HMOs achieved a total return on equity of 108% over four years, compared to 77% for a standard buy-to-let property at the same LTV over the period, research from Platinum Property Partners reveals.
This meant that in 2010, every £1,000 invested in HMOs would have grown to £2,080 by 2014, compared to a standard buy-to-let property where this investment would have reached £1,770.
The research which compared returns on HMOs, buy-to-let investments, equities, gilts, commercial property and cash, saw buy to let achieve the best returns after HMOs let to working professionals, followed by equities achieving 46%, and commercial property gaining 41% over 2010-14.
Steve Bolton, founder and chairman of Platinum Property Partners, said: “Buy to let has proven itself to be the top performing investment over the past four years, with returns from bricks and mortar investments outpacing other asset classes like stocks and shares considerably. However, not all types of buy-to-let property offer equal investment return: our research shows that HMO properties let to young professionals and key workers have the potential for substantially higher returns than vanilla or standard buy-to-let properties.”
Higher returns
Bolton explained the potential for higher returns through HMOs was mainly due to investment being geared towards maximising rental income, with properties converted and refurbished to allow for a higher number of tenants on individual tenancy agreements.
“However, HMOs aren’t all about benefitting landlords: they also fulfil a growing social need for high quality rental properties that are affordable for tenants. The cost of renting a room in an HMO is far lower than renting a one bedroom flat. For the UK’s increasingly mobile workforce, who are delaying putting down roots for longer, it makes financial sense to live in a high quality HMO and still be able to save for long-term goals rather than spending all of a pay packet on rent.”
The research also highlighted that compared to buy to let, where capital gains are the biggest contributor to overall returns, the maximisation of income from a given size of property was the key characterisation of HMOs which provided more reliable returns for investors.
Bolton added: “It is true that capital appreciation has a role to play: however, the housing market is notoriously volatile, as evidenced during the recent financial crisis when short-term capital gains were completely eradicated. Net income provides far steadier returns, and consistently growing consumer demand for rental properties suggests this trend won’t change any time soon”.
