Hello Medway Property News Investors,
I have a significant amount of experience as an HMO lettings specialist in Kent and am constantly speaking with investors who are considering either expanding or diversifying their portfolio.
When investing in property, it is important to give thought to the best way to make your capital work for you and also give thought to the various types of investment strategies that are available.
Choosing the right strategy is an individual decision and something that I cover off in the discovery sessions that I hold.
Whilst there are a range of strategies, I thought it would be helpful to outline a comparison between the kind of returns you can achieve with an HMO when compared to a single let property. This is a key factor when not only deciding what investment route pursue, but also which property and location would work best.
Before embarking on the illustrations however, I thought it would be helpful to explain what I mean by ROI as I find that often people get this confused by the yield of a property investment.
What Is ROI?
Return on investment (ROI) is the annual return that you receive as a percentage of the original cash investment. It is calculated as per:
Cash after expenses (Net profit or EBITDA)
Total original investment
For our illustration I have not included capital appreciation as you cannot make a direct comparison between an HMO and single let due to how an HMO is valued differently.
What Is Yield?
Yield is very different to ROI as it is a comparison between the total potential annual revenue as a comparison to the property value. It is calculated as per:
Total potential annual revenue
Yield is a helpful calculation because it helps guide the ongoing return you are making as well as comparing deals in different areas to ensure you are not paying too much for the property you are purchasing.
When compared to a single let property, an HMO always generates a better ROI. Simply put, whilst an HMO requires a higher level of specialist management, it generates more cash for reinvestment.
The illustration below outlines that and based on the illustrative figures used, this example will generate net monthly revenues of £1,600 for a total investment of £140,000. This means that it will take just over seven years to cover the total cost of investment.
There are, however, a few more barriers to entry when it comes to investing in an HMO. Apart from the initial investment, which is much higher, there is significantly more legislation to meet and a much higher level of management is required.
Single Let ROI
When compared to a single let property, you will see how an HMO trumps a single let property hands down. In terms of monthly net revenues, the illustration below demonstrates just £325 and it could take as much as 16 years to cover the original investment.
With this said however, it does not mean that a single let investment strategy is a bad investment strategy. It certainly is a strategy which is an excellent choice for first time investors because of how simple it is, the minimal level of management required and smaller initial investment.
Where a single let strategy has its strength is in the appreciation that occurs over a number of years. For example, Medway house prices have increased by 68% since 2010 and sold prices in locations such as Maidstone Road, Rochester are 11% up on the previous year and 19% up on the 2016 peak!
Single Let Or HMO – What’s Right For Me?
So, what is the best investment avenue for me I hear you ask and why do people even bother with a single let property?
Investing in property is individual to each person and depends on a lot of factors such as how much cash they have to invest, their current and projected income levels, their long-term goals, level of experience, and risk-appetite. It is always a good idea to have a diverse portfolio so as to not put all your eggs in one basket.
You will see the biggest difference is in terms of the ‘cash now’ generated by an HMO and the long-term investment needed for a single let. With the proposed changes to Capital Gains Tax in 2021, it will be interesting to see if the response is for investors to favour this ‘cash now’ approach over locking capital up in an asset!
I trust that you found this article helpful! I run free 15 minute sessions as well as tailored discovery sessions to provide property investors with all the tools they require to either make their first investment, move into a new area, review, or expand their portfolio. I started doing these because so many investors were asking me for advice that I would not have the time to speak to everyone if it was free.
I am also excited to be running a landlord seminar on 26th March where I will be covering a number of crucial points about how to get the best out of your HMO investment during 2021. You can find full details here and if you book with promo code SUPER before 13th February, you can grab your ticket for just £5!