When considering a buy-to-let (BTL) investment, one of the main factors that will impact the decision is the expected rental yield. For some landlords, a good way of increasing the potential rent they can gain from a single property is through investing in a house in multiple occupation (HMO) property. Here we take a look at what HMO is, as well as the pros and cons of investing in this type of property.
A HMO is a property that is rented out by at least three people who are from different households and who share facilities such as bathrooms and kitchens. A common example of a HMO is a student house that is shared by three or more students from different families.
If the property is considered a large HMO, a licence is required by all councils within England and Wales. To be considered a large HMO, a property must have all the following:
As well as this, some councils in England and Wales require landlords to have a licence if they wish to rent a HMO that has less than five tenants.
A licence is valid for five years and a separate licence is needed for every HMO property owned by the landlord. The cost of the licence varies depending on which council the property is located in. As well as this, to gain a licence, as a minimum, the landlord must ensure that:
The house is suitable for the number of occupants (this depends on its size and facilities);
Landlords should, however, be aware that when it comes to HMO licences and planning permission, the location matters, as Brian Murphy, head of lending at Mortgage Advice Bureau, explained: “It’s important that potential HMO landlords to do their research carefully into the location of the property as some local authorities may not approve additional properties being converted into HMOs due to the concentration of existing premises.”
Although investing in a HMO can be more complicated than a standard buy-to-let, it has the advantage of providing landlords with multiple rents from a single property. As such, although each tenant in a HMO may pay less than a single tenant in a buy-to-let, overall the multiple rents from a HMO could be higher than the rent paid by a single tenant.
In addition to this, if a tenant moves out of the HMO, the property will not stand empty as it is likely that the other tenants will remain in the property. This means that it is unlikely that the landlord will lose out on all rent from the property if a tenant moves out.
“For landlords, one of the main advantages of HMOs is the potential rental yields are often significantly higher than mainstream buy-to-let tenancies,” added Murphy. “This, coupled with increased tenant demand due to a growing UK population plus and more people now looking for affordable housing in cities and larger towns, is what makes them an attractive proposition.”
While the rental yields on a HMO are usually higher than a standard buy-to-let property, the costs of running a HMO can also be higher. For example, the initial costs of converting the property into a HMO can be high, as well as purchasing enough furniture for each tenant. In addition to this, with more tenants using shared facilities such as bathrooms and kitchens, maintenance costs can also be higher. Landlords should also factor in admin costs, as well as the possibility that letting agents will charge higher fees to manage HMOs.
Murphy added: “Landlords should be aware that an HMO typically has higher start-up costs than a standard buy-to-let property including the need to meet the stringent fire and health & safety regulations. HMOs also often require planning consent of the local authority and this can be both time-consuming and costly.”
Another factor that landlords considering a HMO will need to take into account is getting a mortgage. Not all buy-to-let mortgage lenders will offer deals on HMO, so landlords should ensure that they are able to get a mortgage on the property before going ahead with the investment. Using a mortgage adviser, such as Mortgage Advice Bureau, may be a good idea for landlords considering a HMO as they will not only be able to highlight mortgages available to HMO landlords, but will also be able to help investors navigate through this type of property purchase.
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