Every investor is looking for a property which is going to deliver a great rental yield for minimal costs. HMOs can fit this bill, but to successfully manage a HMO and ensure you earn maximum yields, it takes careful management and planning.
(Edited for 2020)
Thoughts of messy students come to the fore and the headache of dealing with unpredictable twenty-somethings as tenants can send some investors running for the hills. But this doesn’t have to be the case.
These days, HMO's are more desirable among young professionals looking for affordable accommodation in town or city centre locations and they are an investment that you seriously need to be considering.
A house in multiple occupation (HMO) is most simply defined as a property that is rented by five or more tenants. These tenants live under one household and share the same facilities, such as a kitchen or a bathroom, but are not members of the same family.
As mentioned, there are a lot of misconceptions about investing in an HMO. So, we’re going to dive into the pros and cons and show you the true value of becoming an HMO landlord.
If you aren’t currently looking to add HMO's to your property portfolio, you could be missing out on a golden opportunity. That being said, you have to be sure that an HMO is the right investment for you.
With that in mind, in this article, we share the reasons why you should consider an HMO for your next investment opportunity and how you can avoid becoming wrapped up in red tape.
You never know, by the end of this post, you could be jumping aboard ‘HMS HMO’ in no time!
Let’s get into the benefits of becoming an HMO landlord first:
- Financial Benefits
- Streamline Your Portfolio
- Spread the Risk
- Costs are Tax-Deductible
- Buoyant Market
Why an HMO Should be Your Next Investment Opportunity
1. HMO's Can Provide Unparalleled Financial Benefits
One of the main reasons anyone invests in a buy-to-let property is for the financial gain, and when it comes to property investment, there aren’t many ventures that can be as lucrative.
For an HMO, rental yields can be as much as three times higher than a single let. According to the Complex Buy to Let Index in 2017, HMO's produced average yields of 8.9%, the highest of all buy to let property types.
When considering an investment, the number you’ll you will be keen to keep an eye on is the rent that appears in your account every month. Property prices fluctuate continuously but when you have a steady stream of income from your HMO, you can start counting the money immediately and, most important of all, regularly.
2. You Can Streamline Your Portfolio With HMO's
There is no denying that the more property investments you have, the more money you can make. However, this can take more time to manage them or more money in letting agent management fees.
HMO's provide a solution to this problem, allowing you to benefit from increased revenue from your portfolio with fewer properties.
Why? Because you have a higher yield with HMO's means you don’t need to have a large portfolio to gain a higher income each month.
By including just a few HMO's in your property portfolio, you can avoid paying for the management of multiple, lower yield properties.
The headache that sometimes comes with being a landlord is reduced by narrowing down to just a few, high yield HMO properties. This keeps your life as simple as possible, while still delivering you the maximum return on your investment.
3. HMOs Help Spread the Risk
While every investor wants to generate income, it is important to consider not just the earning potential of an investment, but also the associated risk that comes with it.
Where possible, spreading the risk associated with your investments should be one of your key priorities.
HMO's help you do this by ensuring that the income generated is spread across multiple occupants. So, even if one tenant falls behind, you still have multiple other occupants providing revenue.
With single let properties, you have all your eggs in one basket - the basket being your sole tenant. If that tenant happens to have a change in circumstances and they can no longer keep up the rental payments, you have no one else in that property to fall back on.
With an HMO, if the worst did happen, you know you have offset the risks and you can sleep more peacefully by decreasing that famous ‘landlord worry’.
4. HMO Costs are Tax-Deductible
Whenever talking about tax-deductible costs, it’s worth remembering that it can be a complicated issue and each case is unique. That being said, there are some HMO tax benefits that are clear.
HMO's are typically already fit for purpose when they are purchased. This means they can be let out without any necessary improvements that need to be made.
However, if, after purchasing an HMO, you decide to change the property by doing something like adding an extension, these improvements can be classed as a revenue cost.
Revenue costs are usually tax-deductible, as opposed to capital costs which are classed as costs incurred in bringing the property up to a habitable state.
Luckily for HMO landlords, these properties often need little work in order to get them into a habitable state (and when it comes to Heaton Group HMO's, they don’t need any!). Therefore, any follow-up costs you incur are more likely to be tax-deductible.
Lower cost and a tax break, happy days!
5. Buoyant Market
One of the most exciting aspects of currently investing in HMO's is the positive state of the market today.
Demand for flexible accommodation is on the rise in the UK. With HMO's no longer seen as simply a residence for students, they are a brilliant property to invest in if you’re weary of a drop in the housing market. With rising numbers of people considering more affordable properties for their rental options, HMO's stand strong against market fluctuations and deliver a consistent demand, unlike other buy-to-let properties.
Along with consistently high demand from a rental point of view, the licencing of HMO properties has risen this year. The Ministry of Housing, Communities & Local Government recently announced its intention to increase the licensing of HMO's in the private rental sector. This is great news for investors as it means that you’re more likely to be granted a licence by your local council.
Now, let's explore some of the things you need to consider before you purchase an HMO:
How to Ensure Your Experience as an HMO Landlord is a Smooth One
6. Remember Your HMO Licence
So, here it is, the dreaded ‘red tape’. Like any investment, there are i’s to dot and t’s to cross before you become an HMO landlord. With a little preparation, though, this doesn’t have to be a daunting task.
The first thing you’ll need to do to become an HMO landlord is to acquire a mandatory licence from your local council for each property you own. HMO licences are valid for five years and you need to gain a separate licence for those properties. If you’re looking to convert a property into a suitable HMO, you might be turned down unless you spend a great deal of time and money trying to meet the licence specifications.
One of the main issues here is that, coupled with more and more investors turning to HMO's, fewer new licences are being granted which makes them harder to acquire for new investors.
Depending on the area in which your HMO is located, your local authority may also require additional licensing, or provide a licence for different amounts of time. Plus, some local councils don’t permit the licensing of HMO's and if they do, this can be a lengthy process.
Luckily, at The Heaton Group, we keep our finger on the pulse of every Council requirement in the North West. So, before you purchase a property for the purpose of converting it into an HMO, make sure you get in touch with us to discuss the licence first!
Again, if you’re selective about your choice of property and you invest in one that already has a licence, you skip the hassle of this step.
Previously (pre-October 2018), a property required a mandatory licence if all of the following apply:
- the property is a House in Multiple Occupation (HMO) (occupied by individuals who are not all related to one another); and
- the property is occupied by five or more individuals; and
- the property has 3 storeys or more
This is now no longer the case, with the three storeys element being removed and if the property is occupied by 5 or more individuals (not related to each other) the property will require a HMO license.
Many local authorities offer discount to accredited landlords which could give you a head-start on saving money in this area.
There is a restriction on minimum room sizes too - in effect from October 2018. For licences to be granted after this date the following conditions must be attached to the licence that requires the holder:
- to notify the local housing authority of any room in the HMO with a floor area of less than 4.64 square metres.
- to ensure that the floor area of any room in the HMO used as sleeping accommodation by one person aged over 10 years is not less than 6.51 square metres;
- to ensure that the floor area of any room in the HMO used as sleeping accommodation by two persons aged over 10 years is not less than 10.22 square metres;
- to ensure that the floor area of any room in the HMO used as sleeping accommodation by one person aged under 10 years is not less than 4.64 square metres;
- to ensure that any room in the HMO with a floor area of less than 4.64 square metres is not used as sleeping accommodation.
Also, further conditions must be included:
- where any room in the HMO is used as sleeping accommodation by persons aged over 10 years only, it is not used as such by more than the maximum number of persons aged over 10 years specified in the licence;
- where any room in the HMO is used as sleeping accommodation by persons aged under 10 years only, it is not used as such by more than the maximum number of persons aged under 10 years specified in the licence;
- where any room in the HMO is used as sleeping accommodation by persons aged over 10 years and persons aged under 10 years, it is not used as such by more than the maximum number of persons aged over 10 years specified in the licence and the maximum number of persons aged under 10 years so specified.
Together with these regulations, where the licence holder has not knowingly committed a breach of the above regulations there will be a maximum period of 18 months to rectify the situation (but is likely to be less).
7. Don’t Become Muddled By Mortgages
When buying an HMO, getting a mortgage is likely to be more difficult than for another buy-to-let property. HMO's can sometimes require a larger deposit and it is also worth considering that some letting agents won’t even take on HMO's if you decide to have the property managed by a third party. If they do, their management fees are usually more than charges for houses or apartments.
Becoming a landlord can be a tricky financial process to navigate and that doesn’t change when it comes to HMO's. Many mortgage lenders will simply not offer HMO mortgages. The few that do could charge you a higher rate of interest than for other buy-to-let mortgages.
It is worth noting that some lenders also prefer to work with those who have prior experience as a landlord and an existing property portfolio. As a result, if you’re looking to purchase an HMO for the first time, you might find it very difficult to find the funding.
This is a common frustration for HMO landlords, which is why The Heaton Group provides an all-in-one service that includes filling your HMO with tenants.
We work with a mortgage broker to help streamline the whole process so you know that, when you invest in a Heaton Group HMO, you will have a greater chance of obtaining finance regardless of your circumstances.
8. Don’t Be Disheartened By High Tenant Turnover
When you have multiple tenants who are not members of the same family, there is always the possibility that you’ll have a higher tenant turnover. As a result, HMO's can sometimes feel like turnstiles and a high turnover of tenants usually carries thoughts of more work and extra cost for the landlord.
By the same token, the type of tenant that you’ll usually find in an HMO are young people who might be living in their first rented accommodation, such as students. This often comes with a whole host of problems, none more so than a higher maintenance cost after the tenants leave.
While tenant stability is undoubtedly an attractive asset, it is worth remembering that the risk of tenant turnover in an HMO is lessened by the fact that your revenue is spread over multiple occupants.
Alongside this, The Heaton Group provides an efficient tenant application, which means you get the right people in your HMO and any vacancies are filled quickly.
9. Find Tenants The Easy Way
Due to the fact that the tenants might be from different areas and are unlikely to know each other, finding five or more good tenants to occupy your HMO can take some work. You have the added task of making sure they’ll all get along within your property.
When tenants come from the same household, they know what it’s like to live with each other and you can minimise the risk that one or more will want to move on. So, with HMO's, you have to get the vetting process right from tenancy application.
The process of vetting tenants can be an arduous one at the best of times but, for HMO's, this only becomes more complicated. Finding a group of people who can pay rent on time, are used to the requirements of being a tenant AND will be happy to live with your other tenants can seem like looking for a needle in a haystack.
Luckily, The Heaton Group are stringent about the vetting of tenants. For our properties, we require a full reference check to ensure that we aren’t accepting applications from tenants with a history of arrears or those unable to afford the monthly rent.
Having outlined the issues with finding tenants, it’s worth noting that, in the modern property market, this is not nearly as difficult as it once was. The rising number of young professionals who want to live in shared accommodation means there is a growing demand for modern HMO studios.
Additionally, The Heaton Group’s HMO's have all bills included in the rent as well as providing a kitchenette and en-suite bathroom for each studio, making them feel more like hotel suites than student accommodation and therefore more desirable places for young professionals to live.
Did We Mention The Heaton Group’s HMO's?
How could we forget?
It might not surprise you that, when it comes to HMO's, The Heaton Group stands clear of the pack.
We were actually one of the pioneers of HMO developments in the North West so, as you can imagine, our industry knowledge when it comes to HMO's is second to none. As we were first to market in that space, we utilise the best technologies, suppliers and partners.
The investments that we can offer go beyond a reliable name and high yield. When you invest in a Heaton Group HMO, you benefit from the following:
- En-suite bathroom in every studio (who wants to share a bathroom?!).
- Kitchenette with a fridge, allowing tenants to store their own food and drink.
- High specification finish: our HMO's have the same specification as our apartments, with high-quality features such as USB plugs, etc.
- Key locations close to public transport, amenities and town and city centre.
- Large shared kitchens with several of each appliance when necessary.
- Sold with an HMO licence already in place.
- Experience of developing and managing over 100 HMO's.
- In-house lettings agency (HG Premier Lettings) with substantial experience of managing HMO's from our portfolio to those of our investors all around the North West.
- A reduced management fee of 10%, rather than 15% for our investors.
Investing in a Heaton Group HMO means you have a high-quality, high-demand property that requires minimum maintenance and maximum profitability.
As outlined earlier on, investing in an HMO has many benefits, from higher financial reward to reduced risk. These benefits are only intensified when you invest with The Heaton Group as you partner with a company who have a proven track record of delivering returns on investment.
Our current HMO list includes the following properties:
So, Is an HMO Right For You?
Now you know the benefits and what to look out for when it comes to investing in a HMO, it’s time to decide whether becoming an HMO landlord is the right fit for you.
If you’re considering an HMO for your next investment opportunity, download our free eBook, How to Invest in Property the Easy Way: Strategies for Success and What to Avoid.