Why Investing in HMOs Could be a Lucrative Move for Landlords
Published on March 15, 2017 by Sarah Mac
Houses in multiple occupation (HMOs) have become an increasingly popular investment channel for landlords in recent years thanks to the higher return offered. And now, thanks to more affordable finance options including a new buy-to-let mortgage designed to target HMOs, the trend is set to escalate.
Affordable housing is in great demand, particularly in larger towns and cities. Tenants of various types are seeking flexible living that doesn’t cost the earth, and renting on a room by room basis effectively relieves the pressure on the housing situation in the UK by increasing capacity.
Wider Audience, Higher Yield
As a landlord, widening your audience is always going to be a good move. HMOs are suitable for a variety of tenant types, from professionals through to students and social housing.
Yield wise, HMOs will pretty much double up on what a landlord can expect to earn from a ‘vanilla’ buy to let, i.e. regular 2-3 bedroom flats or houses that fit the standard lending criteria of mainstream buy to let lenders. Also bear in mind that void periods for parts of HMOs will have a much reduced impact on cash flow than a regular property.
So with rising demand and rising supply, and all the other advantages considered, HMOs clearly offer the ideal investment opportunity for landlords.
What is an HMO?
A house in multiple occupation is a property where tenants have their own individual rooms but share common living areas, for example the bathroom and kitchen. Such properties are popular amongst students but will also appeal to professionals. Lease wise, each tenant can have their own Assured Shorthold Tenancy (AST), or alternatively the entire property can be let on a single AST which incorporates all the tenants.
HMOs will generally be required by law to be licensed by the local authority which will be responsible for determining whether the property comes under the category of HMO. If a property is occupied by members of the same family then it will not usually be classed as an HMO, however a property inhabited by a group of friends is likely to be.
HMOs and the Law
Most local authorities will stipulate that planning permission is required to operate as an HMO, so as a landlord you’ll need to ensure all the appropriate licences and permissions are in order. If you are borrowing to fund the investment then this is doubly important as most lenders will demand documentary evidence of such.
Also bear in mind that if you have converted a property into self-contained flats, and the conversion does not meet the 1991 Building Regulations and more than a third of the flats are rented on a short term tenancy basis, then the property will more than likely be considered an HMO and will therefore fall under the relevant legislation.
HMO Mortgages
There are mortgage products available for a range of buy to let properties, including HMOs, and some of them will be available both to individuals and limited companies. Mortgage distributor 3mc for example has launched an exclusive deal that targets HMOs, and Mortgages for Business offer a range of products for the buy-to-let investor.
If you are considering your options as a buy to let investor, the HMO model could well be a lucrative move. Yes you will have to tick a number of official boxes and there will be a host of legislation and regulations to comply with, but a potential doubled return on investment compared to a regular property could easily make it worth the effort.