Property investment considerations for the beginner investor
In a recent property investment rant, I discussed investing in a house of multiple occupancy (HMO). In this article, I’m going to explore the key advantages and disadvantages of HMOs and single buy-to-let (BTL) property investment. Understanding these will help you make the best choice to kick-start your property portfolio.
What is the difference between an HMO and a single BTL?
An HMO is a property that is tenanted by at least three people from at least two different households (families). They share facilities like bathrooms and kitchens. It’s a completely different proposition to single BTL investment properties.
HMOs are attractive to investors in property, largely because it’s possible to earn more rent from them. As a single BTL, an investment property might earn, say, £800 per month in rental income. As an HMO, the same property could earn double or even treble this.
On the face of it, letting your investment property out as an HMO looks like a no-brainer. But things are never that simple. As with all investments, there are advantages and disadvantages.
What you need to consider about HMOs and single BTLs before you invest
That large potential income is tempting, isn’t it? But before you fall in love with the idea of becoming an HMO property investor, let’s examine the other advantages and disadvantages of HMO investment property:
Advantages of HMO property investment
- As we’ve seen, rental yields can be way higher than single BTL. It’s not uncommon for an investor to convert an investment property to an HMO and earn three times the rent.
- Void periods cause less damage to your income. It is because it’s very unlikely your property will be empty. You’ve got to be a terrible landlord or incredibly unlucky to have all your tenants move out at once. If one tenant leaves, you may still have, say, four other tenants still resident. So, you’re down by only 20% of your rental income.
- The demand from tenants for an HMO is likely to increase. The UK is chronically short of homes, and for many (especially young) people, living in an HMO is their first or best option.
Disadvantages of HMOs
- HMO investment property is very highly regulated. You’ll need a license to operate one. Here is where things start getting a little more complicated. There are general rules that govern HMO licensing, but each local authority is given free rein on the details. For example, an HMO licence is valid for a maximum of five years. Your local authority could insist you have relicensed annually.
- The costs of converting an investment property for HMO can be high, and not every property will be suitable for conversion. There are extra requirements for fire safety, for example, and you’ll need to adhere to environmental health regulations.
- You’ll need to liaise with the local authority’s HMO officer to find out the exact rules for your HMO investment property.
- Tenant turnover is usually high. It means a whole ream of work and extra costs – you’ll need to vet your tenants in the same way you would for a single BTL. You’ll also have extra advertising and marketing costs.
- Maintenance costs tend to be higher than for single BTL investment properties. This is partly due to the high turnover of tenants, but also because of the type of tenants common in HMO properties – often young, first-time tenants with no previous experience of living away from home.
- It’s more difficult to obtain financing for an HMO property investment. Many lenders will not extend HMO mortgages, and those that do may charge a higher rate of interest than on other BTL mortgages.
- An HMO investment property is harder to sell. If and when you do want to sell, you’ll need to find a buyer in a small, specialised sector of the private rental market.
- If you let an HMO without the correct and up-to-date licence, you could be fined up to £20,000.
- Many investment property managers won’t manage HMOs, so it’s more likely you’ll become an HMO landlord.
In short, while an HMO offers the benefit of higher rental income, the cost is a higher initial investment, strict licensing requirements, higher expenses, and a whole lot more work.
Advantages of single BTL property investment
- A single BTL investment property is more straightforward. It can be made with no previous experience of property investment (though you should get investment education first).
- It’s easier to start your property investment life with a single tenant than it is with several.
- While a tenant leaving creates a void period, tenant turnover is less. A tenant is likely to stay in a single BTL property for at least a year.
- The costs of finding and vetting tenants are way lower than for HMOs.
- Probably higher capital growth and easier to sell – there’s a higher demand for single BTL properties, as well as being available to sell to potential homeowners.
- They tend to have lower maintenance and management costs.
- It is easier to find a quality investment property manager, giving the advantage of effortless property management.
Disadvantages of single BTLs
- Void periods, when they occur, mean a total loss of rent until a new tenant is found.
- Lower rental income, because you only have one tenant.
In short, while a single BTL produces lower gross rental, it is easier to buy, with a lower initial investment. It’s easier to set up as a rental property, easier to finance, and benefits from longer and more stable tenancies. Running costs are lower, and it’s easier to find an investment property manager to take on the day-to-day landlord duties.
To discuss which type of investment property is best for you, contact one of our team today on +44 (0)207 923 6100. Together we’ll find the ideal investment to meet your objectives of income, capital growth, or both.
Live with passion
Brett Alegre-Wood
