HMOs vs flats: which gets the best yield in Medway?

You may have seen my recent post about the continued rise in Medway property prices. In that article we found that three-bed terraced houses are the most abundant type of property locally available. So does this mean they are the best bet for an investment, or are there other options?

Well, in other posts I have also looked at one-bed flats as an option for growing capital. So as a point of comparison, this article will focus on the relative merits of investing in three-bed terraced houses as HMOs vs one-bed flats. So, which is the best option?

First of all let’s look at numbers. We already know that there are more three-bed properties advertised for sale in Medway than any other type of accommodation. If you combine flats and maisonettes, however, the figures tell a different story. See the chart below.

Year Three-bed terraced dwellings All flats/maisonettes
2010/11 21% 17%
2011/12 22% 19%
2012/13 18% 17%
2013/14 18% 16%
2014/15 18% 18%

In the past four years the number of three-bed terraced dwellings for sale has dropped by 16%, while the available number of flats and maisonettes has risen by 6%. This may be partly due to developers splitting houses into flats. The available homes for sale in both categories is the same at 18%. So with supply relatively even, what about demand from other buyers?

Interestingly, there has been a drop in the number of housed available to rent.

Year Number of rental houses
April 2010 – March 2011 547
April 2011 – March 2012 538
April 2012 – March 2013 817
April 2013 – March 2014 683
April 2014 – March 2015 331

So, looking at the figures, it would suggest that although the number of three-bed terraced houses and flats advertised for sale sits at 18%, fewer are being bought by investors as lets. This could down to an influx of new buyers. However, this also means there are fewer rooms to rent for those who can’t afford to buy. This could also point towards an increasing prevalence of investors offering single lets rather than HMOs. Which, in my opinion, means that single room lets will be in higher demand and may push up rental rates, which is good for investors.

What about house prices and rental values in Medway?

When investing in an HMO or a single let, you need to carefully consider long-term yields. I will use two examples here: Chatham and Gillingham.

Starting with house prices, we see that in Chatham the average price for a three-bed terraced house last year was £186,721, with a flat/maisonette averaging at £106,227. In Gillingham it was £194,487 for a three-bed terraced and £138,345 for a flat/maisonette.

When it comes to rental values, the average monthly rent for a one-bed flat in Chatham is £550; Gillingham demands slightly less at £507. For a three-bedroom terraced house in Chatham that has been converted into a five-bedroom HMO, the average rent per room is £400, while rent per room in Gillingham HMO rooms is slightly more at £425 (this is an average as size of room and provision of an en suite bathroom usually means the landlord receives higher rent).

Now consider the yield comparison of a flat and terraced house.

Chatham yield

  • Flat/maisonette: 5.29%
  • Three-bedroom terraced house: 10%

Gillingham yield

  • Flat/maisonette: 3.76%
  • Three-bedroom terraced house: 10. 34%

Clearly the initial costs for an HMO are higher. You must also take into account stamp duty, updating and installing bathrooms, solicitors costs and meeting Medway’s HMO regulations, but overall the yield is several times multiplied. The good news is that if one tenant, or even two, gives you a void period, you still have other tenants paying rent (and therefore your mortgage).

We cannot however ignore flats in Chatham as possible prospects for investment. This type of property is still a viable option: yields of 5.29% are possible, drawn from gross rent of £550 a month, and there is the advantage of start-up costs being lower. Also, capital growth may be faster if you buy a flat in a more desirable area such as Chatham Dockside. The disadvantage is that you do not receive any rent when you have a void period in a one-bed flat, and you cannot forget the burden of service charges.

Similarly, a flat in Gillingham is less of a money-maker. But with house prices still rising at 11% in Medway, alongside a declining housing stock, the long-term return on investment should increase.

It is also worth noting that the average price for renting in Medway has gone up over the years and does not likely to stop increasing any time soon, regardless of external factors.

Average price One bedroom Two bedroom Three bedroom Four or more bedrooms
April 2010 – March 2011 £492 £619 £712 £1,250
April 2011 – March 2012 £536 £628 £748 £1,094
April 2012 – March 2013 £555 £668 £788 £1,190
April 2013 – March 2014 £533 £681 £788 £1,348
April 2014 – March 2015 £549 £710 £817 £1,424

I have only looked at the two areas of Gillingham and Chatham here and there are plenty of other investment opportunities throughout Medway; as a point of comparison that should apply in wider examples throughout Medway, though, it’s clear that HMOs can offer a far better yield over flats, therefore presenting a better opportunity for investment.

I am always happy to hear from you, so if you need advice on another area or want to source a property as an investment, then don’t hesitate to contact me. Email me via hasan@bullfinchproperties.co.uk or give me a ring on 07944 726 676.

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