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6 reasons why HMOs are still profitable

Mistoria Group believe that HMOs can be more profitable than buy-to-lets where a single renter or family occupies the property. Here are six reasons why HMOs remain a good investment…

Higher yields

HMOs maybe three times more profitable than traditional buy-to-let investments. Because the yields are greater for HMOs.

The yearly rental income as a percentage of the property’s whole value is known as rental yield. Because HMOs generally produce greater rental earnings than typical buy-to-let properties, yields are frequently much higher.

Fewer void periods

HMOs have lower void rates than buy-to-let properties since they are let too many tenants, which allows landlords to minimize the overall number of vacancies. Even if two renters leave in a six-bedroom HMO, there will be still four other renters paying rent and two new ones found.

When a tenant departs, in the typical buy-to-let scenario, there can be a vacancy period while the home is shown to new renters.

High demand

Demand for high-quality HMOs is increasing – especially during the epidemic. However, the number of private renters in England and Wales (just under 500,000 in 2018) pales in comparison to the number of shared-equity leaseholders (nearly 6.5 million).

This indicates that there is still a lot of interest in high-quality shared living residences, especially in London and other English cities and towns.

Less exposure to rent arrears

With more individual tenants in an HMO, landlords are less likely to have rent arrears issues. Even if one resident is late on payments, the remainder may still be paying up in full, so the landlord’s cash flow isn’t badly affected.

Potential to add more rooms

HMO landlords may be able to increase rental income by adding more rooms over time by extending a property. Garage conversions, loft conversions, and additions are all ways to add extra living space to an HMO.

However, there are regulations regarding minimum room sizes and overcrowding that must be considered, which are addressed in the sections below.

Renovations may add value to your property.

Adding a second room to an HMO may not only boost rental income but will also improve the home’s value in the long run.

Things to consider when investing in HMOs

Although HMOs are typically more profitable than typical buy-to-lets, there are a few things to consider before putting money into one.

HMO finance can be more complex

Although HMO mortgage rates are lower than those for conventional loans, they are still higher than the market’s current rate for FHA-insured mortgages. Lenders often demand larger deposits and lend at lower loan-to-value ratios.

Bridging finance is often required when purchasing a normal home to convert into an HMO, and investors will most likely require bridge financing to fund the purchase and renovation before switching to an HMO mortgage after completion.

Rules and legislation around HMOs are tighter

Larger mortgages are not always necessary. Many investors, including those participating in LET contracts, take out smaller loans to generate cash flow for their portfolios. This can be a good way for individuals who don’t want to buy a property outright or have bad credit because the lender does not require full documentation of income and asset statements. Lenders may also offer

Some local authorities, on the other hand, restrict the number of additional co-living properties that may be constructed.

Additional costs

Although HMOs generally provide higher yields than buy-to-lets, they may also include some extra expenses over buy-to-let landlords.

  • The cost of converting an existing home to an HMO
  • Costs associated with licensing and planning
  • Financing costs – for example, bridge loan interest – are not covered.
  • Water and electricity bills
  • The funds required to pay the council tax are deducted from your monthly income.
  • Potential increased maintenance costs
  • Furniture, fixtures, and fittings costs

Not all properties will work as HMOs

Buying the wrong property to convert into an HMO is one of the most common and costly blunders investors make.

The property’s size is important to consider, with minimal room requirements that must be considered both before and after any remodelling work. Local authority planning regulations are also significant, with some locations having additional HMO rules in place. If you want to learn more about HMO property investments, contact Mistoria Group . Mistoria Group always meet and exceed their investors’ expectations by drawing on the quality of our highly motivated team and by sustaining and developing the strength of their partnerships with all stakeholders.

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