The Cases For and Against
Investing in HMOs in 2020
Most investors know that HMOs can make superb investments. They give rental yields that can't be achieved with standard buy-to-lets and in the right areas, the demand for affordable, flexible housing as offered by multi-let properties has never been higher.
But, as with all things, there are downsides as well. Today we weigh up the pros and cons of investing in houses in multiple occupation.
What Does HMO Stand For?
HMO stands for houses in multiple occupation or houses of multiple occupancy. This type of housing is also called a multi-let.
What Is An HMO?
An HMO is any property which is tenanted by three or more people who are not a family where there are shared facilities such as bathrooms and kitchens.
This is very much a simplified definition. If you look to this flowchart from Salford Council then you'll see that there can be many more elements that come into play when defining exactly what an HMO is.
Also, different local authorities can have different criteria for defining exactly what an HMO is. There can be different licensing requirements. There will certainly be different planning regulations in place.
So before you invest in an HMO I strongly suggest talking to your local HMO Officer. This is someone employed by the local authorities to help landlords and developers stick to local regulations and their advice can be invaluable.
I also suggest that you read as widely around the subject as possible. When it comes to such subjects as licensing for HMOs there is a lot you should take time to learn and understand before you jump in with your wallet.
But, however important understanding definitions and regulations might be, that's not what I want to cover here, in this article.
Instead, I want to look more broadly at the pros and cons of this kind of property investment so that, before you get bogged down in detail, you can be confident you are taking the right step.
And to that end, I will present the cases for and against investing in HMOs.
The Case For (Investing in Houses In Multiple Occupation)
The clearest benefit of investing is HMOs is that they can provide much higher returns and cash-flow than most single lets.
Why HMOs Mean More Money
- Rental yields can be as much as three times higher.
- There are less (impactful) rental void periods. By this, I mean that if one tenant moves out, you still have other rooms tenanted. With a single let a void period will mean an empty property.
- There is less exposure to arrears. With multiple tenants, you're 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 the entire income on a property.
- There can be tax advantages to investing in HMOs in that more of your costs might be tax-deductible.
- Tenant demand for flexible, affordable housing 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 (in the right areas) for HMOs over and above single-room rentals.
The Case Against (Investing in Houses In Multiple Occupation)
If the case I've put forward for investing in HMOs has convinced you then that's fantastic. In 2017 HMOs are still great investments that deserve consideration.
But, it's important to go into this kind of investment with your eyes wide open. Houses in multiple occupation have their downsides too:
- With HMOs, there is more legislation and there are more planning requirements than there are with more straightforward buy to lets. Consider Article 4 for example.
- They can be harder to raise mortgages/finance 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 the demand for these properties is greater than the supply then it is going to be very difficult to one at a decent discount.
- Capital growth can sometimes be lower on these properties. This is because, when a property has been converted into an HMO, it's resale market consists, almost exclusively of specialised landlords.
- There are fewer letting agents that are willing to manage HMOs than there are who will manage standard buy to lets. This increases the chance that you might have to self-manage the property which can be very time-consuming.
- An HMO has higher start-up costs than a buy to let. There is more furniture that needs to be bought. There are environmental health regulations, fire regulations 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.
My Own Experience
I have been investing in HMOs since 2011.
I started off self-managing the properties I bought and as a result, learned a lot about what systems and processes you need to put in place.
The systems and processes are paramount. If you are going to make a success out of an HMO then being able to manage it (and its tenants) properly is key.
The reality is that HMOs are more work to manage than a typical single let. There's no getting away from that.
But if the pros outweigh the cons for you and your situation then they can make great investments.
My Advice: Hire A Letting Agent
One recommendation I would give is to use a qualified letting agent to manage your HMO.
If you ever want to systemise and grow your property portfolio, then this is key.
I managed all my properties for a couple of years and found it was a huge drain on time and resource (which I could have better spent elsewhere).
As a property investor, you want to be concentrating on building your portfolio and sourcing new deals, not on managing tenants in your multi-let houses.