HMOs come with their own set of complex considerations for property investors, but many owners still find them the most profitable option for monthly yields.
Potential rental yields are one of the most crucial factors for most property investors looking at how to get the strongest return from their investment. While capital growth is a vital long-term consideration, monthly incoming rent in relation to the value of the property will make the biggest difference over the short and medium term.
The latest Landlord Panel research report from BVA BDRC looking at Q4 2022 has brought the welcome news that, thanks to extremely high tenant demand boosting the market, yields across the buy-t0-let market in general remain strong in the UK.
While the research, which was undertaken on behalf of Foundation Home Loans, recorded a marginal 0.1% dip at the end of the year, average yields were strong at 5.7% on average. Of course, individual yields can vary greatly based on location, property type and size, along with other factors.
HMOs top of the props
The top performing property type in the study was HMOs (houses in multiple occupation), which offered up average rental yields of 6.4% for the quarter.
HMOs have often held the top spot for rental yields in the buy-to-let market in the past. One of the main reasons for this is due to the fact that they tend to be let out on a room-by-room basis, so there are fewer periods when rental income drops to zero because the other rooms continue to bring in rent.
On a per room basis, the rents also tend to be higher than when you let out an entire property, too. What’s more, the majority of HMOs are let out with bills included to avoid complications with various individual tenants, so this will be a standard amount on top of the monthly rent.
Although there have been reports recently of a decline in the number of HMOs in the UK, including in one study by Octane Capital, the strength of the potential monthly rental yields make them an appealing investment option for many.
Good news on void periods
Rental yields can be directly affected by void periods – periods of time where a rental property sits empty in between tenancies. Sometimes, void periods are inevitable, such as if work needs to be carried out on the property once the existing tenants have moved out, but otherwise landlords aim to keep their properties filled at all times.
This is where HMOs greatly decrease the risk of void periods. HMOs are made up of three or more individuals living there, from more than one household, and each individual or couple tends to have their own tenancy agreement.
This means that one tenant or couple can end their tenancy agreement, while the other occupants remain in the house, so the owner continues to receive rent from the remaining occupants until the vacant room is filled.
However, due to the current high demand in the market, it seems that it’s not just HMOs that don’t have void periods to worry about right now. The research found that void periods were currently at a historic low, with just a quarter of landlords reporting having had a vacant property in the preceding three months.
Typical void periods fell, too, down by an average of 12 days to a total of 70, meaning that landlords (of both HMOs and traditional buy-to-lets) are finding it easier to fill their properties now than at any point in the last six years.
Commenting on BVA BDRC’s findings, George Gee, managing director (commercial) at Foundation Home Loans, said: “There are some very positive fundamentals here, particularly for professional and larger portfolio landlords, in terms of stable rental yields, strong tenant demand, and ongoing profitability of portfolios.
“However, as we might expect, landlords who have a small number of properties are being hit hardest by the rising cost of letting a property including potentially increased mortgage costs.
“It is for these reasons, and the continued low supply of properties in the private rented sector, that many landlords are likely to raise rents in 2023, as they also seek to realign their properties for the local market, and make sure these properties can continue to make a profit.”