Why HMOs make a Great Investment Strategy in the North East
Houses in Multiple Occupation (HMOs) present a lucrative property investment strategy with significant returns and the potential to generate a stable income. However, HMOs may not suit every investor. So, let's explore the ins and outs of HMO investment, particularly in Newcastle and the North East, and outline key considerations for those interested in shared living properties.
We will also compare HMOs with other property investment strategies and answer common questions about HMO investments.
Table of Contents
What is an HMO?
HMO properties are purchased by investors to rent out individual rooms to various tenants. These properties often start as family homes and are then renovated to create appropriate co-living spaces.
Types of HMO
Student HMOs
Student house shares are probably the first thing most people think of when it comes to HMOs. While student HMOs can be a good investment, there are some potential pitfalls to consider. Student HMOs often suffer serious wear and tear and can be more costly to maintain. Some student HMO landlords can experience issues with noise, litter, or parking complaints from neighbouring properties. Competition from high-end university halls and privately-run student accommodation means finding good student tenants can be challenging. Additionally, student HMOs often suffer unavoidable void periods when tenants return home for the summer, meaning rental income is often only coming in between September and late spring.
Professional House Shares
Professional house sharing has grown in popularity over the years. With rising property prices and higher rents in the single-let property sector, many professionals have opted instead for co-living. As well as often saving tenants money, professional HMOs are also well-suited to those workers who prioritise community, friendship, and company over individual space. Professional HMOs tend to suffer less wear and tear than student properties and are generally easier to manage for investors.
Are HMOs a Profitable Investment Strategy?
An HMO investment strategy can be highly profitable, often yielding higher returns than standard buy-to-let properties. They also offer better protection against void periods since each room is rented to an individual tenant. If one tenant moves out, the income from other tenants continues while the vacant room is marketed.
Though HMOs incur higher running costs, high-quality HMOs can generate significantly more income than standard buy-to-lets. Consider this example:
Three-bed buy-to-let:
Annual rent: £12,600
Annual running costs (inc mortgage): £10,388
Annual gross profit: £2,212
Five-bed HMO:
Annual rent: £34,800
Annual running costs (inc mortgage): £19,616
Annual gross profit: £15,184
This comparison shows a three-bedroom property rented on a single tenancy for 12 months versus a six-bedroom HMO where each room rents for £5-600 per month. This is based on an actual property which we sourced on behalf of a client, and which we now manage.
What Are the Benefits of an HMO Investment Strategy?
An HMO investment strategy offers excellent income potential and financial security, even during economic downturns. They can provide a replacement income, offering investors greater financial freedom and lifestyle benefits.
Are There Risks with an HMO Investment Strategy?
All investments carry risks, and HMOs are no different. However, the financial risks are mitigated by the protected cash flow, as a six-bedroom HMO generates six separate income streams. Additionally, demand for well-managed HMOs remains high in the UK, with room demand increasing steadily.
Is it Sensible for a New Investor to Start with an HMO Investment Strategy?
It’s possible for new investors to start with an HMO investment strategy, but these properties are more complex and regulated than standard buy-to-lets. With Clarice Carr & Co, you can benefit from the mentorship and training from experienced HMO investors, professional property sourcers, renovation experts, and planning professionals. For those going solo, HMOs can be daunting and costly if mistakes are made.
Key Considerations When Viewing an HMO Investment
1. Licensing Regulations
Understanding the national and local licensing requirements for HMOs is crucial. In the UK, any HMO with five or more tenants from different households requires a mandatory HMO licence. Local authorities can also extend licensing to smaller properties, so it's vital to check the specific requirements in the Newcastle and North East area.
2. Renovation Potential and Room Size Rules
Assessing the potential for renovation and understanding room size regulations is essential. The more rooms you can create from a refurbishment, the higher your rental income. However, each room must meet the minimum size requirements to comply with HMO regulations.
3. Financials and Timelines
Ensuring your investment numbers stack up is critical. Overspending on the purchase price or renovation can impact your profit margins. Additionally, delays in the renovation process can result in longer periods without rental income, affecting your cash flow.
4. Competition and Demand
Researching the competition and demand in your target area is crucial. While demand for HMO rooms is generally high across the UK, some areas have more competition than others. Understanding the local market can help you make informed decisions and avoid costly mistakes.
5. Long-Term Growth Potential
Considering the long-term growth potential of your investment is important. While HMOs can generate excellent income, they should also be part of a broader investment plan. Evaluating the potential for capital growth in the property will help ensure your investment remains profitable in the long term.
Ideal Locations for HMO Investments
Location is key when considering HMO investments. Evaluating an area’s demand, yield potential, competition, and local regulations is essential. For example, Article 4 directions issued by local planning authorities can require planning permission to convert a property into an HMO, which can affect your investment strategy.
Comparing HMOs with Other Property Investments
Serviced Accommodation vs HMOs
Serviced accommodation typically has lower occupancy rates (around 60%) compared to HMOs (90%-95%) and requires more hands-on management, similar to running a hotel. HMOs, on the other hand, offer more stable and consistent income with less day-to-day management.
Commercial Property vs HMOs
Commercial properties are complex and costly, making them less suitable for first-time investors. Many of our partners started with residential HMOs before moving into commercial investments. Commercial properties also require a larger capital investment and come with higher risks.
Purpose-Built Student Accommodation (PBSA) vs HMOs
PBSA can offer substantial returns but requires significant management and is often a cash-only investment without mortgage options. HMOs, particularly those aimed at professionals, offer more flexibility and potentially lower management costs.
Student HMOs vs Professional HMOs
Student HMOs usually have higher maintenance costs and longer void periods during the summer months. Professional HMOs, like those created by our partners, have fewer void periods and lower maintenance costs, making them a more stable investment.
Is Investing in HMOs Worth It?
Investing in HMOs can be highly rewarding if you understand the strategy and potential pitfalls. Demand for HMOs is high, and stricter regulations have improved standards. Quality, affordable co-living spaces will always be in demand, especially among young professionals.
At Clarice Carr & Co we help investors navigate the complexities of HMO investments, avoid costly mistakes, and maximise returns for both financial and lifestyle freedom.
How Clarice Carr & Co Can Help You
At Clarice Carr & Co our extensive experience in the HMO market allows us to offer unparalleled support and guidance to investors. We provide mentorship and training from experienced HMO investors, renovation experts, and planning professionals. Our goal is to help you make informed decisions, avoid common pitfalls, and maximise your investment returns.
Our Services Include:
Professional Property Sourcing:Â Identifying potential HMO properties that meet your investment criteria.
Renovation Planning:Â Assisting with the planning and execution of property renovations to maximise rental income.
Licensing Guidance:Â Navigating the complexities of HMO licensing requirements.
Market Analysis:Â Providing insights into local market demand, competition, and rental yields.
Ongoing Support:Â Offering continuous support and advice to help you manage your HMO investment successfully.
Get Started on Your HMO Investment Strategy
Investing in HMOs can be a profitable and rewarding venture if approached with the right knowledge and support. At Clarice Carr & Co, we are dedicated to helping you succeed in the HMO market. Whether you are a first-time investor or looking to expand your portfolio, we have the expertise and resources to assist you every step of the way.
Contact us today to find out more about how we can help you on your HMO investment strategy and start reaping the benefits of this lucrative investment approach.
Want to know more? Check out our website or get in touch.  Â
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