When people are considering becoming a landlord, they often ask me what sort of property they should buy. Subject to their budget, they ask should whether they buy a flat and if so, how many bedrooms should it have? Should they buy a house and if so what type? Should they buy nearby or maybe in different parts of the country where prices are cheaper and yields are higher? The decisions for new potential landlords can be overwhelming which can sometimes lead to them not buying anything in the end.
My answer is to consider a local HMO if their budget will stretch to it. I give this answer for the following reasons:
- Maximum Rent
If you rent rooms individually as you would in a HMO, in most cases you as a landlord will get more rent than if letting the whole flat or house. You can even create more bedrooms (as long as you comply with the requirements of relevant legislation) which will bring in even more rent. When you rent as a whole property, you are pretty much fixed to the local market rent that can be paid for a similar property.
- HMO’s usually have no vacant periods
When you rent a property on a room by room basis, an individual tenant will leave his or her room by giving notice. This will not affect the other rooms though, as the tenants all lead separate lives.
Therefore in normal situations, you will never have the whole property vacant, just one room. This means that you will always have rent coming in.
When you rent out a whole property though, usually the tenants will all leave together, possibly leaving you with an empty property, unless you can fill it the same day as the existing tenants leave.
- Easier to find new tenants
When a room does become free in a HMO, depending on location, you may find it easier to find a tenant for a room than finding a tenant to take over a whole property. Therefore this will reduce periods where you are not getting maximum rent.
- Tenants do the viewings so no agents needed
Tenants want a say in who their future housemates will be, rather than just leaving it to a landlord to insert the local unpleasant person. This means that the tenants in HMO’s will invariably do the viewings for new tenants.
From landlords’ perspective this is great, as this means they do not have to do the viewings themselves and also means that they do not need to engage a letting agent. Not needing a letting agent means less costs for the landlord.
- A hedge against defaulting tenants
If you have a 4 bedroom place and one tenant stops paying their rent, you still have roughly 75% of your rent coming in. If you rent a whole property and they stop paying their rent, you have zero coming in. Therefore operating a HMO is a great hedge against defaulting tenants.
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