HMOs are an increasingly appealing form of property investment for landlords with years of experience and those new to the sector.
A house in multiple occupation (HMO) is a property that is rented by at least three people who are from different households. The tenants share facilities, such as kitchens and bathrooms. There are a number of benefits of investing in HMOs and factors to consider before investing. Here’s a guide to help you if you’re considering investing in your first HMO.
Benefits of investing in HMOs
With buy-to-let investments, rental yields are an important consideration. Investing in a HMO often provides higher yields than a standard buy-to-let. Recent research from BVA BDRC shows the average rental yield for an HMO property is 7.5%.
This is an impressive 1.5% above the overall average rental yield for property investments. The gap appears to be widening as well. Between Q1 of 2020 and Q1 of 2021, this difference has increased by 0.6%.
In addition to the potential for strong returns, multiple income streams are also another benefit for landlords investing in HMOs. As the tenants are on separate tenancy agreements, these types of investment can lessen the impact of void periods and rent arrears. This reduces the risk of significant payment shortfalls, providing landlords with more peace of mind.
Factors to consider before investing
Investing in a HMO is more complicated than a standard buy-to-let. There is a growing number of legislation and regulations that landlords need to be aware of. For starters, a large HMO, which is rented by five or more people from more than one household, is required to have a license by all local councils in England and Wales. Licenses are a requirement for some HMOs with fewer tenants as well.
Currently, there are additional licensing schemes being brought forward to different local councils. Landlords need to check what the rules are in their area to ensure they remain compliant. You can reach out to your local council if you have any questions about HMO licensing and regulations. It is crucial that you keep up to date with the latest rules and regulations in place.
Additionally, HMOs come with higher start up and operating costs. Furniture costs, along with utilities, maintenance and letting agent fees, which are more expensive for HMO properties, should be considered.
Sector slated for growth
In recent years, there has been an increasing number of buy-to-let landlords choosing to invest in HMOs. It’s not just landlords with years of experience investing in these kinds of properties. The potential for higher rental yields is attracting a number of first-time landlords entering the market as well.
With buy-to-let investors focusing more on rental yields due to recent tax changes, HMOs are expected to become a more popular choice in the years to come. From a tenant point of view, HMOs are seeing a revival in popularity. As the way people live changes, more young professionals want to live together in more affordable accommodation for longer.
Leading banking and wealth management company Arbuthnot Latham comments on the future of HMOs: “It would seem that the changing reputation of HMOs for renters, and the potential increased gains for investors mean that it’s a growing sector which looks set to develop further while there remains a shortfall of properties at affordable prices for first-time buyers.”