While most investors are aware of HMO properties, a large number are unaware of the significant benefits, particularly financial, that such homes may provide. HMOs remain popular in university towns, where students continue to pick them as a method to live with friends. Some investors, on the other hand, are hesitant to invest in such houses due to new legislation affecting everything from stamp duty to tenants’ fees.
What is an HMO?
An HMO, or house of multiple occupancies, is a home with three or more people who use the same bathrooms and kitchens. These tenants must not be related by blood or marriage.
What are the benefits and drawbacks of HMO investing?
Although there are several advantages to investing in HMOs, the most apparent is their greater yields when compared to single-let homes.
In a single-let property, income dries up if a tenant moves out or fails to pay rent. An HMO building once again has its benefits here. The risk is dispersed, and there are several sources of income available. Even in the tiniest HMO property, two-thirds of the investor’s money is secure if one tenant leaves. It’s especially beneficial for investors who rely on HMO revenue since it makes an HMO one of the best investment opportunities for beginners.
Another significant advantage of HMO ownership is tax savings. In contrast to BTL homes, landlords of HMOs can claim ‘Plant and Machinery Capital Allowances.’ A portion of investment and purchase expenditure is considered an outlay for the rental business through this form of tax relief. Investors may offset these Allowances against non-property income, which is not permitted for typical rental losses. This might result in thousands of pounds in tax refunds.
There is a strong demand for HMOs, which comes as little surprise. The number of people currently enrolled in university, the group with the lowest average income, has never been higher, and disposable income levels have only been lower twice in the past 20 years. It should come as no shock that demand for HMOs increased by 100% last year and 150% three years ago. This trend is sure to continue.
Although the advantages of investing in an HMO property are apparent, any potential investor should consider the risks and drawbacks associated with this business. This mostly takes the form of new legislation that was passed late last year, which is expected to have impacted at least 177,000 homes across the country. Prior to the passage of new legislation, compulsory licensing was only required for larger HMOs with five or more occupants on at least three stories.
However, the licensing’s scope has now been extended to include a wider range of Buy-To-Let (BTL) properties, including flats not connected to commercial premises and flats above shops. Furthermore, standardised minimum room dimensions have been implemented. These will be closely monitored by council officials.
Stamp duty tax, which was implemented in 2016 and levied at a rate of 3% on second homes and HMOs, has also had an impact. The phased-out mortgage interest tax relief has had a significant influence on investors in the sector.
Potential investors should also be aware that HMOs are subject to stricter legislation than single-let homes. For example, in some jurisdictions, it is necessary for any investor who buys a home to obtain planning clearance before turning a single let into an HMO, which may take time and money but has no assurance of approval.
Because of this legislation, investors have found it more difficult to acquire HMO properties that are suitable, eligible, and available. There is a lot of competition for the few remaining properties, which has resulted in steep price increases. Furthermore, raising enough money for purchases has gotten much more challenging since the Bank of England’s fear about the economic risk posed by HMOs in the United Kingdom economy. Lenders have increased lending standards further, with lenders predicting that deposits required for mortgages will also rise soon.
What makes a good HMO investment?
The size of the property is also a major consideration. HMOs with three or four tenants are considered tiny. A three-bedroom house might be bought and rented out those rooms separately by an investor. Work on such a structure would be simpler to obtain planning permission for than larger buildings, allowing the property to go on the market much more quickly.
In an ideal world, the quality of life for renters should be higher in such homes since there are fewer people in a household and thus less conflict, with lower chances of one tenant leaving. Additionally, having fewer tenants lowers the risk of maintenance issues.
The investment potential of an HMO property is also influenced by its location. For example, it is well-known that the North of the United Kingdom is presently experiencing strong economic growth.
Employment possibilities have emerged in Manchester and Liverpool’s clusters, and as more people move there, the desire for inexpensive housing has grown. In the North West, prospective rental yields are among the highest in the country.
Investors should also think about whom they wish to reach. Because students and young people with a low level of disposable income are most likely to choose to live in an HMO, university cities and areas with a high demand for a low-cost lifestyle are excellent investment targets.
Investors should check the local HMO market to ensure that it is suitable for their goals. They should also obtain data on comparable rental rates. The investor may use this information to determine a reasonable rental rate for potential renters while still providing a decent yield.
Other HMOs should also be considered in light of their reliability. Successfully established investors in the sector may have a distinct selling point; potential investors should look to these achievements and come up with their own.
We can assist you in finding the ideal HMO property for your needs, ensuring regulatory compliance, carrying out HMO conversion, and managing your tenants on your behalf at Mistoria. Please take a look at our website to find out more about investing in HMOs, and how Mistoria Group can help with HMO Management.