BTL vs. HMO - Find YOUR Strategy
You’ve decided you want to invest in property. Great. But now where on earth do you start? With newspapers talking about the crazy profits to be made by popping a property on AirBnB and programs like Homes Under the Hammer flooding your TV with success stories of buying, doing up and selling on, how do you decide what’s best for you? It’s a big decision after all, as there’s always someone’s money at stake. To help you get to grips with two of the main strategies out there, I’ve put together this little guide explaining buy-to-let(BTL) and houses of multiple occupancy (HMO); the benefits and potential pit falls and why these strategies may or may not work for you.
This section might as well be titled “Magnolia”. Many people’s perception of buy-to-let is that it is an unfashionably basic strategy which you’d only go for if you really can’t think of anything more exciting to do. It’s certainly not the newest or most flashy strategy out there, but owning a simple terraced house and renting it out to your run-of-the-mill family or professional worker can still produce excellent returns.
If you budget for a letting agent as well, there really is very little to worry about once the property is let out to some good tenants (note the word “good”…getting the right style of house in the right place for the right price to attract the right kind of tenant really is key to this!). Add in the fact that you can get some good mortgage products at great rates fairly easily and this is a very low hassle strategy – gold-dust if you are looking to make your property investment portfolio as passive as possible.
Another big plus point for your average Buy-to-let is that, depending where you are looking to buy one, they are often a lot cheaper to get your hands on than some of the more exciting sounding strategies. This means you can buy more of them with the same money (whether the money is yours or someone else’s) and so you can steadily spread the risk of a tenant moving out and your property having a void period. If you build up a modest portfolio and suddenly have a problem with one house or one tenant, it won’t bring your whole income crashing down to nothing overnight. Trust me, these innocent sounding Buy-to-lets can sometimes get transformed into weed farms and drug dens, or the boiler breaks, or your tenant goes AWOL or won’t pay the rent,…but if that hasn’t completely scared you off, then buying a few of them (ideally not all in a row on one street!) means it is far less likely that your whole portfolio will be affected by any one issue.
Lots of stock available, so easier to find a property
Comparatively low purchase prices
Relatively easy to find a letting agent to manage them
Lots of competitively priced mortgage and insurance options
Opportunity to spread any void risk by building a portfolio quickly
Monthly income relatively low (£150-200/month profit per property if done well)
If you only have one BTL, your eggs are all in one basket
Houses of multiple occupancy (HMOs) are houses which are rented out by the room to 5 or more individuals, so that you have a separate tenancy agreement with each tenant. To be able to do this, you need to acquire an HMO licence from your local council. If you are renting out to less than 5 individuals, the property is classed as a multi-let and it depends on the local council whether or not you will need to obtain a licence. Generally, you as the landlord provide some communal space and a few incentives, such as furniture, wifi, bills and tv included and the tenants only have to worry about paying the rent and keeping their rooms in a reasonable state.
Turning a property into an HMO is a great way to maximise your returns, whilst simultaneously spreading your risk within the same house. HMO tenants tend not to stay quite as long as BTL tenants, perhaps just 1 year instead of 2-3 plus I your average BTL. However, when one tenant leaves, you don’t lose all of your income, just the portion from that room.
The downside for an HMO is that there are more regulations and they require more intensive management. From wired-in smoke alarms and self-closing fire doors to minimum room sizes and fire escape routes, there is much more to think about when setting up an HMO. The best place to get the most up to date information on requirements is from your local Environmental Health or Housing Officer at the local council. It can seem a bit daunting to call them up before you actually have an HMO all set up, but they appreciate landlords getting in touch so much! From their perspective, it shows you are prepared to work with them and make sure your property meets all of their requirements right from the start, which also gets them on your side and most likely will make your life easier as well!
Another thing to watch out for with HMOs is that there are less mortgage lenders and insurance companies who deal with HMOs. This means there is less competition and so rates are generally slightly higher. It can also make it harder to get a mortgage if you don’t meet some common criteria (e.g. having an income >£25,000 or owning your own home). It’s worth contacting brokers for mortgages and insurance as soon as possible if you are considering this strategy to make sure you will be able to proceed if you find a good deal.
A lot of people get quite excited about this strategy, particularly around the student market. Yes, it is true that students do pay a lot for their rooms, but they are also increasingly expecting a lot in return. In some student towns it is completely normal for each room to have an en-suite and personal tv provided. Another thing to watch out for with students is that their “years” are actually only 9 months long, so in some student towns it is standard for students to pay for only 9 months of the year. There are lots of other potential tenant demographics who look for room lets (HMOs) though, for example young professionals, doctors, nurses, supported housing associations among others. Many of these other options have slightly lower expectations but may actually look after your property much better than students!
Higher monthly income from one property (£600+/month profit per property if set up well)
Void risk spread within one property
More regulations so more hoops to jump through to get set up
Some councils have started to charge council tax per room if you have en-suites (the landlord is liable for council tax in HMOs)
Can be harder to find the right size and style of property to convert in some areas
Comparatively higher purchase prices
Only certain letting agents, mortgage lenders and insurance companies deal with HMOs, so you need to hunt these out early!
Conclusion - It's up to you!
There are many pros and cons to either strategy and at the end of the day, it’s a personal choice which one will suit you and your circumstances best. Whatever you choose, try and concentrate your efforts on one strategy until you have mastered it. That way you won’t find yourself constantly chopping and changing what you are looking for. I so often see people who are so keen to get into property that they are looking at every possible good deal regardless of which strategy it falls into. Whilst there are opportunities in every strategy, each strategy will need you to look in a slightly different area, calculate your offers differently and speak to different agents and contacts. Trying to do it all at once is a recipe for disaster! Pick one, become an expert and then look to branch out to the next, it will save you so much time and wasted effort.