Not too long ago I wrote an article about how to value your HMO and I know that you’ll be aware that HMOs have the greatest ROI when it comes to residential property investment, so it’s encouraging to have recently read some research that outlines how HMOs have the greatest capital value.
Research from Octane Capital has indicated that the average HMO is now valued at £364,508; some 32% more than the wider market value of properties. This does vary across the UK, with London being 72%, the West Midlands 55%, Scotland 41%, and the North East as much as 109%.
Looking to the Medway Towns, this 32% average means that the rough average value of an HMO is £380,691 compared to an average house price of £288,403. With HMO ROI averaging at around 15-20% and more people requiring affordable accommodation, it wouldn’t surprise me if we see significant growth in the HMO sector over the next few years.
This hunger for HMO investment comes amidst a huge raft of legislative changes, licensing laws, and the potential future changes such as EPC reform and the abolition of Section 21. Thankfully Medway does not have an active Article 4 Directive in place, however, for a number of London Boroughs such as Bexley where there is a borough-wide Article 4 directive, there are a lot more requirements to meet!
In addition to this, an HMO requires a larger financial requirement, with capital of around £150k needed to purchase and convert a property whereas around £70k is needed for a single let.
Whilst investing in an HMO can be a profitable avenue, as well as the legislation requirements and capital outlay there’s a lot more to manage (often five or more individual tenants) and this is why it’s generally a good idea to work with an experienced agent who will be able to provide a hands-off service.
You may be wondering why HMOs have such a higher capital value to single-let properties. Well, here are a couple of points for you to consider:
Less risk of capital loss due to voids
When investing in a single-let property, your income goes from 100% to 0% during void periods.
With an HMO, you’re spreading your risk over multiple tenants meaning that if, for example, you have a six-bedroom HMO and one tenant moves out, you are only exposed to losing a sixth of the revenue whilst the room is empty.
Less risk of capital loss due to rental arrears
In exactly the same way as you are not as exposed to capital loss due to void periods, you are also less exposed to issues with rent arrears.
I can’t highlight how important it is to vet tenants properly and carry out good references along with credit checks, however, if one tenant is unable to pay your risk is, again, spread over the remaining tenants.
Personally, this report doesn’t really come as a surprise as I know that HMOs bring you much better returns than single let properties, however, it’s certainly encouraging to see the headline confirmed by an official report!
I hope you found this article insightful! If you’re keen to find out more about the Medway property market and an HMO investment could work for you, why not check out the Property Success Network that I co-host.
We meet on the third Thursday of every month at Buckmore Park Kart Track in Chatham and always look forward to some outstanding speakers along with valuable time networking with other investors. You can find details of our next event by heading to our website.