Advice for Property Investors: HMO VS Standard Buy To Let Properties

A look at the advantages and disadvantages of both types of rental properties

When it comes to investing in buy-to-let property there are two main strategies: HMOs and single lets.

A HMO (House of Multiple Occupation) a defined as a property rented out by at least 3 people who are not from the one 'household' (e.g. a family), but share facilities like the bathroom and kitchen. It's sometimes called a 'house share' or 'bedsit'.

HMOs are a completely different beast to standard buy-to-lets and your decision on whether you should rent your property by the room will depend on:

  • How much risk you want to take on over that of a standard single let?
  • How much capital you will have to spend to convert your property, to make it an appealing HMO?

But, whichever route you go down (single let or HMO) it has got to be right for you. Both options come with their own risks and advantages, although there are no hard and fast rules when it comes to property.

We go through some main things to consider before making a decision:

Single Lets

Advantages

  • Less experience needed. If you're just starting out then taking on a standard buy-to-let is a lot more straightforward than a HMO. There are fewer regulations you need to be aware of and, unlike with some HMOs, you won't need a special licence to operate as a landlord. Also, if you've no experience of tenancies, it's easier to start off with letting one unit than several all at once
  • Less upfront cost
  • Less tenant churn. A tenant will usually stay for at least a year in a decent single let so it's likely you'll spend more time finding new tenants for a HMO, as they tend to have a high turnover of tenants
  • Higher capital appreciation. Generally speaking single lets increase more in value over time compared to HMOs especially where a property has been specifically converted to a HMO use
  • Easier to sell. Single lets tend to have a wider market appeal than an HMO and so if you ever choose to sell you'll likely have more people interested in buying

Drawbacks

  • More noticeable voids. If your tenant leaves and it takes a month to find a new tenant that's a whole month without any income
  • Lower returns. Unless you bought cash, the income from a single let usually just covers the mortgage plus a small surplus which should be set aside for maintenance

Overall: lower risk, less hassle, but lower returns

Houses in Multiple Occupation (HMOs)

Advantages

  • Less noticeable voids. On the plus side, it's very unlikely all your tenants will leave at the same time, meaning you'll always have at least some income every month even if you're not at full capacity
  • Higher returns - letting properties by the room rather than as a whole unit generates higher rent overall. A room for professionals cold rent for £100 a week.  A 4 bed house may get income of £700 pcm, but as a HMO it may have income of £1700 pcm

Drawbacks

  • More experience required. There are more regulations with HMOs, mainly health and safety related. You may also need a licence from your local authority before you can start letting to tenants. And, if you've never really dealt with tenants before you're suddenly going to have to deal with numerous tenant applications, tenancy contracts and deposit accounts
  • More upfront cost. HMOs are usually larger than single lets and can cost more for that reason. Also, if you are buying an existing HMO from an investor they will know what yields it produces and so are likely to charge more to buy it. On the other hand if you are converting a property into an HMO there are these costs to consider
  • More work involved - both in terms of having to find more tenants initially and the ongoing maintenance. Tenants don't tend to stay as long in HMOs and because you have more tenants in the first place, finding replacement tenants can be more of an ongoing process. What's more, because tenants know they probably won't be staying very long, these properties tend to suffer rougher treatment
  • Tougher to sell. HMOs are most likely to appeal to investors, who will obviously be looking to get a good deal. Other buyers may be put off if there is a lot of work needed to convert the property back into a single unit

Overall - higher initial investment, more management/maintenance but higher yields

One extra pointer for budding HMO investors: picking the right letting agent for your multi-let

You can offset some of the negatives of HMO's, like extra management, by using a good letting agent. Our advice if you are going to use a letting agent for a HMO:

  • Make sure they actually have experience of managing and letting HMO's - Most don't and many will say they can but don't have a clue of the different management techniques required
  • Ask them where they would advertise the rooms - if they don't mention sites likeSpareroom.com, Easyroomate.com or Gumtree it's likely they'll try to use just the normal portals (rightmove, Zoopla) where people looking for Rooms don't tend to look! Avoid these agents
  • Find out what you get for management - HMO's require a lot more hands on management then a single let. If an agent tries to suggest using their standard management agreement they use for single lets challenge them. They should be visiting the property ideally every week to keep an eye out for potential problems.

Related Articles

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Buy to Let Areas in West Yorkshire that Put Money in Your Pocket

Landlords - should you be a Wakefield Responsible Landlord?

DIY Letting VS Letting Agent - what's right for you?

Protecting Deposits - a Landlord Protection Guide

How to Minimise Void Periods - 6 Top Tips for Landlords

Published on 27 June 2014

Source Dominic Woodward

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