Thinking of investing in houses of multiple occupancy (HMOs)?

Posted by Mark Lloyd, Property Master Academy on 17 July 2019 | Comments

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HMOs are popular with property investors because they offer the potential to achieve much higher rental yields than standard buy-to-lets.

As with any type of property investment strategy, there are pros and cons to consider. Here are some of the advantages and disadvantages of HMOs.

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The benefits of HMOs

The biggest benefit and one that tends to outweigh any disadvantages is the high rental yields that can be achieved.

Another advantage is that your cash flow is not hit as hard by any void periods. Even if you lose one tenant, the other rooms will still be rented out. With a standard buy-to-let, when your tenant leaves, your stuck with an empty property that’s not bringing in any cash whereas that’s rarely the case with an HMO.

The same can be said about arrears. If a tenant falls behind with their rental payments, you’re not so exposed to cash flow problems as multiple tenants mean you’re still generating income.

There are tax advantages to investing in HMOs as some of your costs could be tax-deductible. If your HMO needs refurbishment and/or structural work to make the property habitable for multiple occupants, much of what you spend is a revenue cost and tax-deductible.

While an extension or building an annexe would be considered a capital item, the repair or day-to-day work to maintain an existing item to earn rental income is a revenue cost.

Points to consider before investing in an HMO

The first issue to contend with is finding a suitable property. Not all houses will work as an HMO – you’ll definitely be more limited in how much choice you have than if you were looking to invest in a single-let property.

In the long-term, capital growth may be lower if you’ve converted the property into an HMO because you’re limiting its resale potential. Other property investors are going to be your most likely purchasers.

When it comes to letting agents, there are many that are happy to manage HMOs but not as many agents as there are for standard buy-to-lets. If you choose to manage the HMO yourself, it will be more time-consuming than a single-let.

You’ll also find that there’s not as wide a selection of mortgage products available for HMO purchases – and a larger deposit may be required.

The other issue is outlay. Start-up costs with an HMO could include any renovation work that needs to be done. Then you’ll need to take furniture and fittings into account. Finally, environmental health legislation will contain fire regulations that must be adhered to.

How much demand is there for HMOs?

In the right areas, there’s a big demand for affordable housing and plenty of tenants looking for multi-let properties to keep costs low.

As ever, the property investment strategy you choose is down to your personal situation. However, HMOs are a consistently lucrative option for those investors willing to take the plunge. Those who have invested in HMOs say the key to success in this area is efficient management.

If you plan to manage it yourself, be aware of how much time it will take at the outset. Otherwise, make sure you employ a qualified letting agent with experience of HMO management.

Would you like to learn more about property investment?

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