Following the UK’s decision to leave the EU, London’s property market is widely expected to stutter. In this time of uncertainty for property owners, exciting opportunities are arising for investors from London’s lucrative HMO market.
The idea of letting Houses in Multiple Occupation is appealing to a growing number of landlords who are discovering in the HMO market a revolutionary system of collecting rent from a higher number of tenants while running a rental portfolio more efficiently. Furthermore, HMOs are turning out to be superb investments: the demand for flexible, affordable housing solutions is increasing. There is a trend in the UK, especially in cities and larger towns, where the average size of a typical ‘household’ is declining. At the same time, the overall population is increasing. This combination is leading to increased demand for HMOs over and above single-room rentals.
Many HMO and multi-let investors make fantastic rental returns on their property, compared to a typical single-let rental income. Figures from the UK market often show gross rental yields for HMO as much as three times higher than more traditional buy-to-lets. Furthermore, with HMOs the rental void periods are significantly lower: if one tenant moves out, you still have other rooms tenanted, giving you peace of mind. With a single let a void period will mean an empty property. Additionally, landlords managing HMOs are less exposed to arrears: with multiple tenants, you are less exposed if a tenant falls behind on their rent as there are still other tenants that are still paying. In a single let, arrears can mean losing the entire income on a property.
It is important to consider that there are some tax advantages to investing in HMOs. HMOs and multi-lets often need refurbishment and structural work to ensure the property has the optimal number of rental units, and is reflecting the right standard for the local market.In summary, most spending on HMOs is a revenue cost, and hence income-tax deductible.
In 2017 HMOs are still great investments that deserve consideration. It is however important to take in consideration the downsides of investing in houses in multiple occupation. With HMOs there are more legislation and there are more planning requirements than there are with more straightforward buy to lets meaning they can be harder to raise mortgages and finances for, especially for new landlords.
Not every property can work as an HMO, so the number of suitable properties in an area might be limited compared to single lets. If demand for these properties is greater than the supply then it is going to be very difficult to obtain one at a decent discount. Furthermore, capital growth can sometimes be lower on these properties. The reason for this being that when a property is converted into an HMO, it’s re-sale market consists, almost exclusively of specialised landlords.
There are fewer letting agents that are willing to manage HMOs than there are who will manage traditional buy to lets. This increases the chance that you might have to self-manage the property, which can be very time-consuming. In terms of financials, when investing into an HMO you will incur into higher start-up costs than a buy-to-let. There is more furniture that needs to be bought. There are specific environmental health regulations, fire regulations and safety laws that need to be taken into consideration.
Finally, there is the mortgage. A mortgage for an HMO is more difficult to get and a bigger deposit is most likely going to be required. In conclusion, the continuing upwards trend of people choosing to live in HMO properties doesn’t appear to be decreasing anytime soon, meaning they remain one of the best property investments available at the current time. However, HMOs are not for the faint-hearted. They have higher running costs because of increased management and maintenance work. But if you do your research and pick wisely, there is great potential for healthy returns on investment.
By using a property management software that has been tailored to suit the HMO market, you can negate some of these problems. Arthur Online has become one of the leading software options for HMO managers, allowing for easy communication, maintenance management and conforming to regulations