Many property investors know the basics of HMOs as these property investments can offer higher rental yields, especially when compared to single lets. When purchasing a property, it can be helpful to consider whether it could work as an HMO property investment. A buy-to-let in an appealing location with the right setup could earn lucrative yields as a multi-let property.
Below we go into more detail about what HMOs are, the kind of licensing you may need to run one, and the positives and negatives of owning an HMO.
What are HMOs?
An HMO, house in multiple occupation, is typically defined as a property owned by a landlord and rented by at least three people who aren’t in the same household. The renters share facilities like the kitchen, bathroom and living room.
HMOs often are more affordable, flexible housing options for tenants and are especially popular among students and young professionals. Across the UK, there has been high demand in HMO property investments, and these types of properties are expected to remain a popular rental and investing option in the coming years.
Types of licensing
When letting out an HMO, you may need a license from your Local Authority depending on the type of HMO, how many renters you have, and the area your property is in. Here are three different types of licensing you might need for your HMO.
- Mandatory licensing applies to all of England and is needed for a property with five or more tenants making up two or more households.
- Additional licensing is typically introduced by a Local Authority for specific wards or areas and is for a property with three or more tenants in two or more households.
- Selective licensing can also be used by a Local Authority for specific wards or areas and involves licensing needed for all privately rented properties. This is usually introduced if there have been prevalent issues, such as antisocial behavior.
It’s important to note that Local Authorities have different criteria for defining what an HMO is, and this makes licensing requirements different across the UK. Check with your Local Authority to find out what the regulations are for your property.
The pros of HMOs
Since you have a higher number of tenants in an HMO property, the biggest benefit of investing in HMOs is the opportunity to make higher returns and have better cash-flow, especially when compared to most single lets.
Void periods and a tenant falling behind in rent can also be less impactful in an HMO. If one tenant moves out or falls behind in paying rent, you’re still getting rental income from the other tenants. This can provide more security.
The cons of HMOs
If you’re managing the HMO yourself, it can be extremely time-consuming. Because of this, there are also less letting agents that manage multi-lets. When it comes to investing in an HMO, there are also more requirements and legislation to consider, making it a less straightforward investment.
Additionally, multi-let properties have higher starting costs, including purchasing furniture for the property. It can also be more difficult to get a mortgage for an HMO property investment and will also likely require a larger deposit.
Assessing property investments
Not every property is suitable for an HMO, so it’s important to assess whether it’s viable. Is the property laid out well for tenants to have individual rooms and a kitchen, reception room and bathroom communally or can it be converted? Research the property’s location. Is there a large population of students, young professionals and other prospective tenants for an HMO?
To further assess HMO property investment deals, use PropertyMenu’s Deal Calculator and pick your chosen exit strategy, including HMO, to help you decide whether a property investment deal you’re considering is the right investment for you.