The last few years has seen a huge growth in the popularity of Houses of Multiple Occupation (HMOs) from both investors/landlords buying these properties as well as tenants with HMOs becoming as popular as ever to live in, not only being seen as grotty student digs which is what many people associate HMOs, now dispelling this image and becoming incredibly upmarket types of accommodation with tenants willing to pay more than a flat. In this short blog, we outline the reasons to buy a HMO as an investment.
When people are looking at investing in property, they have a number of options, most commonly single occupancy houses or flats. As with any asset class, there are a number of benefits and drawbacks these types of properties as there are with HMOs. If an investor is to buy a single house or flat then they stick a single person or family in there paying the rent of let say £650. Once the mortgage has come off and an allowance for maintenance then the investor will be lucky to be left with a few hundred pounds as net profit each month, which many might see as fantastic and as briefly mentioned this is relatively low risk and a long term stable strategy. However, for people looking to make some series cash off property then HMOs are the way forward. Unlike with a single occupancy, where you receive only one lot of rent, with HMOs you have 5 or 6 people paying you rent albeit, at a lower rent as it’s for the room, but not that much lower, let’s say £450 per room. So, with 6 rooms at £450 that £2700 rental income compared to £650, so once the mortgage has come off that and as it’s an HMO the landlord pays the bills usually for (but not necessarily depending on tenant type) plus a voids and maintenance allowance, then investors can easily be left with £1000+ compared to £200 profit each month.
Return on Investment (ROI)
The second major advantage of HMOs over other residential investments is the increased Return on Investment they receive from HMOs. As discussed above, the increased rental income and profit from HMOs allows the returns of HMOs to be significantly higher than if one was investing in single occupancy properties. People investing in single let’s may be lucky to get a return of 5% however with HMOs it is not uncommon to see returns from 12-25%. A little point, however, to think about is there are a number of ways of working out returns, do you mean Net Return or Gross Return or Return on Capital Invested? For this example, we are going to stick with Return on Capital Invested which is worked out taking the net income each year divided by the capital invested into the property, not including mortgages. So, if you invested £50k as the deposit and then £10k for works with a net rental profit of 200 per month then your return would be 4%. But if we look at the example of an HMO and its return you can see why they are significantly higher. Taking the same property with a deposit of £50k but as it’s an HMO a little more money will need to be spent on regulations and furniture, say £20k but the net rental income is £1000 per month so £12k per year then the return would be 17% which obviously reflects a much higher return than a single let or in the bank or for that matter many other investment vehicles out there like the stock market.
Less Impactful Voids
The last major benefit of HMOs over other property investments is the fact that if you have a void period with a single occupancy property then you have no rent coming in at all, however with an HMO, if one room is vacant, you still have another 5 lots of rental income coming in which will cover the mortgage at least, instead of having to dip into your own pocket to folk out and pay a mortgage when there’s no rent coming it. This obviously helps to increases returns over a period of time and keep profit coming in each month. 7
It would be unfair not the mention that HMOs do have their downsides and why many people shy away from them such as much more intensive management and greater maintenance issues/wear and tear however if people like the idea of greater cash flow and higher returns than this is easily outsourced to an agent like Relocation PA who manages peoples HMOs for them on a daily basis so they don’t have any of the hassle.
If you would like to know more about how Relocation PA can help manage your HMOs or assist you with buying an HMO then please don’t hesitate to get in touch at firstname.lastname@example.org or call us on 01432 700 025.