A niche property investment sector in the UK that is often overlooked by investors is the HMO.
A typical HMO comprises between five and twenty individually tenanted rooms. It is usually a large house which has been converted for the purpose. It will have one or more shared kitchens and may have shared bathrooms and lounges. Whilst rooms with en-suites are popular, these are not essential as there is good rental demand from more budget conscious tenants who are happy to sharea bathroom.
On April 6th 2006 mandatory HMO licensing came into force across England. The intention was to raise the standard of accommodation in HMOs. HMOs need to be registered with the local council, which will assess whether the property meets the requirements to be a HMO and whether in its view there is enough space for the occupants and the property is well managed.
Some investors may be concerned about the quality of tenant, but as with any property if the right letting and management agent is used there should be few problems for the landlord. Tenants vary from professionals seeking a room in London to stay in for several days a week through to construction workers and students. Rents in London are extremely high by general UK standards and accordingly tenants are prepared to live in smaller spaces if they offer convenience and are reasonably priced. The good news for HMO owners is that rents are unlikely to fall going forward. Demand is set to grow for relatively low budget accommodation and this will produce even better returns for owners.
Whilst few overseas owners have entered this sector, HMOs are popular in the UK. The major attraction for investors is that they provide a higher income stream than traditional buy to let properties. An income of 5% – 6% net of all costs is available with some London HMOs. With typical apartments only receiving this as a gross figure at best, it is easy to see the attraction.
Prices for good quality properties vary according to size and location. A smaller HMO in a decent area might start at GBP400,000 and some larger properties will cost in excess of GBP2m. Buying an established property and converting it to a HMO is an attractive proposition which will increase the return to the investor. However, professional assistance is recommended if this is to be done successfully.
For investors seeking an attractive income stream, a HMO may be a sound investment. For further information on this sector please contact us.