HMO Investing: The Good and The Bad
Forth Action Invest on February 16, 2023Are you looking into HMO investing? Well, we’ve got you covered with our guide covering ‘HMO Investing: The Good and The Bad.’
For those new to HMO investing, you won’t be alone in your quest to learn more, as HMOs have become an increasingly popular investment strategy for property buyers.
The total of HMOs in the last year has increased to 55,849 across the UK. And the average HMO is worth £464,546 in the current market, totalling a market value of £25.944bn.
Our article will cover the following:
- What is a HMO?
- Who is the HMO aimed at?
- Why are HMOs so popular?
- Are HMOs a profitable investment?
- What are the benefits of investing in HMOs?
- What are the drawbacks of investing in HMOs?
- How to overcome ‘the bad’
*Please note this blog does not constitute investment advice. Conducting your own due diligence and being aware of risks before making any investment is key.*
What is a HMO?
A HMO stands for ‘house in multiple occupations,’ otherwise known as a houseshare. It includes at least three tenants who are from separate households and share a toilet, bathroom, or kitchen facilities with the other people in the house.
A large HMO is a property housing at least five tenants (all from different households) and they also share toilet, bathroom, or kitchen facilities with the others.
This is entirely different to a traditional household, as this refers to people who are married or in a relationship, relatives, or step-children/step-parents.
Who lives in HMOs?
Recently released Census data highlights a rise of 16.7% in the number of 16-24-year-olds living in communal establishments between 2011 and 2021.
And with a higher number of student enrolments over the last few years, which continues to grow, the pull to HMOs could increase amongst the student population.
But it’s not just students who favour this style of living. There’s a range of people who are opting for this style, including:
- Trainee or recently qualified medical staff
- Young professionals
- Recent graduates
- Students
- Unemployed singles or couples
- Seasonal or contract workers
- Live in staff
- Young non-professionals
- Migrant workers
- Older people who cannot afford to buy their own property
- Local Housing Allowance claimants under the age of 35
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When investing in HMOs, you’ll have to consider what tenants you’re catering for, as each type of person may have different priorities.
Good aspects to look for before purchasing are: is the property in commutable distance to a city centre, hospitals or universities, are there transport links or bus stops close-by and is there a garden (this could be advantageous for young families).
Most tenants will be looking for a fully furnished property too. Students could be more attracted toward a HMO in the midst of student nightlife, whereas young families or people on Local Housing Allowance may wish for a good school nearby.
According to a recent report, here are some other top desires from tenants:
55.8% require high-speed broadband
52.8% are looking for rooms with ensuite bathrooms
39.1% want large rooms
39.1% desire quality furnishings
34.8% now need office furnishings for home working
30.4% are looking for a communal space to socialise in
27.7% require a garden or outdoor space.
And 12.4% are hoping to bring their furry friend with them.
Why are HMOs so popular?
HMOs are popular with tenants because of the more affordable cost and flexible rental accommodation.
With house prices being out of reach for many people, HMOs are the low-cost option they’re looking for.
Other benefits to tenants include the convenience of the location, being able to socialise with like-minded people, lower travel costs if in a good area, flexibility with short-term contracts and an option if university accommodation is limited.
Are HMOs a profitable investment?
While HMOs are still quite a niche section of the buy-to-let market, the value and number of loans for HMO purchases have seen a strong increase over the last five years.
For those looking at various investment strategies, 47% of landlords with an HMO agree that they offer better rental yields than other residential rental properties. These impressive rental yields can sometimes be up to three times higher than standard buy-to-let properties.
They’re a property style which could also see further growth over the next few years, with a leading wealth management company predicting houses in multiple occupations will increase in number and importance.
What are the benefits of investing in HMOs?
Let’s explore the benefits of investing in HMOs for property investors in the UK…
Higher rental yields
As mentioned, HMOs average a higher rental yield than their other buy-to-let counterparts. If you buy in the right location, like the North West for example, you could see more affordable property costs with the option of higher rental costs.
Somewhere like Manchester could be lucrative for HMO investors as this Northern hotspot is quickly becoming an attractive alternative for city living away from the capital. By 2025, the city is expected to grow in population to 635,000 – the greatest percentage of population growth outside of London.
Less void periods
In a buy-to-let, when your tenant leaves it can cause long void periods while you’re waiting for a new family to move in. With HMOs, when one person leaves, it only causes a loss of 20% (if your property houses five tenants.)
So with this property style, you’re more likely to have a consistent stream of income and fewer void periods.
Demand is expected to grow
With the percentage of students and young professionals increasing within the UK, the demand for HMOs is expected to grow.
What are the drawbacks of investing in HMOs?
Paperwork and legalities
HMOs require a whole lot of paperwork – more so than the usual buy-to-let property. And this is heightened further if you have more than five tenants in one property.
This also means the start-up costs can be higher too. But with any rental property, you must always ensure it meets relevant standards and is a safe home for your tenants. This is absolutely paramount.
If you want to rent a property as a house in multiple occupations, you must contact your local council to check if you need a license. Your council can share further legal information and assist with any questions.
Alongside the usual regulations, the HMO must also meet minimum bedroom sizes (this is important if you’ll be switching up the layout when renovating.) Typically, the bedroom must be:
- 4.64 square metres for a child under 10
- 6.51 square metres for a person aged 10 or over
- 10.22 square metres for 2 people aged 10 or over
But your council may have their own standards for bedroom sizes. That’s why it’s important to check these aspects before beginning your HMO investing.
So be sure to ask about HMO licensing, planning permission, minimum room sizes, additional fire regulations and overcrowding rules.
Difficulties in managing tenants
Managing one tenant (or family) can be challenging at times, let alone when there are multiple separate individuals living in one property.
When you’re letting out your HMO to various people, you’ll have to do seperate tenancy agreements, contracts and more – all with individual timelines.
This requires time and the ultimate level of organisation.
Mortgage types
Before settling on HMO investing, you must know that it can be a little more difficult to secure financing for this type of property.
If you’re buying a HMO through having a mortgage, lenders may require a bigger deposit and may lend at lower loan-to-value percentages.
How to overcome the ‘bad’ in HMOs
The ‘bad’ can sound daunting, but when done right, HMOs can be a positive investment for landlords up and down the country.
To overcome the negatives, working with specialists is key. This way, they can guide you towards some great properties that could be HMO-suitable. This is the first step in ensuring the investment is worthy, so you can get more bang for your buck (while creating valuable living situations for numerous tenants.)
At Forth Action Invest, we work with investors to source the best buy-to-let and HMO properties that suit their requirements. We also offer a ‘guaranteed rent scheme,’ ideal for those looking to future-proof their finances.
To learn more about HMO investing, book a free consultation here.
*Please note this blog does not constitute investment advice. We recommend you conduct your own due diligence before making any investment.