Understanding HMO Investments: A Comprehensive Guide

Introduction

HMO (Houses of Multiple Occupation) investments are one of the most popular and profitable real estate investment strategies in 2023. Investors seek alternative ways to maximise their returns in economic uncertainty and a possible recession. HMO property investment can be a highly profitable venture. Providing one of the highest rental returns in the private rented industry. HMO investments have become increasingly popular among both experienced and inexperienced investors. Many landlords prefer to invest in HMOs over traditional investments. Let's look into the world of HMOs, discussing their advantages, challenges, and prospects related to HMO investment.

What is an HMO?

An HMO is a property owned by a landlord and rented out to three or more unrelated people on separate agreements. Typically, an HMO property has a shared kitchen, living, and bathroom amenities, with each bedroom being rented out individually. This enables investors to augment their rental yields and income considerably.
Different types of HMOs cater to various tenants: students, young professionals, and local workers. Irrespective of the HMO category, specific standards and responsibilities must be fulfilled before leasing the property. In some instances, having an HMO license can be necessary, depending on the property and rules set by the local government.

Why invest in HMOs?

HMOs are an attractive investment option for landlords because they generate a higher rental yield than standard buy-to-let properties. Furthermore, the advantages of  HMO investment are that they have a higher demand and lower vacancy rate. Despite the additional administration and maintenance requirements, landlords ready to invest their time and energy often find HMOs highly profitable.
In recent years, HMOs have come under strict rules and regulations. This caused many landlords to sell their property, and some potential landlords have avoided entering the market due to the higher HMO mortgage rates. However, it is important to note that the resulting lack of rental property has increased demand and improved the profitability of the HMO sector. 
‍But how profitable are HMOs? According to data from the British Landlords Association (BLA), HMO landlords earn an average rental return of 7.5%, almost double that of standard buy-to-let properties (3.63%). However, these figures are subject to change as the housing and rental markets constantly evolve. Moreover, the location of the  HMO investment can also significantly impact these averages.

What type of location is right for an HMO investment?

The location of your HMO investment will determine the success of your investment. A location with high rental demand and high yields could provide the best long-term returns for the buyer, regardless of fluctuations in house prices. Here are some points to consider when choosing an HMO investment location:

1. HMO tenants prefer being close to the City

Cities within or near urban areas are highly attractive to the HMO target market. Prime location,  modern amenities, lively nightlife, employment opportunities, and easy public transport connections often characterise these areas. Cities are great places to invest, making them an ideal location for HMO investment.

2. Searching for areas with a high demand for shared housing

Identifying areas with a high shared housing demand is essential to generate a high return on your HMO investment. Cities with a shortage of affordable housing opportunities, a rapidly expanding population and a large student population typically provide a consistent flow of tenants for an HMO property.

3. High Rental Returns

Look for the areas with the best rental yields to maximise rental income. Find out which cities have high rental demand and low property prices for HMO investment.

4. University Cities are Excellent for HMO Investment

Investing in HMOs in university cities can be a smart decision. Student populations tend to be concentrated in these areas, and demand for shared houses is very high. For instance, students often look for housing options that are both cost-effective and conveniently located near their college or university. Moreover, if an HMO is not intended to be rented to students, it still can be a smart decision. These areas typically have many graduate students and young professionals searching for shared housing.

5. HMO Investors Value Regeneration and Trendy Areas

Areas being redeveloped or seeing a boom in development can provide excellent capital growth opportunities for HMO investment. These areas often see increased housing demand as new amenities, businesses, and infrastructure build-out attract new residents. Investing in these areas offers the potential for rising property values over the long term.
It's important to remember that conducting proper market research, identifying the local demand, and focusing on investment goals should be considered when selecting the right location for an HMO investment. By taking these carefully measured approaches, HMO investors can significantly increase their future ROI.

New rules to weed out the industry?

In October 2018, the new licensing rules for HMOs entered into force. All large-scale HMOs will now require a licence to operate. The new licensing rules also include new minimum room sizes. The local council gives HMO permits that last up to five years. The HMO owner must ensure the house is appropriate for the tenant and the property manager. The owner or an agent is deemed "fit and proper". This excludes people with criminal records or breaching landlord laws or codes of conduct. 
‍How much does it cost to get a licence? Licence fees vary from council to council but are between £500 and £1,000 for a single property. According to Octane Capital, “This has been one of the main barriers to HMO property investment.” It has also raised standards in some cases, contributing to eliminating rogue landlords.

Are there any fees associated with HMOs?

HMOs are complex investment models and come with many risks. Without proper planning and understanding, you could easily run into unexpected costs. Below are the some common HMO related cost that investors must be aware.

1. Insurance
   Insurance is necessary to protect your occupants and your HMO  property investment.
2. Void Periods
   As an investor, it is important to be prepared for a void period at any time of the year. A recommended contingency plan is to plan for two to three weeks unrented period per year.
3. Maintenance
   ‍For renovations or repairs, HMO maintenance can cost an average of 2-5% of your annual rental income. ‍
4. Management
   This is a completely optional service, depending on your approach. Generally, a specialist agency will charge 10-15% of your gross rental income to manage your HMO.

More HMOs are available in the private rental sector today than ever before. They are perfect for students and professionals and are often the top choice for people looking for cost-effective housing and the opportunity to meet someone new.

Factors to be considered when making HMO property investment 

To maintain your HMOs at a high level of demand in the future, few investors need to maintain their property portfolio's success and sustainability. Below are some valuable tips for HMO investors with a professional approach.

1. Enhance Your Strategy for Property and Tenant Management

Properly managing your properties and tenants can help investors provide a better service and attract long-term tenants. It's crucial, especially amidst the cost-of-living crisis, when tenants often contemplate whether to stay or relocate based on the most favourable option. A positive tenant-landlord relationship can greatly impact their rental decisions.

2. Stay updated on the needs of modern tenants

Tenant needs constantly change, and today's students expect more from their rental homes. So, it's important to stay updated with the current market. It is important to know how to design and build homes; it will grab the attention of your target tenant. Doing this can help your HMO properties in the long run.

3. Examine Your Systems and Processes

Professional HMOs are more complex to set up and manage, so reviewing the systems and processes can be beneficial. It will help to identify areas where investors can improve the efficiency of the entire HMO portfolio. Moreover, it will help the investor to stay updated on their legal compliance regulatory changes and ensure nothing slips through the cracks.

Pros and Cons of HMO Property Investment

Pros

1. The rental yield is more than double that of traditional buy-to-lets. 
2. Less of a problem with rental void periods. Even if one tenant leaves, you'll still have rent from the other tenants. (For example, if you have five tenants, losing one tenant would only result in a loss of 20% of your rental income.)
3. Increasing demand across the region. It will likely push up the value of HMOs and the value of your property.
4. If your local authority issues an 'Article 4' directive (which means HMOs cannot be set up under permitted developments), you will likely see an increase in your property value.
5. HMOs are in high demand in many areas, particularly university towns and major cities.

Cons

1. HMOs can be more challenging to manage as there may be more tenants. This means you may need to spend more time on property management.
2. Finding an agent who can handle HMOs can be challenging. However, it's becoming less of a problem as more investors and renters opt for HMOs.
3. HMO investment start-up costs are higher than traditional buy-to-let properties.
4. In many areas, you'll need a license to operate an HMO in many areas. The licensing process can be costly and time-consuming.

In conclusion, HMO investments are attractive for housing landlords looking for higher rental yields and long-term growth. However, it's important to consider the advantages and challenges. Conduct in-depth research and seek professional advice to make informed HMO property investment decisions. With the right strategy and diligence, the HMO market can be a profitable investment for landlords. To know more about market dynamics and trends of student housing kindly register your property with amber.