What is an HMO?
An HMO, or House in Multiple Occupation is a property let to at least 3 people who aren’t from the same household.
The tenants of an HMO generally have their own bedroom but share facilities such as the kitchen and bathroom. An example of this type of let could be a student houseshare.
This differs to a standard type of let. A single let could be one individual with access to the whole property, or a family unit where again, they all have access to each room of the property.
Are they a good investment?
HMO’s can definitely be a good investment for landlords. With rental yields ranging from 8% – 15%, sometimes even higher, they can certainly be very profitable. Running an HMO isn’t always plain sailing however, they can be hard work.
HMO Vs. Buy to Let
Buy to let rental yields vary throughout the UK and usually range from 3% to 8%. When compared to HMO rental yields, this is a less profitable way of letting however the work involved is also normally less.
Mostly, each tenant of the HMO has their own AST and the turnaround of tenants is usually higher than a buy to let.
As an HMO is more likely to be let to people that don’t know each other, there is a greater risk of the tenants not getting along. This situation would need to be sorted by the landlord. If a property was let to a family who had a disagreement, it’s likely they would resolve this without the landlord getting involved.
It again comes down to the more work involved, the higher the return.
Interest rates tend to be similar in regards to a buy to let and a small HMO. Interest rates for larger HMO’s tend to have a rate loading of 1-2% higher than buy to lets.
HMO Vs. Commercial investment
Commercial investments, e.g. retail shops, are also a popular property investment and more and more landlords are exploring this option.
Commercial rental yields tend to fall in-line with buy to let yields however rather than letting on a 6 month contract, commercial leases tend to range from 3 years to 15 years, or longer. This means that once you have a tenant, it’s likely you don’t have to worry about finding new tenants for a number of years.
Although this is a positive, they aren’t as profitable as letting out an HMO.
Another concern with commercial property is that as the high street and retail sector is declining, it may be harder to find tenants. This means that the property may be left unoccupied and not producing a rental income.
As an HMO has multiple tenants, it would be unlikely that all tenants move out at the same time, meaning there is still an income generated. Aside from the difference in rental income, HMO mortgage rates tend to be lower than commercial mortgage rates, increasing the profit further.
There are a huge variety of HMO mortgage products available. Lenders offer products to both first time landlords and experienced landlords. The interest rate will be determined by your experience.
There are also products for small HMO’s, e.g. a 3-4 bed property right through to large properties such as student halls of residence.
The deposit needed for a first time landlord is 25%, however, if you don’t own any property at all, you could be expected to pay a deposit of 35%. Experienced landlords are able to borrow the highest amount at the lowest interest rates.
There are other factors to take into consideration such as the number of tenants, the credit profile of the applicant and whether you’re looking for the property to be owned by a Limited company or not.
Interest rates start at just under 2% however between 3% – 4% is more realistic for most people. Anything larger or more unusual would incur rates of between 4% – 6%.
Lender fees should also be taken into account. Some don’t charge a fee at all, some charge a flat fee and some are percentage based.
Some high street banks offer HMO mortgages however a specialist HMO mortgage lender will probably be more suitable. A good HMO mortgage broker will be able to source the market for you in a couple of hours.
What are the main advantages of HMO investment
The rental yield can be as much as 3 times higher than with standard a buy to let.
There is less chance of the property becoming completely vacant and therefore not income producing.
The demand for affordable housing in certain areas is rising meaning finding tenants could be easier
A larger HMO could be valued commercially, against the rental value, rather than against just the ‘bricks and mortar’. This means you me be able to sell for more or raise a larger mortgage.
And the main disadvantages
Managing the property can be time consuming and costly.
Set up costs can be higher as the property may need work to make it suitable for letting as an HMO.
The risk of tenants not getting along and causing issues.
Some areas are overloaded with HMO’s meaning finding tenants could be harder, or a lower rent charged to entice tenants.
Things to consider before buying a HMO
There are a few things to consider before deciding to let under a house in multiple occupation.
A good HMO managing agent will take out some of the hassle of running the property. The letting agent will likely source tenants and deal with emergencies.
HMO income is of course taxable, so this should be taken into consideration. It’s worth discussing your situation with an accountant who will be able to provide tax advice.
When looking for tenants it’s worth choosing tenants who have similar lifestyles. For example, having professional, working people living with students could cause issues.
Property location is also key, you should look at demand for HMO’s in the area. If you are managing it yourself, you should research the location and be able to sort problems quickly.