According to the latest research by BVA BDRC, HMOs continue to generate significantly higher average rental yields compared to other property types – seven per cent compared to the overall average rental yield of 5.8 per cent.
When you factor in the added peace of mind that comes with knowing that if one tenant moves out there is less exposure to arrears, it’s no surprise they are proving so appealing to clients looking to maximise their investments.
And it is not just experienced landlords with years of rental know-how behind them; HMOs are also attracting the attention of investors looking to take their first steps in the buy-to-let market.
As with any financial investment, however, there are downsides as well as upsides.
Managing HMOs can be challenging, and first-time buyers in particular should only go into an arrangement with their eyes wide open.
Many people believe a property only becomes an HMO when five or more people forming more than one household are living it.
Not only is that incorrect, it could potentially have very costly consequences for landlords. A property is actually classified as an HMO when it’s occupied by at least three unrelated tenants forming more than one household who share toilet, bathroom or kitchen facilities.
While HMOs with five or more unrelated people are subject to mandatory licensing with all local authorities, some councils insist on landlords with fewer residents obtaining a licence.
Landlords failing to apply for a licence when one is required could face a fine of up to £20,000, plus costs.
Adding up the costs
The costs associated with running an HMO can be higher compared with a traditional single let property too.
Start-up costs can mount up if conversion work needs to be carried out or furniture needs to be purchased, while running costs for letting agents, utilities and maintenance can soon eat away into those much vaunted potential higher rental yields.
Finding the right HMO mortgage
Finally, aspiring first-time HMO landlords might find their choice is more limited when it comes to securing the finance they need.
Their complex nature can mean there is often more work in managing HMO properties, resulting in some lenders being more cautious as a result. Many lenders will insist on some form of letting experience before they will lend to someone buying an HMO.
So if you’re approached by a client who still wants to purchase a house in multiple occupation but who doesn’t have any previous buy-to-let experience, would you know where to turn?
There are lenders out there who can support both you and your client every step of the way.
As some doors shut in certain areas of the buy-to-let market, different ones are opening up.