HMO investment is popular because it typically generates higher yields, but for inexperienced landlords, HMOs are a minefield. If you are considering investing in an HMO or want to add one to an existing property portfolio, read on.
What are HMOs?
HMOs are houses shared by multiple unrelated people. Tenants typically have their bedrooms with access to a shared kitchen, bathrooms, and other communal areas. HMOs are common in the student sector, but they also appeal to people on a low income, such as those in entry-level jobs or on benefits. They also suit young professionals living in expensive cities like London.
Choosing the Right HMO Model
Before searching for a suitable property, decide your target tenant. Student HMOs must be close to colleges and universities, whereas location is less critical for other tenants.
Buying a Property
Buying an HMO is not as straightforward as buying a residential home. Far fewer HMOs are on the market, and finding a suitable property may take a while. Consider whether you want to buy an HMO with tenants already in situ. This is a better option for a less experienced landlord, but factor in the additional purchase cost.
Converting an Existing Property into an HMO
Another option is to buy an existing residential or commercial property and convert it into an HMO. This might seem like an excellent idea if you have experience in property development. Still, such work does not fall under permitted development, and you’ll need to apply for a change of use from the local planning authority. As such, it is a risky move because, under Article 4 restrictions, there is a strong chance your planning application will be denied.
What is Article 4? Article 4 is designed to maintain the quality of housing in urban areas. Article 4 restrictions apply to many areas of famous cities like Manchester and Sheffield. If you plan to buy a property to convert into an HMO, you must check which areas of your target city fall under Article 4.
The Costs of Running an HMO
HMO management is more complex than a single residential let. Instead of dealing with one tenant, you’ll have several. Unless you are willing to treat your HMO as a full-time job, you may have to factor in the cost of using a letting manager to deal with the everyday tasks.
HMOs are also subject to a lot of additional red tape. Many areas require HMO landlords to be licensed. Bedrooms must be a minimum of 6.51 square meters per adult. The property must have smoke alarms, a gas safety certificate, be fire-compliant, and more. There are many regulations landlords must adhere to, and a failure to do this could lead to prohibitive fines.
HMO investment can be profitable, but capital growth is lower, and the additional cost of managing an HMO will cut your profits. Nevertheless, there are fewer rental voids and demand for cheaper housing is growing, which makes investing in an HMO an attractive proposition.