What is a HMO?
A HMO is a House in Multiple Occupation which simply means that it is a multi-let property that accommodates multiple tenants/family groups with private bedrooms and shared kitchen, bathroom and living areas.
There are currently more than a million buy-to-let investors in the UK and with rising house prices and a shortage of accommodation the demands for a single room in a HMO has risen dramatically and this trend is continuing.
The HMO buy-to-let model has become extremely popular however you need to know how to invest in HMOs to become a successful property investor.
How to invest in HMOs
The basic principle of HMO investment is to buy under-priced property and covert it to accommodate more tenants. In a falling market property investors tend to buy and sell quickly. They tend to go for properties that simply need a basic refurbishment or an extension that adds immediate value.
However, property investors hold onto properties when the market is recovering and use the HMO investment model. An example of this would be to buy a 2-3 bed terraces for £60,000 to £80,000 and then spend £20,000 to £40,000 converting it into a 5 or 6 bed rental property.
In this scenario each room could then be let for £280 per month giving a rental income of £20,000 per annum which would give the property an estimated of £200,000 to another investor/buyer. A 10 percent rental return is fairly standard and at this point it would be possible to mortgage the property for 70 percent of its value with part of the money invested on the next HMO project and part paid as a salary.
Where to invest:
- Restrict purchases to your local area as it is the market that you know.
- Ensure investment value by choosing areas where there are at least 20,000 people of working age. This information can be found by checking the census or by various other methods.
- Avoid areas that are saturated with rented accommodation.
The keys to successful HMO investment
HMO investor Glenn Armstrong, who helps individuals find investors, create a strategy, get joint venture partners and answers HMO investment questions, highlights the key facts you need to know about HMO investment:
- You may need to find investors as some lenders only offer buy to let mortgages to more experienced landlords.
- HMO properties may have higher running and maintenance costs.
- You may require planning permission depending upon the extent of the modifications to the HMO property.
- You may need to apply for a council license if multiple occupants are going to live under the same roof with shared amenities. This is usually mandatory for properties that will house 5 or more people over 3 or more floors and ensures conformity to fire and safety regulations.
- Consider renting to young professionals, students, immigrants, and social benefit tenants. Council and government incentives might be available to landlords who rent to Local Housing Authorities (LHA) and asylum tenants with fixed and guaranteed rental yields.
HMOs generally offer less risk to investors when compared to single family rentals. Should one tenant not make a rental payment then there are still 4 or 5 other tenants making payments to cover your costs and protect your investment. The same benefits also apply should a 1 tenant leave the property vacant.