What’s a better investment – a small or a large HMO?

In amongst various meetings this week, I had a great chat with a landlord about the optimum size of an HMO property. We started discussing the pros and cons of smaller versus larger, and what would potentially offer the best return on investment. With those of you who are first time landlords in mind, I thought it might be useful for me to talk through some of my views and the finer points about the size of an HMO. Let’s remember that HMOs are currently very popular, which increases the competition when you’re on the lookout for suitable properties. Therefore it helps to have a really clear view of what it is you are after, ready for when something comes up.  

Smaller HMOs

Pros:

  • Generally I would say they are easier to manage; less rooms, less tenants, less work.
  • Some tenants prefer to live in a smaller household finding it cosier and more interactive.
  • The utilities are less and therefore reduce overheads.
  • It is easier to find small groups of tenants which allow you to let the HMO in a very short space of time, capitalising on your investment.

Cons:

  • There is potential for less income in a smaller HMO. The income is sometimes comparable to a single let, and therefore not always a worthwhile investment.
  • An empty room can have a big impact as it is a large percentage of the rent. A void can hit the landlord harder.

Larger HMOs

Pros:

  • Much higher income from multiple rents.
  • One vacant room has much less impact on overall rental income.

Cons:

  • Higher bills as utilities increase with the number of occupants.
  • Some tenants are put off by large households as they are less social.

The truth is that not every house is suitable for use as an HMO property. Whether it’s bedrooms or communal spaces, room sizes matter. This is especially pertinent given the EPC regulation changes I blogged about a couple of weeks ago. The minimum room size laws could impact the renovation of an HMO property, so it’s important to consider that in your planning. Don’t waste time viewing properties that are not going to work for you by setting out some rules about exactly what you’re looking for, before you start your search.

HMOs as an investment

So let’s quickly talk about why HMOs are a good investment, no matter the size. The clearest benefit for investing in HMOs is that they can provide much higher returns than most single lets. But why?

  • Tenant demand for flexible, affordable housing is increasing.
  • Rental yields can be as much as three times higher than single lets.
  • There are less (impactful) rental void periods.
  • Your exposure to arrears is minimised, because other tenants that are still paying.

Sound good? Well, in order for me to impart a fair and honest assessment, I should counter with some downsides (it’s always important to make a well informed decision when investing):

  • It can be harder to raise finances for an HMO investment
  • An HMO has higher start up costs than a buy to let.
  • More legislation is applicable; licensing laws, environmental and fire regulations all apply.
  • Capital growth can be lower because a converted property re-sale market consists – almost exclusively – of specialised landlords.
  • Self-management of an HMO which can be very time-consuming. On the plus side I own a specialist HMO letting agency that can manage every aspect of your property.

I have been managing HMOs since 2008 and I’m always happy to offer advice on a potential investment. Those of you who are first time landlords of HMOs, it would be great to hear how you’re getting on. Email me at hasan@bullfinchproperties.co.uk, contact me via LinkedIn or join our discussion group over on Facebook.

And if you haven’t already, why not sign up to our email subscription and we will email you investor alerts. HMOs are very popular among investors. Good properties are sought after and will be snapped up fast, so don’t miss out!

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