Are HMO’s the smart investment?

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In the post-Brexit world, nothing is certain. However, it appears that investment in Houses of Multiple occupancy is where many property investors are looking. HMO properties can allow a landlord to maximise their return by splitting property into separate spaces with separate tenancy agreements. An HMO is defined as a property with at least three tenants forming multiple households, where ‘multiple households’ means tenants are not in a relationship or related.

HMO landlords tend to come in three categories:

• Those who rent out spare rooms within their property

• Regular ‘Buy-to-Let’ Landlords that bought a large property that it is suitable for HMO letting

• Landlords that actively seek out properties that are suited to an HMO style or are willing to spend time and money changing a property to become an HMO

Why invest?

Demand

There is a growing trend amongst the under thirties to not live alone. This could be due to a plethora of reasons, two of which are the fact that rent for a single bed recently moved over the £1000pcm mark or maybe thanks to sites such as SpareRooms that increases the opportunities available to find groups of similar people to live with. Whatever the reason, it is good news for those looking to get into the HMO market.

Furthermore, with the 21^st century phenomenon of ‘Generation Rent’, there are more people looking to rent rather than buy. This is thanks to things such as more stringent mortgage laws and inflated property prices, even after Brexit. This means that the size (and quality) of the potential tenant base has increased.

Ability

Since 2013, Planning permission rules surrounding small scale extensions have been relaxed. This means that investors actively seeking properties to convert to an HMO style are able to quickly and easily increase the size of a property without having to go through the arduous process of planning applications. This has been a particular bugbear of MP Steve McCabe, who raised the issue of ugly HMO extensions in parliament in August.

Return

When compared to a standard buy-to-let single freehold and block of flat models, HMO’s outperformed both. The single and block of flat models returned 6% and 7% respectively, whilst HMO’s averaged a 10% return per annum. As the saying goes…the numbers don’t lie.

Things to consider

Rules

As with all types of private rented housing, there are laws surrounding certain things that must be provided. For HMO’s these are more complex than usual. Firstly, the property must be licenced to become an HMO by the local council. To gain this licence the property must adhere to a certain criteria. For example, no room can be too far from communal facilities such as a kitchen or bathroom (when renting out individual rooms) and there are stipulations over the types of locks that must be used on doors both inside and outside the property. Unfortunately for those looking to invest in HMO’s, there is currently no standard definition of what an HMO is or what it must contain, therefore it is best to check with the council what the property must have and ensure the correct licence is applied for or face a fine of up to £20,000.

Oversupply

As is often the case when an investment opportunity that offers a higher yield than the rest comes to light, lots of people jump on the bandwagon. This means that the market could be flooded with shoddy HMO’s. The best thing to do to avoid this and being dragged down is to spend time thinking about the potential layout of an HMO property and how it would feel to live there. Tenants are more willing to pay higher rent when the property is worth it. Furthermore, this doesn’t have to cost more, it is simply a case of taking a step back and thinking “How would this work if I was living here?”

Making life easier?

Unsurprisingly, having multiple tenants with differing tenancy agreements means that HMO rental is more complex than a standard single let. The property manager will have to deal with issues both in the communal areas and in private areas. This is where property management software is key. Arthur Online is the leading property software management tool when it comes to HMO letting. Arthur’s unique database allows the property manager to work on both a property and unit level. This means when an issue arises, or a task needs to be completed the property manager can automatically inform all parties that need to know.

Furthermore, due to the fact there are more tenancy agreements within the property, there tends to be a higher turnover within HMO properties. However, when using Arthur this is not a problem. Tenants can request to end a tenancy through Arthur, the property manager can the accept this and automatically assign the letting agent to find a new tenant.

By using Arthur Online Property management software, Landlords can take on an HMO without worrying about the extra workload it may present.

Sign Up for a free thirty day trial of Arthur Online.

… LandlordZONE.

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