HMO as an Investment has been rising in popularity in recent years because of its potential to help you achieve higher rental yields. HMO stands for Houses of Multiple Occupancy. Instead of renting out an entire house or flat, you can rent out each room. Your first step is to meet with your local council to apply for this and to make sure that your property qualifies as an HMO. You will also need to make sure that your property meets certain requirements like for fire, health, and safety.
Rental yield is higher if a property is HMO versus non HMO status. Instead of collecting a single rent for your property, you can collect several rents. For example: 6 x £400 pcm less bills is greater than say collecting £1500 from a single tenant. Keep in mind that there will most likely be some HMO conversion costs involved in order for the property to operate as an HMO. Conversion costs may include some or all of the following: installing extra smoke and fire alarms, installing more bathrooms and fire doors, perhaps converting the garage into another room, making sure each room has a kitchenette area with wash basin, but keeping the cooker in the main kitchen. You might also want to install card meters for electricity, and then lock the boiler and controls away. Check with your local housing council. You'll most likely have to deduct the local council tax from your profits. If you hire a cleaner for the communal areas (which is highly recommended), then you should also deduct cleaning expenses from your profits.
There is a huge market for HMO properties. First off, home prices are rising faster than income which means more people are renting. And, do you know why London can claim over 250 languages in the capital? That's because the Migrant population is increasing. Let’s not forget about all the single people in the market due to higher divorce rates and separations. And, what about students' lettings? If your property is near a university, you’ll have a steady, predictable flow of potential student lets. Generally speaking student tenants are less fussy compared to professional tenants.
Another reason why investing in HMOs is so attractive is that there is less risk not collecting. Say, for example, if one tenant out of five can not pay, you still get 80% of the total rent. Compare that scenario if you rented out to just a single tenant. If that one tenant was late or could not pay, you lose out on 100% of your total monthly income.
Investing in HMOs can offer you personal freedom. If you have processes in place, it could be weeks before you need to attend to a tenant.
If your HMO property is in a prime location, opportunities for premium rent can be achieved. You can then charge for premium services like: cleaning, gardening, Internet, and satellite cable.
The hassle of managing an HMO is greater. More tenants means more paperwork and you might engage in an endless cycle of letting and re-letting. With each new tenant, you’ll need to spend more time doing viewings, and performing background & credit checks.
HMOs needs more management. Communal areas might need more frequent regular maintenance and repair. Five different tenants using one dining table, one kitchen, one balcony can definitely lead to more wear and tear.
Tenant turnover can be high. In the case with students, it is just a fact of life that some students cannot complete their studies, or transfer to another university. The model student tenant will eventually graduate and move on for further studies or finally find employment in another location.
Ask yourself what is your strategy? If you plan to let out to young professionals, then you must check around and see if you’re close to a large employer. Likewise, if you plan to let out to students, you’ll need to make sure your property is close to the school or transport system that goes to a school nearby.
You’ve done your due diligence and searched out your location. How about checking with the local council and see if there is any new properties planned in your location? If there are too many options for your potential tenants, it might not be as attractive an investment as you originally hoped for.
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