When choosing where to invest your hard-earned cash, it’s always wise to try not to put all your eggs in one basket. Even if you want to stick with the property sector, within this there are many different options to keep your portfolio as diverse as possible and manage your risk levels.
How can you diversify within property?
Choosing different property types is one way of diversifying your portfolio. From traditional buy-to-let, to off-plan new-builds, to student rentals and houses in multiple occupation (HMOs), you can ride the waves of change within the housing market by having a good selection across the board.
The benefits of investing in an HMO
You can generally expect to achieve better rental yields with an HMO. In recent research it was found that the average UK HMO reaps a 6.3% yield, compared to 5.5% for a standard rental. This is most pronounced in the north-west, with Manchester, Liverpool, Preston and Bolton all offering top rental returns.
Reducing impact of void periods
The more tenants you have, the more reliable your income. HMOs are occupied by three or more people who are not related, meaning they all have separate tenancy agreements. When one tenant leaves, while you lose the rent for that room, you still have income from the other tenants, so void periods have much less impact.
Things to consider
While there are major advantages to investing in an HMO, there are some important factors to take into account before you take the plunge.
Higher initial cost
Buying a larger property with more bedrooms is likely to be more costly, even if you go down the route of converting a smaller property into an HMO with more bedrooms. There are several additional costs associated with this kind of property such as planning and structural renovation that you must consider beforehand, although for most investors, the returns should offset these.
It is possible to get specialist mortgages for this type of property, and many investors opt to use a broker to secure the most competitive rates.
Licensing and Regulation
If you have a large HMO (with five or more unrelated tenants), you must now obtain a license to operate legally. The cost of this will vary from council to council, with some areas also being subject to additional or selective licensing schemes which means that even smaller HMO owners must hold a license. As councils regularly review various areas for licensing, it is important to keep an eye on whether this applies to you.
Not every property can work as an HMO. You must ensure you adhere to these regulations or you will find yourself out of pocket with an unusable property. Since October 2018, bedrooms in an HMO must be at least 6.51 square metres for an adult, 10.22 square metres for two adults, and 4.64 square metres for children under 10. These required room sizes can be altered by councils if they see fit, so check what the rules are in your local area.
Some areas of the UK are more suited to HMO rental than others. With this in mind, it’s important to consider what kind of tenants you are likely to attract with this style of tenancy as it will greatly impact the stability of your occupancy levels.
HMO tenants aren’t likely to be families, but more likely be young or single people unable to afford tenancies in stand-alone properties. These people, along with professionals who also favour HMO rental should inform where you choose to invest. Areas with strong commuter links, access to amenities and a swathe of bars and restaurants do well, whereas suburbs and rural areas are less suitable. Getting your location wrong could be the difference between a profitable HMO and a cash-sucking failed venture.
Expectations of tenants in a post COVID world
Changes to the way people work will have an impact on the expectations of your tenants, particularly because the vast majority of your tenants are likely to be professionals.
According to YouGov, 57% of the workforce expect to continue to work from home at least some of the time, so think about how you would need to cater to this in your properties. Strong wi-fi and desks in bedrooms will become the norm, so ensure you provide these or risk being driven out by competition who do on SpareRoom.
The way forward in 2021
As we move through 2021, many industry experts expect rents to rise even if prices remain the same, and many investors stand ready to take advantage of any impact changes to the rate of unemployment, the end or extension of the stamp duty holiday or other market changes that could cause property to become available at an attractive price. Keeping an eye on changing trends and moves within the housing sector, including location and property type, can help you maximise your investments, and HMOs can be a great way of diversifying your portfolio while maximising your rental income.