HMO investors flock to auctions chasing high yields

Houses of multiple occupation (HMO) are in hot demand since chancellor Rishi Sunak introduced a stamp duty holiday which means no tax is paid on the first £500,000 of a residential property purchase.

Although landlords still have to pay the three per cent stamp duty charge, the temporary tax break can save investors thousands of pounds.

The HMO market has been given an additional boost by further government changes to planning laws that will allow commercial and retail premises to be converted into housing without full planning permission, extending the permitted developments that currently allow offices to be converted in the same way.

Auction activity

Tomer Aboody, director of property lender MT Finance, said auctions were “extremely busy” right now.

Plenty of stock is coming to the auction houses from investors looking to cash out of the market as it heats up, said Aboody, while experienced landlords were looking for HMOs to add to their portfolios.

The latest national report of auction activity from EIG showed that auctions were beginning to return to health, after stalling because of the halt on valuations.

Although the number of lots offered across the 43 auctions nationwide fell by close to 30 per cent in June, the percentage of those selling went up 13.5 per cent to 81 per cent.

HMO landlords can achieve yields upwards of eight to 10 per cent compared to a UK average of around five per cent for single tenant buy-to-let properties.

“Many investors looking to maximise yields are opting for HMOs,” says Abody. “It is an attractive asset class because the housing market is such that people will be renting for longer and there will be a steady supply of tenants.”

Ying Tan, chief executive of Dynamo, said: “We have definitely seen a rise in HMO enquiries from experienced investors. They are the ones seizing the opportunity right now. The stamp duty holiday has raised interest and investors are looking for the best return.”

Tan said HMOs have wide appeal for tenants because renting an individual room in a house is cheaper than paying for the whole house.

Risk versus reward

But there are risks that come with HMO letting, that investors must consider.

Tan added: “A lot of tenants who live in house shares may work in the hospitality trade, which has suffered job losses. The good thing about HMOs, however, is that there you can have five to six renters in your property and only need two or three of their payments to cover your mortgage.”

But the high yields should not trick investors into thinking HMOs are easy money.

Aboody said: “HMOs are only suitable for sophisticated investors who understand the market and what they are getting into. I would not advise first-time investors to go down this route.”

He added: “It is an extremely specialist regarding management and costings, where your perceived income yield is impacted by the managing expenses.”