The HMO Market 1st Jul 2016

Recent research has found that over the last 5 years, HMO investors have received a higher return on their investment than the average buy to let investor.

Since 2011, the average gross return for HMOs before voids and maintenance on capital has increased by 18-20% compared with an average gross return of 6-8% for traditional buy to lets. Putting this into numbers - £1000 invested in HMO in 2011 has grown to £1900 in 2016; £1000 invested in an average buy to let in 2011 has grown to £1300 in 2016 (based on cash flow excluding equity).

Indeed, there are predictions that HMOs will be the most popular property choice amongst buy to let investors over 2016 (Shawbrook). 34% of investors cited HMOs as their preferred property type, followed by terraced housing at 28% then flats and maisonettes at 22%.

The attraction of HMO is largely due to the high potential yields, plus a lot of HMO type properties will also experience strong capital growth. 72% of investors said yield was the main reason for investing in HMO, with 29% citing capital growth. 18% were attracted by the reduced risk of void periods.

To give an example, a 3 bedroomed non HMO property in Morningside, Edinburgh is currently advertised on Lettingweb at £850 per month. A 3 bedroomed HMO property 1 street away is advertised at £1500 per month.

However while the rewards might be rich, growing and managing an HMO portfolio is incredibly complex due to the legal requirements and increased governance of this sector. So what are some of the considerations for HMO?

• Location is key. It is essential that you buy in the right location – research your market and choose an area where HMO properties are in demand. Identify areas rich in students, or young professionals willing to share, with good local amenities and decent transport links.

• Buy the right property to suit your budget, taking all costs, expenses and voids into consideration. The more bedrooms, the higher the rent. Do however consider wear and tear, and forthcoming changes to this allowance.

• Ensure before you buy that the property is indeed suitable as an HMO conversion. Making a property HMO compliant is not easy and is not cheap, plus bear in mind the annual renewal fee plus possible further upgrade requirements.

• Also bear in mind the new Private Tenancies Bill, and the impact the clauses on bringing a tenancy to an end will have on letting to the student market. Current draughted legislation does not allow for the 10 month student academic term. This clause is under review.

Do you have time to deal with all of the demands of an HMO property, including keeping abreast of all current and forthcoming regulations and legislative requirements? If not then it would be wise to have a reputable letting agent to fully manage your property. Over 50% of landlords surveyed stated that they find the complexities of planning and licensing an on-going challenge. Controls on HMO properties are stringent, and penalties for failing to comply are hefty.

If you choose to go down the HMO route, it is certainly worth getting a reputable letting agent involved. The Key Place is very experienced in managing HMO properties and can deal with the complete HMO process for our landlords . . . we take the stress, worry and hard work away! Contact us now for further information.

For detailed information on HMO licenses, visit the Scottish Government, or your local authority websites.