- As tougher legislation and ever tightening tax rules come into force, landlords are increasingly looking to diversify their property portfolios to ensure their ventures remain profitable. That is why they are now turning to investment in HMO properties; a recent survey by BVA BDRC showed that 1 in 5 landlords now own at least one such property. But what makes HMO investment such an attractive option?
Arguably the reason most landlords choose to add an HMO to their portfolio is the potential for higher yields than can be achieved with other property types. At the Mistoria Group, we can boast of a 13% yield (8% rental yield and 5% capital growth) for the majority of our properties. According to the same research by BVA BDRC described above, landlords can look forward to a rental yield which is one fifth higher than that possible from other property types. This is because rent payments can be collected from a higher number of tenants.
It should be noted, however, that there may be some additional costs associated with HMO investment, such as the purchase of an HMO specific licence, which must be renewed every few years. The initial costs of investment may also be higher because of a need to make the property suitable for use as an HMO, such as ensuring rooms meet a minimum size as defined by Government regulations. With a higher turnover of tenants, more maintenance may also be required. However, by keeping these costs low a considerable profit can be made.
Such yields can be achieved because of the high demand for HMO properties, particularly amongst the student population. Renting in an HMO offers a cheap alternative to purchasing or renting an entire property, not only because of rental charges but also because bills can be split between tenants in such properties. Further, groups of friends at University want to live together; renting an HMO provides them with the easiest way to do this. With the number of students attending university increasing, demand for HMOs is set for even further growth.
Void Periods Less Damaging
Void periods are inevitable when letting out a rental property, but the effects can be less damaging for landlords of HMO properties. When a tenant leaves a single-let property, the rental income unsurprisingly dries up and it’s a race against time to find a new tenant. However, in an HMO property, if one tenant leaves, the damage is offset because the rest of the tenants are still paying rent.
Similarly, another advantage of having multiple tenants each paying rent individually means that if one falls behind on their payments, the effect is less damaging for landlords. Furthermore, in student properties, it can often be stipulated in the contract that every tenant in the property is responsible for rental payments; if one tenant fails to pay, it may be possible to claim the rent from the other tenants. However, it is unlikely that this issue will arise, because most students have solid guarantors to cover such costs – their parents.