There is no doubt that in a turbulent economy, investing in property is still one of the best ways to keep your money safe and watch it grow. There are many different types of property that you might choose to invest in, but HMOs are proving to be particularly popular. However, these are different to many other types of property investment opportunities, so it is important that you understand what you are investing in.
In this article, we take a look at how investment in HMOs works and the different things that you need to consider before you put your money into a property.
An HMO is a House in Multiple Occupation. This can refer to a range of different property types, but all of them will be home to people from different households. The term HMO is most commonly associated with buildings that contain a number of different bedsits with a few shared facilities, but it can also cover buildings that contain flats that have their own facilities but are not self-contained, refuges, blocks of converted flats and even employee accommodation.
HMO properties are normally let out to several people on a room-by-room or flat-by-flat basis, and tenants usually share at least some amenities, such as a kitchen, bathroom or communal living area. Whilst HMO properties can be let out to anyone, they are usually aimed at students, tenants on benefits, or HMOs for professionals who are yet to invest in their own property and want to be near a city centre or business area.
HMOs are proving to be an important part of many investment portfolios. This is because they often offer good levels of return. You can benefit from a number of different rental yields, which means if any part of your property is left vacant, you will not be empty handed. Generally speaking, yields tend to be two or three times higher than other types of rental property, but it is important to remember that more money might be needed to convert your property into an HMO initially.
Before investing in an HMO property, you need to think about the way in which it will be financed. If you are not a cash buyer, then you should look for a specialised HMO mortgage which is tailored to your specific needs. These will take into account the potential for higher rental income and can therefore offer more favourable terms in comparison with other buy to let mortgages. However, you do need to be aware of the basis upon which the lender will instruct a valuation, so make sure you do plenty of research to understand exactly how this mortgage option will work.
For a long time, HMOs had a bad name as they were associated with poor and cramped living conditions. It is important to remember that there are now a number of specific regulations and licencing requirements that you will need to take into consideration. A landlord will need to have a licence for each HMO property that houses five tenants or more, instead of a single overall licence. It is also essential that you notify the local council of your intentions to build an HMO and make sure that you are aware of any regulations relating to the minimum room size requirements. To keep your HMO licence, you must maintain these minimum standards, and significant penalties can be issued for any landlords found to be in breach of them.
Not every property will be suitable as an HMO, so you need to look carefully at what your building offers. Not only do you need to consider things like the location and local demand, but you will also need to look at how practical it is to convert the property into different flats or bedsits, while still ensuring that each one has the required facilities and minimum room size.
If you are investing in a property that is not already operating as an HMO, then you will need to set aside plenty of cash in order to refurbish and convert it. It is worth remembering that the materials and labour costs are likely to be significantly higher than if you were refurbishing an ordinary house or flat. This will be because you might have to install extra plumbing for multiple bathrooms as well as things like fire alarm systems which are not required in single family properties.
There are also a number of higher maintenance costs which are attached to HMOs as so many people will share them, and you are likely to have a higher turnover of tenants. This can mean that the property is subject to more wear and tear than the average family tenant might require.
When looking at the competition offered by other HMOs in your area, it is worth remembering that many landlords now include bills like gas, electricity, water, broadband and Council Tax in the room rate. This means that it is your responsibility to pay these no matter how much tenants consume, so you should factor this into your costs before making an investment.
Many HMOs find that they have much higher tenant turnover than other buy-to-let properties. This is because they are often home to students who might only need it for part of the year before they move on to other things. Other tenants might stay a few months as a stopgap during life changes. This can require more management time from the landlord, but demand for HMO properties is still high, meaning that rooms are not left vacant for long.
HMOs work very differently to other kinds of buy to let properties and require significant investment and management on the part of the landlord. However, they can also be extremely profitable as high demand and higher than average rental yields mean that there are still many advantages to investing in an HMO.
