More property investors are turning into HMOs (Houses of Multiple Occupancy). For landlords, gross yields are higher than a standard buy-to-let property and, while they demand a level of expertise in terms of managing occupants, the buildings and the abundance of legal obligations, the financial yields add up. The statistics show that since Q2 of 2018, the gross yield of an HMO has increased from 8.6% to 9.6% in Q2 of 2019, whereas a standard buy-to-let has increased by 0.3%.
As the population of the UK growing, there is a big demand there. The Office for National Statistics reported that England’s population alone grew by 358,000 in 2018 (up 0.6% from mid-2017). With a rising number of people in the UK looking for accommodation, the shortage of housing stock is another reason for the growth in this market.
Average incomes are now lower than house prices and it appears that individuals (like young professionals) are embracing HMOs in order to save money for a deposit – especially in big cities such as London.
Spareroom showed statistics that only 31% of adults in the UK living in shared accommodation could afford to rent on their own if they wanted, and only 12% could afford to buy their own property. Renting properties in London usually takes around 50% of tenants’ monthly income, sharing accommodation has become a more attractive option.
The research shows that 57% of tenants share for financial reasons, 37% for social and financial reasons and 3% for social. As people staying single for longer in their 20s and 30s, there is more desire to be mobile, social and have better income. By sharing accommodation they can save money on rent and save for a mortgage.
Now it’s easy to understand why HMO is of interest to investors, tenants, and lenders. But it is not the best solution to the UK’s overcrowded cities. Many investors will pursue this route but licensing, legal and financial risks are substantial. HMOs are not always the same: they do not all serve the same geographies, demographics or income brackets. They can be of different quality (including dilapidation).
It is important when considering a lending strategy that lenders should not be afraid of HMOs but approach with the caution they would reserve for any other market.