Hello Readers,

In these challenging economic times where mortgage rates have normalised from the unprecedented rock bottom rates we have gotten used to, and things such as fuel bills have rocketed, I am finding that I tend to get the odd question about whether investing in property is still a good choice.

The answer is clearly a big yes, but something I don’t tend to write about that much is the difference between a single let investment strategy and one focused on building a portfolio of HMOs.

Whilst it has some significant benefits, I know that an HMO strategy isn’t for everyone, and single lets are still alive and kicking (even in a world of increased tax legislation such as section 24).

I thought I would take some time to write this simple article explaining the pros and cons of each strategy, so you can consider which is the best approach for your individual goals.

All About Investing In HMOs

Those who have been reading my articles for a while may recall how I wrote about HMOs could be the way forward as interest rates soar and how HMOs have the best ROI when it comes to property investment.

But whilst this may be the case, HMOs are certainly not right for every investor and if you’re starting out you may be better off with a single let strategy to get some experience of things like purchasing and letting a property along with managing tenants.

When it comes to pros and cons, here are the main things to consider. Let’s start with the pros:

Pros

• Excellent cashflow & ROI: In comparison to single let properties, HMOs win hands down when it comes to cashflow. For example, a fully managed six-bedroom HMO in Medway could generate positive net cashflow of over £1,000 per month that can then be reinvested.
  
  
• Less exposure to voids: This one is simple. With the property divided up into individual rooms, more tenants equal less exposure to voids because if one leaves it does not mean the property stops generating revenue.
  
  
• Excellent demand: In a cost-of-living crisis this one is particularly apparent because of the ability for tenants to all-inclusive accommodation that’s significantly lower cost than renting a whole property.

Cons

• Increased regulation: HMOs need to meet much tighter standards than single let properties. This increased regulation generally requires specialist input to ensure you don’t miss any of the required standards.
  
  
• Demand on management: If you’re wanting to self-manage and have a low-time input, then managing an HMO won’t be right for you. More tenants and more regulation simply means a greater burden when it comes to management. Managing multiple tenants in one household can also potentially be very stressful and require a unique skillset to manage.
  
  
• Higher costs: Whilst I’ve put this as a con, it’s generally cancelled out by the fact that HMOs generate strong cashflow. HMOs do, however, have higher costs when it comes to initial investment, finance, maintenance, management and all-inclusive bills.

All About Single Lets

The most common way for people to get into property is through a single let investment strategy. Single let properties are houses or apartments that are rented out to one tenant or a family. This type of investment is typically more straightforward than an HMO and is often considered to be the more traditional approach to property investment.

Pros

• Light touch management: Whilst HMOs have a high demand when it comes to management and compliance, single let properties generally have a lower burden on management. One of the main advantages of investing in a single let property is that you only have to deal with one tenant, making the management of your property much simpler. With this being said, there is still a requirement for management and maintenance meaning property is not a hands-off investment.
  
  
• Capital appreciation: One of the main differences between an HMO and single let property is capital appreciation. You will see below how one of the cons is cashflow, but this is balanced out by capital appreciation (growth in property value) with funds often being able to be released when you remortgage.

• Strong demand: Yes, this is a pro here as well as being a pro for HMOs. Rental demand is strong, with Government legislation having caused a lack in rental stock leading to higher demand.

• Exit route easier: Additionally, single let properties can be easier to sell than HMOs, as there is typically a larger pool of potential buyers.

Cons

• Cashflow: Single let properties tend to generate lower nett cashflow and £200 – £300 per unit in the south east. This is somewhat countered by capital appreciation; however, this is only available every few years when you refinance.
  
  
• Maintenance costs: Maintenance costs for single let properties do tend to be lower overall, however something like a boiler replacement or other major issues can very easily wipe out your profit for a good few months (or even a year if you buy in the north).
  
  
• Slower to expand: With lower ROI and less in terms of cashflow for reinvestment, it can take longer to grow your portfolio meaning that for something like the first decade of growth you could find yourself simply just putting money in to expand rather than largely using funds generated from within the business.
  
  Once you get to a good number of properties (say 5-10), you should be able to generate enough to purchase another property at least every five years.

What’s right for you?

So, what’s the best strategy I hear you ask! If you were to ask me, I would say that HMOs tend to win hands down because of the ROI and cashflow it generates.

Whilst this may be my preference, it’s certainly not always the case and choosing a property investment strategy is down to the goals of each individual investor.

If you’re looking for a long-term strategy that is likely to beat average pension returns and not to worried about taking money out for a good number of years I would certainly recommend considering a single let approach.

With this being said, if you are willing to take on a little more risk and are looking for a potentially higher rate of return, an HMO might be a good option.

There’s certainly mileage in having a diverse portfolio and a mixture of HMOs along with single lets can make for an excellent approach.

I’d be keen to hear what you think! As usual, you can contact me by replying directly to this email or messaging on LinkedIn.

Hasan