First things first, what are HMOs? Often referred to as a house share, a house in multiple occupation (HMO) is a property where multiple tenants reside in more than one household. They can be hostels, multiple bedsits, a block of converted flats or a self-contained cluster of flats. HMOs are ideal and highly sought after by students or young professionals, who are looking for a cheaper living situation with a social element.
To classify as a HMO, there must be a minimum of three tenants from at least two different households who rent rooms and the property’s communal spaces (kitchens, bathrooms etc.).
HMOs are like any property investment – there are pros and cons for them. We’ll take you through just what you can get out of buying one at auction and what you might risk.
Pro – Constant earnings
The sheer number of potential tenants in an HMO means it is very unlikely that you will ever have a break in rent flow so it will always be a steady form of income. Even if there is a high turn around on tenants, say for students who move on after a couple of years, there will always be overlapping contracts, meaning you eradicate the risk of an unvacated investment.
“HMOs are great for your portfolio, as it means you can have all the perks of multiple rental incomes with fewer properties and less management fees.”
Pro – Higher yields
While not a guarantee and dependent on the location, HMOs are known to have higher yields than most property investments as they have multiple tenants. It is also great for your portfolio, as it means you can have all the perks of multiple rental incomes with fewer properties and less management fees.
Pro – Less risk of rent arrears
One tenant means only one or two sources paying rent, which can sometimes mean it is late or cannot be paid. With HMOs, having multiple tenants means you are greatly reducing the risk of losing out on your source of income by spreading it over a larger number of tenants. If one should fall behind, you still have rent coming in from other sources, so it’s not such an absence.
Pro – Strong demand
HMOs are only increasing in popularity as people seek out more flexible and affordable accommodation. If you buy a HMO near a university or a popular student area, you are nearly guaranteed to have tenants. Students are likely to share positive living experiences among themselves, and your let will almost market itself. But on the other side of this, they are equally likely to share if they have negative experiences too.
Con – Requires a licence
There is some red tape that goes into becoming a HMO owner. You need to acquire a mandatory licence from your local council for each property you own. As HMOs become more and more popular, however, fewer licences are being granted, meaning it can be harder for new investors.
Con – Difficulty in securing lending
As a HMO is such a considerable undertaking, due to them usually being larger buildings with many tenants, landlords typically require previous experience in the field before lenders are willing to grant funding. Those looking to invest will most likely need a very healthy track record with all boxes ticked.
“Those looking to invest in an HMO will most likely need a very healthy track record with all boxes ticked.”
Con – More risks with tenants
HMOs typically attract a younger tenant base who, as we mentioned before, are usually students and who are typically living on their own for the first time. This could mean house parties, appliances being broken, and mess. Lots of mess. There are ways to avoid this – being more selective over the tenants you accept and confirming they have guarantors to ensure you are protected regardless of what happens. Even if you avoid students, having multiple tenants means more people to cause wear and tear in your property in general.
Con – Time consuming
Having multiple tenants, especially younger ones who are in a transitional period in their lives, means you have multiple people to manage and advertise for at a high rate, which can be far more time-consuming than a traditional buy-to-let. This means if you don’t already, instructing a property manager is more advisable.
If you are interested in finding out more about HMOs or acquiring one at auction, don’t hesitate to reach out. We’re always on hand for help and friendly advice.
