Buy -to- Let, the HMO Market 1st Jul 2015
If you are thinking about expanding your property portfolio, the House in Multiple Occupation (HMO) market provides a high yield, stable investment opportunity. As such, it is becoming an increasingly popular buy-to-let investment choice.
Embarking on this investment route requires a lot of thought and background work but returns achieved can make it very worthwhile. HMO rental yields are higher than more traditional buy-to-lets, plus if you make a wise purchase, you will enjoy strong capital growth. On a month-to-month basis you will make more than you would in a smaller 1 or 2 bed property. An option would be to save the money to reinvest in another property, or pay off your mortgage so that you have an unencumbered asset when you retire. Furthermore, as HMO properties are in high demand, void periods are minimal.
HMOs have grown in popularity over the years for a number of reasons:
• There is a housing crisis and demand is outstripping supply.
• It is cheaper to rent a room in a shared flat than it is to rent a whole property.
• Young people are struggling to get onto the property ladder due to restricted borrowing and so continue to flat share.
• Changes to housing benefit rules means single people are only entitled to a room in a shared property.
• There are a large number of people from outside the UK keen to share to make their living costs more affordable so they can save or send money back home.
• Students like to flat share in areas close to where they are studying.
• Living costs have increased and sharing bills etc is preferable to many.
Over the last few years attitudes to rental have changed, and sharing with others has become appealing for many reasons. As a result, these types of property are eagerly snapped up by hungry tenants. However people want a good quality, well presented home, not a shoddy run-down flat share. And quality will fetch you a handsome rent.
For example, if you take a good 4 bedroom flat in Central Edinburgh. Letting to a family or 2 professionals may get a rent of £1000 or so, however renting to 4 individuals would result in a rent of £1500 - £1700 depending on the quality of the property. A big difference!
It is essential that you consider the location that you are going to buy in, 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.
So with high yields, big capital growth, and minimal voids what is the catch?
• HMO properties cost more to buy.
• Mortgage lenders require larger deposits and rates are higher than typical buy-to-lets.
• The HMO license costs money, and the application procedure takes time. The property cannot be rented out as an HMO until the full license is granted.
• Upgrading to bring the property to HMO standards can be costly and time consuming.
• Running costs are higher – increased management, increased wear and tear therefore higher maintenance costs.
For information on the HMO process see accompanying newsletter article.
If you choose to go down the HMO route, it is certainly worth getting a reputable letting agent involved, as the management is far from easy. 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.