It is more important than ever for investors to choose investment strategies that will be untested during these unprecedented times.

In this guide, I’m going to cover the main reasons why HMOs are a good strategy in this climate.

But first…

What is an HMO property? What is a Buy-To-Let Property?

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HMO (Houses of Multiple Occupation) is where 3 or more unrelated tenants live in one household sharing facilities such as bathrooms and kitchens. HMO tenants pay a premium rate per the room which produce higher cashflow. Whereas Buy-To-Let is where a landlord decides to rent out a property under one tenancy agreement. This is typically suited for families and couples, a more straightforward investment strategy.

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Currently the Bank of England is under pressure to increase interest rates because it has a target to keep inflation under 2%. The Bank rate is already at its highest level for 14 years, rising consistently in response to the soaring cost of living. Just under a third of households have a mortgage, according to the government's English Housing Survey meaning many homeowners and Landlords are now facing much more expensive monthly repayments. The BBC have found in comparison with pre-December 2021, average tracker mortgage customers will be paying about £394 more a month, and variable rate mortgage holders about £251 more. The increase in mortgage rates for Landlords can significantly reduce profits if high cashflow strategy are not being utilized. The next decision will be announced on 11 May where we could see further changes to the Bank of England base rate.

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Let’s imagine a £175,000 3 bed house with 2 reception rooms that can be converted into bedrooms. If this property is converted to a 5-bedroom HMO the landlord could potentially earn of £550 per a bedroom. That would provide a monthly income of £2,500 before expenses. However, if the landlord decides to keep the property as a Buy-To-Let they would gain a monthly income of around £1,500. With the current rising mortgage rates and uncertainty of the market, investors will further begin to see less of their monthly profits. With HMO properties there is less exposure to rent arrears that will be greater than the property expenses. If one out of five tenant’s default on a payment the other tenants can cover the property expenses, further decreasing the risk to landlords.

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Here’s what is looks like:

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There is value in having a diverse portfolio as there are various pros and cons with both investment strategies.

In summary…

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If you made it this far, thanks for reading. Investing in HMO properties has some incredible benefits, but it isn’t for everyone. Make sure to follow us on Instagram @parataproperty to stay up to date with how we continue to minimise risk in the current climate.

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