setting.
Some HMO landlords will also let their rooms/properties to students, which comes with some additional things to think about, such as having a guarantor on the tenancy agreement.
Along with the high yields comes the added income stability compared with a standard buy-to-let, because there are multiple income streams coming from each room let out. For example, if you let out a four-bedroom property to a family and they move out, the property is empty, but if you let it out as an HMO, individuals can come and go and you maintain your income from the remaining tenants.
Things to consider
Some investors are put off the HMO model despite the high yields due to the additional legal and regulatory considerations to factor in. This includes licensing, as large HMOs and standard HMOs in certain areas must have a licence in order to operate, which the owner must pay for.
There are also minimum room sizes to adhere to, and some additional safety measures to be aware of, which can differ from a standard buy-to-let.
Property and tenant management can also be more time-consuming and costly compared with a single occupancy property. Many investors opt to use a specialise management company to deal with the comings and goings of tenants and keep them up to date with regulatory requirements.
There may also be additional challenges due to the fact that tenants in HMOs tend to be strangers, perhaps from different backgrounds and with varied personalities, and this can sometimes lead to clashes or even a higher tenant turnover than some might expect.
If you’re looking for your next investment property and high yields are a priority, speak to one of our advisers at BuyAssociation about our HMO properties and other investment opportunities in the UK.
