5 Reasons to Invest in HMO Property

Every financial expert says that passive income is what will give you financial freedom. And one way to earn passive income is through real estate, specifically by investing in HMO property.

But what is Houses in Multiple Occupation or HMO? What makes it more lucrative than standard single buy-to-let investments? If you’re looking to invest in real estate or looking to diversify your current portfolio, consider investing in HMO properties and start earning more passive income.

How an HMO Property Works

For a property to be considered an HMO, it needs to be leased to a minimum of three unrelated tenants who’ll share facilities like the kitchen and bathroom and toilet. So rather than renting the whole house to a single tenant, its rooms are rented to different tenants. This is how HMO works.

The main purpose is to provide affordable housing opportunities especially for young individuals who can’t afford to rent a whole apartment in the city just yet.

For investors, HMOs maximises the opportunity to make a profit from a property. It presents real estate investment opportunities that don’t require large investments yet offer a higher yield compared to standard buy-to-let properties.

Benefits of having HMO property

Investing in HMO offers more desirable benefits unique to this kind of investment. If you’re unfamiliar with its benefits, here are some of the notable ones that it offers.

1. Financial Benefit

Ask any financial expert: property investments are a sure-fire way to earn passive income. What makes it even better is that HMOs have the highest yield among buy-to-let investments at 8.9% based on data from the 2017 Complex Buy to Let Index.

Even when property prices fluctuate, your income is guaranteed because of the monthly rent payments you’ll be receiving.

2. Streamlined Portfolio

Normally, the number of properties in your portfolio determines the income you get from these real estate property investments. However, you can earn more with less with HMO investments. Given the higher income generated by a single HMO compared to a single buy-to let-property, you don’t need to own a lot of properties to earn more.

Through HMOs, you can streamline your portfolio and not sacrifice any income. It’s also easier to manage especially if you partner with HMO specialists to manage your property for you.

3. Spreads the Risk

Investments always come with a certain level of risk. Aside from the returns, it’s part of the evaluation that every investor needs to consider. With HMOs, the risk is mitigated because it’s spread among the different tenants.

Compared to single-let properties, you’re completely reliant on that single tenant for your income flow. But for HMO, when one tenant is behind on rent payment, you’re not put in a tight situation since there are at least two other tenants that you can expect income from. This is how risk is spread out.

4. Costs Are Tax-deductible

Properties ideal for HMO investments are normally complete and already fit for the purpose upon purchase. HMO sale property consultants will help you choose properties that are best for HMO investments.

But in case of any renovations due to repairs or for improvements, these costs are classified as revenue costs, making them tax-deductible. But with the right HMO sale property consultants, you’ll be able to invest in properties that are well-maintained and need little to no repairs.

5. Buoyant market

HMO is a very profitable business to be in right now. The market is buoyant with more and more tenants choosing to go the HMO route rather than lease a whole house. More than students, young professionals are choosing this more affordable option.

To meet the rising demand, the supply of HMO houses have risen as well. License applications have increased, which is a good sign for investors. The positive economic impact of this form of investment makes it more likely for your license to be approved.

5 Reasons to Invest in an HMO Property

Now that the benefits of HMO versus standard buy-to-let properties have been outlined, here are five reasons that make it a worthwhile investment.

1. Increased Income

Real estate investment opportunities come in different forms, but only in HMO can you maximise the income you can get from a single property. Ask any HMO specialist and they’ll tell you that you can earn up to three times more with HMO versus standard buy-to-let properties.

To show it in numbers, you can have a four-bedroom property leased for £1,000 a month to a single tenant. That’s not a bad amount of income you can generate each month.

But with HMO, you can rent each room even for just £500 and you’ll get £2,000 from the same property. Now, imagine if you had a few of these HMO investments in good locations within the city. That’s a significant income stream for your cash flow each month.

2. Void Period Affects You Less

The risk and reality of buy-to-let investments is that there will be periods when your property will be void of tenants. This loss of income can hurt you especially if you’re dependent on the income it brings.

But with HMO, one or two-room vacancies will not hurt you as much since you still have other tenants occupying other rooms. But to make sure you don’t have long void periods, employing a tenant referencing strategy helps.

3. Avoid Rent Arrears

Similar to the second reason, rent arrears are part of the property investment game. It happens and it’s something that every landlord has to deal with once in a while. But with HMOs, one tenant with rent arrears will hardly make a dent to your income stream since you have several other tenants paying rent.

While it’s not an ideal situation to have arrears, its financial impact on you is lessened.

4. Easier to Pay Taxes

Paying taxes is a fact of life. Luckily, rental properties classified as HMO makes it easier for you to do so. As mentioned above, renovation and construction costs for HMOs are classified as revenue cost, making it tax-deductible.

Even though instances of revenue costs can differ on a case-to-case basis, there are clear tax benefits that you can get when you’re invested in HMO. If you’re investing in it for the first time, sale property consultants that you can trust will be able to show you the tax benefits you can enjoy.

5. Upgrades Property Portfolio

An HMO rental property is an upgrade from the standard buy-to-let because it allows you to put more attention to your investment, allowing you to take better care of your property.

HMOs let you manage fewer properties without sacrificing any income. With fewer houses to manage, you can fix any issues more efficiently. What makes it even easier is if you partner with HMO specialists to help you manage your investments for you. This frees up your time for other endeavours.

Advantages of HMOs

Investing in HMOs have several advantages compared to other real property investment opportunities. If you’ve been looking at HMOs but still aren’t quite sure, here are the advantages that you’ll get from this investment.

1. Higher Rental Yield

If you’re looking for a high-yield investment, HMO is the way to go. A single property for HMO rental will generate you more income than standard buy-to-let properties. And the more rooms you have in your property, the higher the profit. You won’t even have to invest in a lot of properties to get a higher yield.

2. Licensing

Before you can rent a house as an HMO, it’s mandatory to get a license as the landlord. While it’s an additional step not required when having a single house for rent, it does offer advantages. A license allows you to let a room to a tenant and makes it easier to evict them when needed.

3. Less Impactful Void Periods

Because of the multiple income streams, you get from a single property, any void period for a room is less impactful. As long as you have other tenants, one vacancy will not hurt your income.

4. Less Exposure to Rent Arrears

Related to the previous point, you enjoy less exposure when you have a tenant or two behind rent payments. But because you have other tenants, you still have rent money coming in and you won’t be scrambling to pay for your expenses.

5. Tax Benefits

Another advantage is the tax benefits you can get with HMOs. The law states that any renovation or improvements made on a property being let as an HMO is considered revenue cost, thus tax-deductible.

6. Increasing Demand

The UK has seen a spike in the demand for HMO housing. More people are looking for affordable housing and HMO is a great option not just for students but also for the young working-class too. The increase in population and the rising expenses in the city make living in HMOs an attractive option.