As a landlord or property investor, the chances are that you know HMOs can make for great investments. Not only do they offer the highest rental yields on the market, but demand for affordable housing has never been higher, meaning you’ll have no trouble filling your rooms.
From student accommodation to shared housing, HMOs are an attractive option for investors and landlords, but they don’t come without some compromises. To help you make the right decision for your next investment, we’ve rounded up the biggest pros and cons of HMOs…
The benefits of investing in HMO property
- Better yields: HMOs offer up to three times higher rental yields than standard properties, making them a great choice for investors. Remember that the property’s location, condition, and interior will all determine the rent you can charge each tenant
- Fewer void periods: When you rent out a property to one tenant or family, you’ll have to consider void periods - where the family moves out and you wait for another tenant to move in. In HMOs, it’s likely that at least some of your tenants will remain, even if another one is vacating, so you won’t lose all of your rental income overnight
- Arrears less likely: When you let out a house to multiple tenants, you balance the risk of late payments. If one tenant falls into arrears, the rest will still be contributing
- Tax benefits: As spending on HMOs is a revenue cost, this is tax-deductible. Speak to your accountant to understand exactly what you can/cannot claim on the property
- High demand: Whether you’re letting to students or multiple households, demand for HMOs has never been higher, particularly in cosmopolitan cities. Always identify the demand and competition before you invest in a property to maximise your returns
The drawbacks of HMO property
- Mortgage: It can often be harder to secure a mortgage on an HMO than it is to secure a mortgage on a second home or buy-to-let property. You may need to consider alternative financing options to fund the investment/renovation project
- Red tape: You’ll need to cut through more red tape and overcome legislation to make your HMO work. Speak to your local council or planning officer for support
- Limited capacity: Many properties cannot be converted into HMOs. You’ll need to find a large property that offers space for every tenant. In some areas, opportunities for HMOs are limited and properties that are ideal for HMOs command higher prices
- Resale value: Capital growth can be limited on HMOs, as you’re only likely to resell to property investors or landlords. Bear this in mind before making a firm decision
- Higher startup costs: HMOs have higher startup cost than buy to let properties, as you’ll need more furniture, and need to follow legislation such as fire regulations and environmental health regulations before a council will approve your HMO property
- Property management: Not all letting agents manage HMOs, which means you may need to look at self-management or hire a member of staff, which can increase costs
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