If you are considering investing in an HMO property you may be wondering what are the pros and cons of HMO properties.
What are the pros and cons of HMO property investments? The number one pro or advantage of an HMO property is they are higher yielding investments when compared to a standard buy to let investment. Whereas the top con or disadvantage of HMO properties is the red tape and legislation you have to comply with before you become an HMO landlord.
You may ask whether the red tape is worth the extra yield with an HMO property? That’s a decision you’ll have to make, but let’s take a look at all the HMO property pros and cons.
What are the pros to HMO property investments?
- HMO properties offer a higher yield.
- Less impact from void periods.
- Arrears won’t hurt your cash flow as much.
- An increase in tenant demand if you pick your area correctly.
- More income from fewer properties.
Let’s take a look at each of these in more detail.
1. HMO properties offer a higher yield vs buy to let properties
Due to the fact that there are more tenants in an HMO property vs a buy to let investment, an HMO makes better use of the rentable space. This is why the income is higher and the yield is better than on a standard buy to let property.
For example, even on a smaller HMO property which makes better use of a 4-bed house it would produce better rental income. If this 4-bed house has two reception rooms, one of these rooms can be used as another bedroom.
That means you can have up to 5 tenants in this house instead of one family. However, the number of tenants in the house will depend on the the room sizes and how much communal space there is. But on the assumption the rooms sizes comply, let’s explore this example.
Let’s say the standard rent for a single family for a property of this size and location would command a monthly rent of say £950 per month. But for the same house and location, each of the rooms would let out at say £395 per room as an HMO property.
This makes your HMO gross monthly income £1,975 instead of £950, which is an extra £1,025 per month. However, with an HMO you will normally be responsible for paying the utilities, which will increase the running costs. Also, the management fees on an HMO property will be higher than they are on a buy to let.
But even with these extra costs, your monthly cash flow will be higher than it would be if you rent the house out as a buy to let. Thereby giving you the better yield.
2. You’ll have less impact from void periods with HMO properties
Using the above example to illustrate this point; If you rent the same house as a single family let you have one tenant. If this tenant gives notice, you may have a void when this tenant moves out until you get a new tenant.
However, if one of your five tenants gives notice and moves out, even if you have a gap between this tenant moving out and a new tenant moving in, you still have four paying tenants.
3. Arrears won’t hurt your cash flow as much with HMO properties
If your single tenanted buy to let property is in arrears you will be impacted straight away by the lack of cash flow.
However, if one of your five tenants in the above example were to have problems paying their rent, assuming the other four tenants don’t have similar problems, you have four tenants to keep your cash flow going.
For example, using the same numbers above, if the single family stops paying rent you receive nothing per month. But if one of the five HMO tenants stops paying, your rent will still be £1,590 per month.
4. An increase in tenant demand if you pick your HMO investment area correctly
If you choose the right area to buy your HMO property, you are likely to get good demand from people who are looking for cheap rent. It’s cheaper for tenants to pay for a room in a house vs having to pay rent for a whole house or even a flat.
Your HMO does need to be in a town or city, as this is where the demand will be. There’s no point in buying a property in a village or in the countryside and expect to fill it with tenants.
Towns and cities with universities and colleges are good places to invest in HMO properties. Students love the HMO concept, as it’s cheap and it means they don’t have to live alone. However, be careful with this strategy, as students can a reputation of destroying properties.
Plus many of the universities in towns and cities have now got dedicated student accommodation, which has reduced demand for the HMO properties nearby.
However, this hasn’t taken away all the demand, as second and third year students tend to like to be more independent and rent a full house. But be careful about location, as you need to have your HMO property within walking distance to the university or at the very least on a bus route.
5. You get more income from fewer HMO properties vs buy to let
If you prefer the idea of having fewer investment properties, HMO properties solve this. If you want to have good cash flow with say three-four HMO properties, this may be better than having to buy say 8-10 buy to let properties to create the same cash flow.
What are the cons to HMO property investments?
- Increased legislation.
- HMO licence is needed.
- More difficult to obtain finance.
- More planning restrictions.
- Not all properties suit HMO.
- Limited market when selling HMOs.
- Increased start-up costs.
- Higher costs.
- Property management is harder.
- You need to consider tenants mixing.
- Higher deposit.
1. You’ll have increased legislation and compliance with HMO properties
Due to the fact that HMO properties involve multiple person occupation it’s deemed a higher risk. The legislation and red tape is to help protect the other occupants in the house from the risk of fire.
This means that an HMO property needs to be upgraded to accommodate multiple tenants. For example, all the internal doors need to be fire doors.
But in addition to this, it’s important that the tenants have good liveable space in the property too. The legislation is designed to make sure that bad landlords cannot cram too many tenants into an unsuitable property. To prevent this from happening, there are significant penalties and fines for failure to comply.
2. An HMO licence is required to own and run an HMO property
As a result of the increased compliance and legislation for HMO properties it has been deemed necessary to require all HMO landlords to have an HMO licence in order to own and let an HMO property.
Which means the HMO landlord must be a fit and proper person. Also, they must not have a criminal record or be in breach of landlord laws or code of practice. The house must also be suitable for the number of occupants too.
The penalties are high for not obtaining an HMO licence before letting a property to multiple tenants. This can be a fine of up to £20,000!
3. It can be more difficult to obtain finance on HMO properties
It can be more difficult to get an HMO property mortgage. This is especially true if you’ve not owned property before. It’s easier to get a specialist HMO mortgage if you are already an experienced landlord and own at least one, but preferably more, buy to let properties beforehand.
Lenders want to know you have the necessary experience as a landlord before they lend to you on an HMO property.
4. There are more planning restrictions with HMO properties vs buy to let properties
Not all properties can be converted into a house of multiple occupation. There are certain planning restrictions in place which may prevent certain properties from being an HMO.
There’s also what’s known as the Article 4 Direction. This planning rule was brought in back in 1995 and many town councils have adopted the rules. What it means is in an Article 4 Direction area you need planning permission to convert a house into an HMO.
So be careful if you buy a property that’s in an Article 4 area that doesn’t already have planning permission, as there’s guarantee you’ll get the permission for it to be an HMO. This wouldn’t stop you from letting it out as a buy to let, but you may have invested in such a way that the investment only works as an HMO.
5. Not all properties suit being an HMO investment
As already mentioned above in the HMO licence section, the house must be suitable for the number of occupants. This means that the bedrooms must be over a certain size and the communal area must be a suitable size for the number of occupants.
Additionally, you need to have a set number of bathrooms and toilets per head and the kitchen must be suitably sized and have the right facilities for the number of tenants.
6. There’s a limited market when selling HMO properties
It’s important to understand that your selling market is limited when you come to sell an HMO. You will only be able to sell your HMO properties to another investor, unless you evict all your tenants and make the necessary changes to convert the property back to a house.
But of course if you try to sell your HMO in this way, whilst you are waiting for it to be sold you won’t be receiving the rent.
7. HMO investment requires increased start-up costs
HMO properties are more expensive at the outset as you normally have to furnish each of the bedrooms and the communal areas. Whilst you can furnish a regular buy to let, it more usual to rent-out a buy to let unfurnished.
In addition to the furnishing requirement, there are the additional regulations to follow. These include for example fire regulations and environmental health regulations.
In order to make sure your HMO complies with the legislation and regulations you will need to invest in the necessary upgrades to the property.
8. HMO properties involve higher overall costs
The running costs associated with an HMO property tend to be higher than a buy to let investment. For example, it’s standard for the landlord to pay for costs like heating and electric. There is also a higher wear and tear cost on HMO properties too.
Additionally, the letting fees on a house of multiple occupation tend to be higher than on a buy to let property. For example, you’ll probably pay somewhere between 8-10% for full management on a buy to let property, whereas this is more likely to be somewhere between 10-15% on an HMO.
9. Property management is harder
Due to the fact there are more tenants per property, the management is more difficult and time consuming. This is where I suggest you don’t manage the HMO yourself, but instead use a management agent who is experienced with houses of multiple occupation.
10. You need to consider tenants mixing
Due to the fact that a house of multiple occupation involves many tenants and mixing together people who don’t know each other, you need to be careful about how you choose your tenants. For example, you wouldn’t want to mix professional tenants with students, and visa-versa.
11. Higher deposit
Certain HMO mortgage lenders will require a higher deposit. But also if you are looking at a larger HMO with in excess of 9 bedrooms this will be considered a commercial property. Many of the lenders in this case will not only require a higher deposit, but the mortgage itself will be a repayment mortgage rather than an interest only mortgage.
Conclusion on HMO property pros and cons
Whilst the bias in this article seems to be towards more disadvantages to HMO investing, as there are more cons vs pros, this should not necessarily put you off.
If you are looking for higher yielding properties and if you outsource the property management to a good letting agent, there’s no reason why you shouldn’t invest in an HMO investment.
However, if this is your first investment property, don’t start out with an HMO property. Start by buying a buy to let investment first.
Are HMO properties a good investment?
Most property investors know that HMO properties make a good investments The rental yields are much higher than a standard buy-to-let investment, and if you choose the right area where the demand for affordable multi-let properties is high, you can’t go wrong.
Whilst the red tape is a pain, your cash flow is better protected with an HMO.
I hope you’ve got something from reading this article about HMO property pros and cons
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