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Houses in multiple occupancy (HMO) represent just one way to make money in residential property. HMO investing may be a little bit more difficult now thanks to regulatory changes and financing options, but it remains a viable investment strategy for a lot of people.
If you are thinking about buying a property or two yourself, this article will help give you an idea of whether HMOs are right for you or not.
Note that HMO investing is not for the faint of heart. But putting in the effort might be worth it when you consider the high yields and growing demand for this sort of property. The best advice anyone could give you is to suggest you get your hands on a comprehensive guide to HMO investing, then ask plenty of questions from qualified experts so you fully understand what you are doing before you get started.
To get you pointed in the right direction, here are the most important things you need to know about investing in HMOs:
What Qualifies As an HMO?
There are different kinds of properties that can qualify as HMOs based on unique circumstances. But as a general rule, an HMO is a structure that meets the following criteria:
- It houses at least three tenants who are not related
- Toilet and kitchen facilities are shared by the tenants
- It is the only or main residence of its tenants
- The only purpose of the property is living accommodation.
A building with completely separate units for each tenant is not considered an HMO. Tenants have their own exclusive space, including bathroom and kitchen facilities. As a side note, investing in flats is an entirely different enterprise.
HMOs Produce Higher Yields
You should know that one of the primary benefits of HMO investing is the higher yield.
Landlords have the opportunity to charge rates that are lower per tenant compared to single flats, but higher than single flat rental when combined.
On average, HMO properties offer a yield that is several percentage points higher than traditional flats.
HMOs Are Less Risky
From the standpoint of generating consistent rental income, HMOs tend to be less risky too. Remember that to qualify as an HMO, a property must have a minimum of three tenants who are not related to one another. The best way to think of it is to see each tenant as a separate revenue producer.
The likelihood of all three tenants in a unit leaving at the same time is fairly low. More often than not, one tenant will bow out while the other two remain. You can replace that one more easily than replacing all three and, in the meantime, you still have income from the remaining tenants.
**Check out this related post on the advantages of using OpenRent for finding new tenants**
More Strict Borrowing Criteria
HMO investing certainly does have its benefits, including higher yields and lower risk potential. But those benefits have also turned a lot of investors on to the HMO market. This has not made the government happy, and they now see HMO investing as a threat to housing supply. So regulators have made it more difficult to invest in HMO properties.
For example, regulators have imposed stricter underwriting requirements. In short, it is more difficult to finance an HMO property now compared to what it was a few years ago. The stricter requirements also generally translate into higher deposits. So investors need to have more cash up front to get in.
Mortgage Brokers Are Your Friends
The government’s action has slowly but surely dissuaded banks from getting involved in the HMO market. That means there are fewer lenders to go to when you need financing. But fewer doesn’t mean zero. There are financing options available if you know where to look for them.
In this regard, mortgage brokers are your best friends. An HMO investor who goes straight to a mortgage broker stands a better chance of finding the best possible financing package for his/her circumstances. Moreover, mortgage brokers can give the kind of advice investors need to make good decisions.
Bear in mind that UK mortgage brokers are also financial advisers. They specialise in mortgage lending, but they also do what bank loan officers and mortgage underwriters cannot do: advise clients about how to use their mortgages to their own financial advantage.
Management is Always a Consideration
Lastly, you should know that HMOs require management. You cannot simply buy a property, fill it with tenants, and then forget about it. The property has to be maintained in order to keep it in compliance with regulations. And of course, you want happy tenants.
Some investors rely on rental payments as their sole source of monthly income. This frees them up to manage their properties full-time. Other investors hire management companies to take care of things. The management company acts as a letting agent and property manager simultaneously.
In summary, HMOs represent a good opportunity for investors looking to make money in property. As long as you thoroughly educate yourself and understand what you are doing, getting in on HMO investing can be an incredibly good thing.