Over the last 15 years, the HMO market has been transformed. Back in the ‘90s, multi-lets were mainly student housing or cheap and slightly tatty homes for those on a very low budget. But by the mid-2000s, things were starting to change and now there are many landlords offering boutique-style shared accommodation for working professionals.
The reason for the boom in HMOs was, quite simply, that they could generate far better returns than single home lets. Despite the additional administration demands of letting each room on a separate Assured Shorthold Tenancy (AST), greater maintenance requirements due to higher traffic through the property and having to pay utility bills, the all-inclusive rooms rents could add up to 2-3 times what you’d get for letting the property to one family, leaving landlords with market-leading profits.
But, as the market grew, regulations tightened. On top of the extra duties, obligations, costs and tax changes that affected every landlord, HMOs were subjected to additional health and safety rules, potentially having to gain planning permission for change of use, and mandatory licensing. In October 2018, HMO landlords were hit with a ‘double-whammy’:
Most recently, under the Fire Safety (England) Regulations 2022, which came into force on 23rd January this year, HMO landlords must appoint a ‘Responsible Person’ for the building, who is legally responsible for ensuring specific fire safety duties are carried out. These minimum duties include putting up fire safety instructions and distributing them to all tenants – both on move-in and annually after that – and providing information about guidance about fire doors.
So HMO landlords have a lot to know, do and stay on top of. And now, in addition to significantly higher mortgage interest rates than they’ve been able to access over the last decade or so – which is a potential issue for all landlords, regardless of the type of let - HMO landlords are finding their profits dented further by energy costs, which have rocketed over the past couple of years, and very few landlords have been able to pass the majority of this increased cost on to their tenants.
So, with tighter regulations requiring more time, effort and money – plus increased fines for landlords who fail to comply, even unintentionally – and profits being squeezed by rising costs and fewer tax breaks, are HMOs still a viable investment?
The upsides of HMOs
There are two big benefits to letting a property as an HMO. Firstly, while there are a lot of hoops to jump through and HMOs will always be more time-consuming than single-let properties, the reality is that they still usually generate a higher profit. Tenants are willing to pay good market rates for a decent private bedroom in a well-maintained shared home that’s finished to a high standard.
Secondly, a change in tenancy in a single-let home often means you have a void period with no rent coming in. The benefit of having each room let individually is that if you have one room vacant between lets, the other rents should be more than enough to cover your costs until the room re-lets, and may even continue to generate a monthly profit for you.
And there’s a potential bonus benefit to having an HMO: because they are larger properties, they may have better scope for adding value through extending than a smaller single let and if you can refurbish and extend when you buy, you could increase the capital value substantially.
5 things to consider if you’re thinking of investing in HMOs
As with any buy-to-let, investing in HMOs is a marathon not a sprint, so view it as a long-term investment and make sure you plan and budget well ahead for maintenance and repairs over time. Not only will that help you secure the best rental income, but it will also help protect the capital value, which should appreciate well over time.
If you’d like any advice about HMO investing in your current location, just get in touch with your local branch and one of the team will be very happy to help.
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