Is an HMO property a good investment?

Nathan Walker, Sales Director at CPS Homes in CardiffNathan Walker, Sales Director, points out a few pros and cons to HMO properties so that a landlord can better decide if it's an ideal property investment for them..

Many landlords who are involved in the HMO market are aware of just how attractive they can be as an investment. The rental yields are typically some of the highest around for the right property in the right location, often exceeding regular buy-to-let property yields by quite a margin. The demand for affordable, flexible housing, such as those offered by multi-let properties, has been consistently growing over the past few years.

There are plenty of positives that can be argued to promote a HMO investment, but are there any downsides? As with all investments, there are good points and bad points, and the same certainly applies for an HMO investment.

Read to learn a little more about HMO’s so that you’re better equipped to weigh up the pros and cons when deciding if a house in multiple occupation investment could be right for you.

What is an HMO?

Firstly, HMO stands for house in multiple occupation, or a house of multiple occupancy. A HMO refers to a residential property that consists of several subdivided rooms (often within what was once a singe large house with multiple rooms) that are let individually to tenants from more than one family. HMO’s usually have 'common areas' that are shared by each tenant living in the property, such as a communal living room, kitchen, bathroom and garden/patio.

This is a simple definition, but other factors can also come into play when defining what a HMO is. Furthermore, different criteria and licensing requirements may exist depending on your local authority, as well as different planning regulations. For this reason, it’s vital you’re clued up on HMO requirements within your specific location - so speak to your local HMO Officer before coming to a decision.

The positives to investing in an HMO property

The most obvious benefit and the main reason so many landlords choose to invest in an HMO property is the rental income that can be achieved. HMO’s are known for providing much higher returns than the majority of single let properties.

Why do HMO’s typically achieve a much better return on investment?

  • Rental yields are often two or even three times higher
  • An HMO landlord has less exposure to arrears as the rental income is from multiple tenants - with a single let, arrears would likely mean the entire income on the property
  • Rental void periods aren’t as significant as income is still being received from other tenants who occupy the other let rooms
  • The demand for affordable, flexible housing within busy cities or nearby suburbs is on the rise
  • There are many tax advantages to HMO investments meaning more of a landlords costs may be tax-deductible

The downsides to investing in an HMO property

When it comes to potential downsides to investing in an HMO property, there are a few things that need to be considered before deciding if it’s the ideal investment for you.

Some of the things that you need to take into account include:

  • Extra legislation and planning requirements need to be met with HMO’s in comparison to a standard buy-to-let property.
  • Converting a property into an HMO could potentially result in lower capital growth due to the fact it’s likely to appeal to specialised landlords seeking an HMO property.
  • There are higher start up-costs as more furniture needs to be bought as well as fire and environmental health regulations that need to be considered.
  • It may prove more difficult to secure a mortgage on an HMO property - particularly first-time landlords
  • You may find a limited supply of suitable properties in areas you’re interested in as not every property can operate as an HMO
  • There are less letting agents offering to manage HMO properties compared to the number offering to manage standard buy-to-lets

Ultimately, the key to successfully investing in HMOs is much the same as any other property let investment - choose the right property in the right area for a fair (or better than fair!) price and manage it appropriately. HMO properties can certainly involve far more work to execute and manage successfully, but if you feel the pros outweigh the cons then they can prove to be an incredibly fruitful investment over the longterm.

If you’re looking for a qualified and highly experienced letting agent to manage your HMO property in Cardiff, or if you’re on the lookout for the ideal property investment opportunity, don’t hesitate to contact our expert letting team here at CPS Homes. You can get in touch by calling us on 02920 668585, e-mail enquiries@cpshomes.co.uk or pop into one of our three Cardiff branches.

28 April 2021

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