Will HMOs still be a profitable property investment in 2019

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TPFG

2 months ago - 31-12-2018

Houses in Multiple Occupation (HMOs) have long been considered one of the most profitable ways to invest in property.

After all, why have one amount of rent coming in each month when you can have, say, six?

However, HMOs have been subjected to more stringent rules in recent years and are generally regarded as more work for landlords than those renting more traditional properties.

But will HMOs continue to offer the same profitable yields in 2019 as the property market, in both sales and lettings, moves into uncharted waters once the UK finally completes its exit from the European Union?

Ellis & Co took a look at the pros and cons of HMO investment and how the sector could fare in 2019.

WHAT IS AN HMO?

A House in Multiple Occupation (HMO) is a property rented by three or more single tenants, who are not family, with shared kitchen and bathroom facilities.

Although that is the standard, simplified definition of an HMO, other factors can come into play. For landlords thinking of investing in an HMO property, it's best to check with the local authority for their definition and licensing stipulations.


THE PROS OF INVESTING IN AN HMO

Higher yields

Rental yields can be up to three times higher from HMOs compared with traditional properties. Figures released in January 2018 revealed that HMO yields in 2017 averaged at 8.9%.

We wait to see how the figures stack up for 2018...

Fewer void periods

All landlords suffer void periods, whether in the HMO lettings game or renting out a traditional property. It's part of life letting property.

However, while traditional landlords can take steps to reduce void periods, HMO landlords are somewhat more protected by having multiple tenants.

If one moves out, you potentially still have three, four, or five tenants in place, giving you financial security while you look to fill that vacant room.

Less pressure on rent arrears

As with void periods, having an HMO tenant who falls into rent arrears can often be offset by those tenants who continue to pay their rent on time.

That again provides landlords with breathing space while they take steps to deal with the tenant in arrears.

Tenant demand

With increasing pressures on landlords with regard to legislation on taxation, some have chosen to increase rents to cover additional costs. That has pushed some tenants into the HMO space, which is usually a cheaper option to renting an apartment on a single tenant basis.

HMOs remain a popular choice among tenants in big cities, who prefer the flexibility and social aspect of multi-let living against single tenant properties.


THE CONS OF INVESTING IN AN HMO

More legislation

HMOs, as you might expect, are more complicated investments with increased legislation and more planning hoops to jump through.

They can also, in some cases, be harder to raise finance to purchase, especially if you are a rookie landlord embarking on your first purchase. Some lenders also demand a bigger deposit for an HMO purchase.

Not all properties will work as an HMO

Landlords looking to invest in HMOs will need to search harder to find a suitable property. Not all homes can make HMOs and there are a multitude of things to think about when viewing potential properties, both in terms of what exists already and what space or changes can be added or made.

Lower capital growth

While HMOs can produce higher yields and more security than traditional lets, they are sometimes restricted on capital growth.

Once a property has been converted into an HMO, it is largely restricted to remain in that form. That means when you come to sell it, your potential market generally consists only of landlords.

While a buyer may be keen to purchase your HMO and turn it back into a family home, the costs of converting an HMO could put many traditional buyers off.

Increased initial costs

As well as conversion costs, landlords buying a property to become an HMO also need to factor in increased costs around furniture and appliances, as well as covering environmental health, fire, gas and legionella regulations.


SO, WILL HMOs STILL BE A GOOD INVESTMENT IN 2019

Due to the ongoing Brexit uncertainty, a market featuring fewer property transactions will almost certainly push more people into the private rented sector.

Increased competition for single tenancies is also likely to see more people considering multi-let living as a genuine option.

Interest rates remain low, keeping the door fully open on borrowing for property investment, while property prices remaining stagnant and dropping in many London boroughs, means there are potential bargains to be found for landlords looking to invest in an HMO.

Thinking of investing in property in 2019? Talk to one of Ellis & Co's experts to find the best properties for you.


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