HMOs – A Goldmine for Property Investors
HMOs (Houses with Multiple Occupancy) are the first choice for many property investors as it’s obviously more lucrative to have multiple incomes for a single property than just one tenant.
A study by property investment firm Platinum Property Partners compared the returns on HMOs that were rented to young professionals and key workers against standard single occupancy buy-to-let investments between 2010 and 2014. It found that with a 25% deposit HMOs achieved a total return on equity of 108%, compared to 77% for standard buy-to-let properties.
HMO investment is “intrinsically geared” towards maximising rental income according to Steve Bolton of Platinum Property Partners, who said, “HMO properties are strategically converted and refurbished to increase the size of communal areas and number of rentable bedrooms, therefore allowing for a higher number of tenants on individual rather than shared tenancy agreements. This results in greater returns for landlords despite the higher price initially paid.”
What constitutes an HMO?
An HMO is a property rented out by at least three people who are not from one household but share facilities like the bathroom and kitchen. This is typical for a student or professional house share.
An HMO must have a licence if it is both:
• Three or more storeys high
• Occupied by five or more people
Your local council will let you know if you need a licence, which is valid for five years once granted, and whether you need to undertake any improvements such as fire safety measures to get one. There will probably be a charge for obtaining the licence, but it’s essential as letting an unlicensed HMO can result in a £20,000 fine.
Your HMO strategy
To make this kind of property investment work, you need to be sure you understand your market. It’s crucial to apply the following factors:
1. Know your location – if you want young professionals as tenants, your property should be in an area of high employment with good public transport. If it’s students you’re after, then make sure colleges and universities are nearby.
2. Contact the council – keep in touch with your local council’s HMO department so you’re aware of all their requirements regarding licensing and risk assessments.
3. Always reference tenants – it pays in the long run to pick the right tenants, preferably ones that will get on with each other. Think about the personality of the house when choosing tenants as this should mean less hassle from arguments.
4. Create a system – when it comes to dealing with rent collection and maintenance, it helps if you have an organised process. If this isn’t your area of expertise, then outsource the work to an agency.
Are HMOs for you?
HMOs are not for everyone as multiple occupancy equals multiple paperwork. However, in many respects it’s no different from any other type of renting, it just means there’s more administration and referencing to take into account.
For many property investors, the rewards justify the additional time. In July 2014, we wrote about how HMOs generated some of the highest returns in property investment in our post HMOs: Best Potential Profit Maker in Property Investment.
And that’s still proving to be the case.
Do you want to learn more about how HMOs can help your property business?
Whether you’re just starting out or need a refresher, our Property Foundations Course will help you to understand the different investment strategies that you can use in today’s property market.
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