HMO investment properties: pros and cons
A house of multiple occupation (HMO) often appeals to landlords who want to maximise their rental income by securing a higher monthly rate from multiple sharers or charging on a single-room basis. Typically, they offer higher yields and are popular in neighbourhoods with a large intake of students. If you’re thinking about your next buy-to-let opportunity, then you’ve probably given HMOs some thought. But is it really a better investment than a conventional buy-to-let tenancy? That’s what we’re exploring with this guide, which looks at the pros and cons for landlords thinking about setting up an HMO.
How do yields compare with a standard buy-to-let investment?
HMO properties usually provide higher yields than standard buy-to-lets. That’s because the landlord either charges by the room or rents to a large group of unrelated sharers, who then share the common areas, such as kitchen, bathrooms and reception area.
This is different from a conventional buy to let, where the landlord lets the entire property to a single family, couple, or small number of sharers (usually no more than three). As a result, rental yields can be as much as three times higher with a HMO, as there are either multiple incomes from several individual tenants or more tenants in the property paying a higher overall monthly rent.
According to research from BVA BDRC, the average rental yield in a HMO is 7.5% compared to 6% for a typical tenancy. The numbers are also growing, with HMO rising a further 0.6% compared with a standard let between the first quarter of 2020 and 2021.
What are the upfront costs of acquiring a HMO or converting an existing property?
If you’re looking specifically for an HMO property, you might consider buying an existing HMO that has tenants in situ. In this case, you would become the landlord once contracts are complete and assume your responsibilities, from managing the tenants to ensuring that all compliance is in place.
In most cases, however, landlords purchase a single-family home and convert it into an HMO. That means applying for the necessary licenses and ensuring the property meets safety regulations before listing the property (or individual rooms) on the lettings market.
You will also need to ensure it has the relevant safety features and living facilities, such as enough bathrooms for tenants, fire safety doors and robust fixtures and fittings. Be aware that HMOs are prone to far more wear and tear than other buy-to-let properties due to the number of people living in them and using the fixtures, fittings, and furniture.
The amount you can end up paying varies depending on several factors, such as property size, location and any work or repairs needed to make it HMO friendly. As a rule of thumb, you should factor in the following costs:
- Property purchase price.
- Stamp duty.
- Solicitors fees.
- HMO licence.
- Renovations, such as fire safety doors, to bring it up to standard.
- Compliance documentation (such as a gas safety certificate and EICR).
You should also think about renovations. If the house is an older property, you may need to replace fixtures and fittings if multiple tenants use them on a daily basis. In a single-family home, the cooker and oven may only be used once a day. In a HMO with five tenants living independently of each other, it’s not unreasonable to think that each tenant will use appliances at least once a day each.
How do operating costs compare?
Though your rental income will be higher with an HMO let, your operating costs will almost certainly be higher too. Here's how costs compare.
A standard buy-to-let is probably cheaper when it comes to upkeep. Again, it won’t have as much wear and tear as an HMO because fewer people live there. Your chances of successfully letting a standard buy-to-let property unfurnished are also higher than with an HMO.
People moving into a single-family home may plan on staying for longer and want to put their own stamp on the property. Alternatively, an HMO often sees higher turnover and the tenants attracted by an HMO (e.g. students) prefer to move into somewhere that has basic furnishings.
More tenants will likely mean higher maintenance costs too. With five or six people using one property, you can expect appliances to break down more frequently than if you have a single person living in a one-bedroom apartment. Operating costs will be higher as a result, but it’s important to remember that these costs can often be claimed as expenses in your tax return.
An HMO rented out on a single-room basis is less likely to incur costly void periods than a standard let. When a single-let property is empty, you won’t receive any rental income and will need to pay for utilities and the council tax. With a HMO, however, one tenant could leave, but four still live there.
That means you’ll still receive rental income from the remaining tenants. They may also be able to find you a new tenant faster than if you listed the room on a property portal, as they could know friends looking for somewhere to live.
If you rent your HMO using a joint AST, voids are also likely to be lower as landlords can rely on more stable, reliable demand in the market for HMO properties. For example, if you rent to students, you can be fairly certain of strong and consistent demand at predictable intervals, as well as guaranteed minimum tenancy terms with your tenants who will need the property for at least the length of the academic year.
What is the time cost of running an HMO vs a standard tenancy?
There’s no doubt that you’ll spend more time on handling maintenance and repairs with an HMO. Tenant turnover is typically higher, too, so you’ll probably need to spend more time tenancy administration, such as rental contracts, Right to Rent checks, deposit handling, etc.
Ultimately, you’ll need to be prepared to invest more of your time in a HMO. It’s a specialised type of let that requires an even more professional approach than a standard buy-to-let property. More effort is involved, but there’s also potential for higher rewards with increased yields and shorter void periods.
Risks involved with running an HMO
Multiple people living under one roof independently of each could lead to a greater incidence of health and safety issues. The chances of fire and other hazards increase, which means HMO properties need to meet specific compliance regulations before being let.
Compliance is also more complex, meaning it’s easier to breach – even if it’s an accident. For example, HMOs with five or more tenants forming at least two households require a licence by law, while properties with fewer than five renters may still need a licence depending on where the house is located.
You could also find that your licence is rejected unless the property undergoes specific alterations, such as fire doors in every room. All of these factors need taking into account before you commit to a HMO. Failing to do so could see the costs mounting up, leaving you out of pocket in the process.
HMO: the pros and cons
Before buying a HMO, you need to do the research and see whether it’s worth the extra effort this type of let requires. On the downside, you can expect to invest more of your time and spend more on maintenance and repairs. Compliance is also more stringent than with a typical tenancy, meaning you will require a licence and could need to make alterations to the property.
There are many reasons to take the plunge, though. For experienced landlords with the time and resources to commit to running an HMO, the yields are higher (as much as 15% in some markets), you can expect fewer void periods, and a more reliable stream of income.
Summary: HMO property investment
An HMO property can be a smart investment for landlords with a realistic understanding of the time and effort required to run it correctly . Before making a decision, ensure you are familiar with all the relevant legal and administrative obligations and have the financial resources in place to prepare a property for an HMO tenancy. If you’re committed, setting up an HMO could see you earn more than you would with a single buy to let and is worth exploring for that reason.
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