If you’ve been considering investing in the UK property market, you’ve probably heard of Houses in Multiple Occupation, or HMOs. They’ve come a long way from their humble beginnings in the 1990s, when they were predominantly student digs or rather shabby rental options for low-income folks. Fast forward to today, and many landlords are offering upscale, shared accommodation geared towards working professionals.

The reason for this dramatic shift? Simply put, HMOs offered a tantalizing promise of higher returns compared to traditional single-home lets. But as with any promising investment vehicle, increased scrutiny and regulation have followed its success. A new article on PropertyWire looks at whether HMOs continue to be the investment darling they once were.

Why HMOs Were Once The Belle of the Ball

Historically, HMOs have been extremely profitable for landlords. Despite the extra administrative efforts of individual tenancy agreements and greater maintenance needs, HMOs often yielded 2-3 times the rent that could be earned from a single-family let. All the extra hassle was generally considered worth it when you looked at the beefy profits.

Regulatory Changes: The Double-Edged Sword

As HMOs gained popularity, regulators also took notice. The market has been increasingly hemmed in by stringent rules. In 2018, a couple of significant changes rocked the boat for HMO landlords:

1. Minimum Bedroom Sizes: New regulations specified the smallest size a bedroom could be in an HMO. This meant some rooms could no longer be let out, significantly reducing landlords’ rental incomes.
2. Licensing Expansion: Previously, only HMOs with ‘three storeys or more’ needed a license. The new rules expanded this, requiring any HMO housing five or more unrelated individuals to be licensed.

Fast forward to 2022, and additional responsibilities were heaped on HMO landlords under the Fire Safety (England) Regulations. They now have to appoint a ‘Responsible Person’ to ensure compliance with specific fire safety measures.

Rising Costs: The Uninvited Guest

And it’s not just red tape that’s been tightening; expenses have been rising too. Mortgage interest rates are higher than they’ve been for the past decade, and energy costs have skyrocketed. Sadly, most of these added costs can’t be passed on to tenants, further squeezing landlords’ profits.

The Continued Appeal of HMOs: It’s Not All Doom and Gloom

Pros:

1. Higher Profits: Despite all the hurdles, HMOs generally still offer a higher rate of return compared to single-let properties. Tenants are willing to pay more for well-maintained, high-quality shared spaces.
2. Cash Flow Stability: Unlike in single-lets, where a change in tenancy could leave you without any income, an empty room in an HMO won’t drastically affect your earnings. The rent from the other rooms often suffices to cover the costs.
3. Value Addition Potential: Larger properties like HMOs offer more scope for adding value through renovations and extensions, increasing their capital value.

Five Key Considerations Before Taking the HMO Plunge

1. Capital Requirements: HMOs are seen as higher-risk, meaning you’ll likely need a more substantial deposit for a specialized mortgage compared to a traditional buy-to-let mortgage.
2. Market Demand: Before investing, ensure that the demand exists for your target tenant group, as some areas may have an oversaturation of HMOs.
3. Council Regulations: Local authorities can have varying regulations regarding HMOs. Always consult the local council to understand what’s required in your chosen location.
4. Quality of Amenities: Aim for high-quality fixtures and amenities to attract the kind of tenants that would be willing to pay a premium.
5. Maintenance Budget: With high foot traffic, expect higher maintenance costs. Have a robust budget and schedule for regular upkeep.

Conclusion: Is the HMO Still a Golden Goose?

Like any form of investment, the viability of HMOs isn’t black and white. While regulatory hurdles and rising costs have made the sector more challenging, the potential for higher returns still exists. For those willing to do their homework and commit to the extra effort and capital, HMOs can still be a rewarding long-term investment.

So, the golden goose may not be as golden as it once was, but it hasn’t lost all its feathers just yet. Make sure to weigh the pros and cons, consult local regulations, and carefully plan your finances before you dive into the world of HMO property investment.