There’s no doubt that returns on the traditional single tenancy buy-to-let property have fallen. They’re still healthy compared to many other types of savings or investment, but they’re shrinking, which has led many landlords to reflect on their position.
While some have left the business, others have taken a more business-like approach. There has been a rapid increase in the numbers of buy-to-let mortgages given to limited companies. The recent tax changes driving those who want to stay in the sector towards incorporation. In addition, landlords are getting smarter about the properties they buy and the types of tenancies they are willing to offer.
Figures from Mortgages for Business suggest that whereas the yield on a typical single tenancy property is now averaging 5.6%, HMOs are delivering returns of 8.9%. It’s a substantial difference, but is becoming an HMO landlord the way to go?
Before we look at the potential benefits, perhaps it’s worth commenting that there are strong regional differences between property costs and yields. Only this week the rapid growth of cities away from London has made the news. If you can up the yield from your portfolio by getting into growing areas at the right time, you should do well. And, indeed, with purchase costs, maybe, 20% lower, in areas like the North, a lot of landlords are maintaining their yields by moving their focus geographically.
Landlords choosing the HMO route, could also be tapping into changing demographics. Our booming Northern and Midland cities are often a magnet for the young who are comfortable with renting a room in a shared property. Single people tend to be more mobile than families, moving for work or simply to experience what another location has to offer, but aren’t often in the position to rent property outright – it’s no longer just students who choose to share. What’s more, graduates are increasingly staying on in the cities where they’ve studied and are a key target market.
If you’re thinking about the HMO buy-to-let route, you’ll need to weigh up the finances, and be careful with your choice of investment. If you were to convert a property that previously had a single tenancy, there will be extra upfront costs. When every room needs its own security and WIFI, costs can mount. Many local authorities insist on licensing for HMO landlords, and properties may need considerable modification to meet the right standards.
A further issue is that not all lenders offer mortgage deals for HMO properties. There are a few specialists and smaller providers, but you could end up paying more than you would expect.
On the positive side, you should be able to command a much greater overall rental income from the property, and although some would argue that an HMO with continually changing tenancies is a risky proposition, it can actually help to spread your risk. When one tenant chooses to move on, you’re still receiving rent from all the other rooms, not looking at a potential void period for the whole property. If one tenant defaults, you should still have sufficient income to ensure your mortgage is covered.
One last thing. HMOs haven’t always had the best reputation and in some cases, local authority licencing has been essential to protect tenants. But the rental market is changing, and tenants are demanding more all the time. To get the best returns out of a buy-to-let – HMO or otherwise – you must be prepared to offer high standards and high specifications.