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HMO v Buy-To-Let: What’s Better?

By 24 March 2021No Comments

If you ask any seasoned property investor whether they prefer to invest in a House of Multiple Occupation (HMO) or a Buy to Let (BTL) most will say the former.

That’s because the yields in HMOs are far higher, often double and even triple that of a BTL. And no, the work isn’t twice as difficult. Especially, if you opt for running an upmarket HMO, one which will attract professional tenants who will respect your property. Not only will you have less hassle, but you should always receive your rent on time due to the fact your tenants have full-time well-paid careers.

So, why doesn’t every property investor opt for an HMO? Well, like every property strategy there are pros and cons, but what are the differences between HMOs and BTLs, and which one is the right strategy for you?

Management

It’s known that HMOs need more management than BTLs, mainly because there are many tenants and issues may rise that need your attention. Managing a HMO can bit proven time-consuming, but if you don’t want to manage your HMO yourself, it is recommended to get a letting agent to do it for you.

Licencing stipulations

Trying to set up an HMO can often feel like you’re jumping through hoops. For instance, you will need a licence from the local authority before you can even advertise for your first tenant. That license involves fire regulations that must be in place, such as carrying out regular drills and equipping the property with fire-fighting appliances (including fire doors in large HMOs). Download our Landlord Checklist to find out more about licencing and safety checks.

The price

Another reason for opting for a BTL over an HMO is price. A one or two-bedroom property is going to be far less expensive than a four or five-bedroom to buy. However, as mentioned before, the yields are higher, hence the income is higher. You might spend more but the rewards are a lot better than those of a BTL.

Mortgage

If you can’t afford to pay for the property with cash outright, then it’s best to go to a specialist mortgage lender for both BTL and HMO. In the case of the latter, it might be difficult to get a HMO mortgage unless you have some experience running a previous HMO. However, there’s no need to worry, because you can benefit from our in-house funding facility that allows you to get up to 100% funding for all your HMO projects. Contact our franchise manager to learn more about our funding options.

Furnishing

Unlike with certain BTL rental property eg. three to four-bedroom family houses, you will need to furnish your HMO. In the case of an upmarket HMO, it can prove expensive, however, you can negotiate for buying in bulk, eg beds, showers etc.

Cash flow and voids

Once you do have your HMO ready, you can look forward to not just great yields, but also a great cash flow as there are more tenants to collect rent from, than in a BTL. If one tenant moves out, for instance, you’ll still have another three or four paying rent. In the case of a BTL, void periods (when no-one is renting the property) can prove painful as it means no rental income at all.

Demand

Young professionals moving into cities are looking for upmarket rooms to rent, where they can meet other people at the same time. We increasingly hear of couples renting luxury double rooms with en-suite in HMOs. That’s because the UK still has a huge housing shortage, meaning in many cases a room in an HMO may be all that’s available for a lot of individuals or couples. Also, we’ve seen that the pandemic has shaped the property market in a way that people prefer living in the community a HMO provides rather than living by themselves.

The key to successfully running an HMO is to find the right property in the first place. Will it be a property you convert or one you refurbish? The high yields afforded by HMOs make this a competitive market and that’s why it’s good to have a team of HMO experts helping you out.

The HMO market is rapidly involving as the tenants’ desires are changing constantly. At Sourced, we can help you choose the right model based on your financial goals. Our HMO experts are always up to date with changes in the property market and they are happy to answer all your questions and prepare a bespoke plan while providing you with access to many off-market properties and learning resources. To find out more, download our Sourced HMO Partner Prospectus.