Houses in multiple occupation (HMOs) have been rising in popularity, with many landlords reporting better returns than standard buy-to-lets.
Over the past couple of years, numerous lenders have reported a greater level of interest in HMO property investment. While in the past the asset type might have put off some buyers due to the greater level of work involved, it seems that the pros are increasingly outweighing the cons.
One recent piece of research from Landbay found that half of landlords use their HMO property – or portfolio of HMO properties – as their sole source of income, demonstrating just how lucrative this investment type can be.
Today, it is well known that HMOs can be the most profitable type of rental stock you can own, with the National Residential Landlords Association (NRLA) estimating that average yields are around 6% in England, rising to more than 9% in certain areas. This is considerably higher the equivalent single households rentals.
However, it is important to note that numerous factors will play a role in the ultimate success of the investment, from choosing the right location with high tenant demand, to charging the right amount of rent and managing the property well. At the same time, standard buy-to-lets continue to be a popular, tried-and-tested option for many landlords.
Great returns attract investors
With so many landlords receiving their sole income from their HMO property or properties, it is increasingly being seen as a useful asset class to diversify into either as well as or instead of traditional flats. For investors looking to specifically target strong yields, it is clearly a top choice.
In Landbay’s survey, 72% of HMO landlords own their HMO property through a limited company. This is another notable trend within the property investment space in recent years, as more landlords are choosing to operate via a limited company due to the way they are assessed for tax purposes.
One of the recognised down sides of owning an HMO can be the management, as having multiple tenants on multiple separate tenancy agreements can be complicated. However, interestingly, Landbay found that almost half of the properties in the survey were self-managed by their owners, with a third of these having portfolios of 20 or more homes.
Good research is vital
Rob Stanton, sales and distribution director at Landbay, said: “Our survey results show continuing confidence in HMOs. Despite proposed rental reforms and local authority licensing schemes, the market remains resilient. With an ongoing housing shortage, demand is stronger than ever for decent and fairly managed house shares.
“HMO landlords have received a boost from falling utility bills. This means higher net rental which can make it easier to borrow a greater amount against the property’s value. In addition, council tax banding for individual rooms in shared houses has been reversed so HMOs are classed as a single dwelling as before.
“As long as investors do their research thoroughly before making the leap, HMOs can give great returns.”
What qualifies as an HMO property?
To qualify as an HMO, the property must be home to at least three tenants, who all come from more than one household (ie. are not related an have separate tenancy agreements). Tenants must have shared facilities, such as kitchen or bathroom.
Separate to this is what is known as a ‘large HMO’, which is where five or more tenants live together forming more than one household and sharing kitchen and/or bathroom facilities. From an owner’s perspective, more rules apply to large HMOs, such as minimum room sizes and licensing requirements.
HMO property is a particularly popular rental type among groups of friends who want to live together in a larger property, but with separate contracts.
HMOs are also a common option among individuals who might be new to an area, or want to live in a sociable property close to a place of work, or in a more desirable location than they may be able to afford if they rented their own flat.
If you’re interested in investing in HMO property in some of the UK’s top performing areas, get in touch with BuyAssociation today. You can also read more here.
