Do HMOs still stack up as an investment?

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Over the last 15 years, the HMO market has been transformed and there has been a boom. The reason for the boom  was, quite simply, that HMOs could generate far better returns than single home lets.  

But as the market grew, regulations tightened. On top of the extra duties, obligations, costs and tax changes that affected every landlord, HMOs were subjected to additional health and safety rules, including these two in October 2018:

1. Minimum sizes for bedrooms were introduced, meaning some landlords could no longer let certain rooms, dramatically reducing their income
2. The ‘three storeys or more’ criteria for needing a licence was removed, meaning any HMO housing five or more unrelated individuals had to be licensed.

HMO landlords have a lot to know, do and stay on top of. And now, in addition to higher mortgage interest rates, HMO landlords are finding their profits dented further by rocketing energy costs. This begs the question, do HMOs still stack up as an investment?

The upsides of HMOs

There are two big benefits to letting a property as a HMO. Firstly, while HMOs will always be more time-consuming than single-let properties, the reality is that they still usually generate a higher profit.

Secondly, a change in tenancy in a single-let home often means you have a void period with no rent coming in. The benefit of having each room let individually is that if you have one room vacant between lets, the other rents should be more than enough to cover your costs until the room re-lets.

And there’s a potential bonus to having an HMO: because they are larger properties, they may have better scope for adding value through extending than a smaller single let and if you can refurbish and extend when you buy, you could increase the capital value substantially.

5 things to consider if you’re thinking of investing in HMOs

1. Capital – As HMOs are considered higher risk, they require specialist mortgages and lenders tend to offer lower loan to value percentages, meaning you’ll probably need to find a bigger deposit than if you were getting a traditional buy-to-let mortgage.
2. Demand – Generally speaking, every major city should be able to offer decent HMO investment opportunities, but some areas have become saturated. As with any investment, research the market and make sure there’s good demand before you buy anything.
3. Speak to local council – Every local authority has the power to make its own licensing and planning rules, and some are far stricter than others on what they will and won’t allow – particularly if you’re looking at converting an existing standard home to an HMO.
4. Invest in quality fittings – If you’re targeting working professionals, aim to fit out the property with the amenities you’d want in your own home – e.g.
   • Fast WiFi
   • Good quality showers
   • Modern cooking appliances
   • Efficient laundry facilities
   • Plenty of storage
5. Maintenance schedule and budget – HMO properties have higher traffic, so you’ll need to redecorate and carry out other maintenance and repairs more often than you would with a single let. But it’s worth staying on top of things so that your existing tenants are encouraged to stay and to make sure you’ll be able to re-let rooms at a good rent as and when they come up.

As with any buy-to-let, investing in HMOs should be seen as a long-term investment. Make sure you plan and budget well ahead for maintenance and repairs over time. Not only will that help you secure the best rental income, but it will also help protect the capital value, which should appreciate well over time.

If you’d like any advice about HMO investing, get in touch with your local Leaders branch who will be happy to advise.

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