What is the difference between HMOs and Buy to Lets?
HMOs vs Buy to Lets – how do they compare and which is better? In this article we’ll explore key differences between these two property investment strategies, looking at: Initial investment costs Ongoing management Benefits Challenges and considerations What is an HMO? An HMO is a House in Multiple Occupation that is let to three
HMOs vs Buy to Lets – how do they compare and which is better? In this article we’ll explore key differences between these two property investment strategies, looking at:
- Initial investment costs
- Ongoing management
- Benefits
- Challenges and considerations
What is an HMO?
An HMO is a House in Multiple Occupation that is let to three or more people who are not related. Each person has their own bedroom and the tenants share communal areas such as the bathroom and kitchen.
Find out more about HMOs and HMO Mortgages in this article.
What is a Buy to let?
A buy to let property is let to people who are part of the same household.
Investment costs
The initial investment costs for any type of property investment can vary significantly depending on the purchase price, whether you are doing any light or heavy refurbishments, and how much deposit you are putting down etc. The costs are very much dependent on your personal circumstances and your plans for the property.
However, generally speaking, an HMO property could have a higher purchase price than a buy to let because it is likely to be bigger and have more bedrooms. It’s also more likely that you’ll need to invest in renovations for an HMO compared to a buy to let because you’ll need to ensure the property layout is functional for three or more cohabiting individuals.
Ongoing management
With an HMO property each tenant has a separate tenancy agreement and makes separate rent payments. Whereas with a buy to let property there is one tenancy agreement for the household and one rent payment.
With a buy to let the utility bills and council tax are usually managed by the tenants whereas with an HMO the landlord is responsible for managing and paying the utility bills and council tax.
An HMO is likely to require more maintenance and repairs than a buy to let because there are typically more people which leads to more wear and tear.
Benefits of an HMO
Rental yield – the rental yield is the biggest appeal of HMOs vs buy to lets. With an HMO you can generate more income than a buy to let because you have more tenants who are each paying rent separately. And, of course, the more bedrooms and tenants you have, the more rental income you can generate.
Appeal to a large audience – with rising house prices and increasing rent costs an HMO property appeals to a wide audience, especially students and young professionals. With this in mind, it shouldn’t be difficult to find and replace tenants.
Benefits of a buy to let
Less time commitment – buy to lets are easier to manage than HMO properties and require less time commitment.
Fewer repairs – buy to lets are likely to have less wear and tear than HMOs and require fewer repairs, saving both time and money.
Easier to obtain a mortgage – it’s much easier to secure a mortgage offer on a buy to let property than it is for an HMO; there is a wider choice of lenders and products. Also, the interest rates are lower than they are for HMO mortgages.
Challenges and considerations of an HMO
Higher turnover of tenants – HMO tenants usually come and go more frequently than buy to let tenants due to changes in their personal circumstances – which is one of the reasons why HMOs are more time-consuming to manage.
More difficult to obtain a mortgage – there are fewer lenders that offer HMO mortgages and the lending criteria is stricter than it is for buy to let mortgages, as a result it’s more difficult to get a mortgage offer on an HMO. Find out more about HMO mortgages here.
Licensing – to manage an HMO you may need an HMO license from your local council – this is a legal requirement.
Furniture and appliances – with an HMO property you will need to furnish the property and provide appliances which is another cost and also comes with more admin, time and effort to manage and maintain.
Vacant periods – as an HMO landlord you may experience periods where the property is vacant and therefore you’re not generating any rental income, this is more common for student properties, especially during the summer months.
Challenges and considerations of a buy to let
Income limitations – unlike HMOs, buy to let properties do not offer as many opportunities to increase rental income. For example, you may be restricted with what renovations you can make to enhance the property or increase the size and number of bedrooms that would facilitate growth in income.
Withstanding economic downturns – arguably buy to let properties are less likely to withstand economic downturns than HMOs because the rental yield is smaller and therefore these investments can be less resilient during times when interest rates skyrocket.
In summary, managing an HMO will require more time, money and effort than a buy to let, but you’ll reap the rewards with a greater rental yield.
At Fosters Financial we help property investors to secure the most suitable and competitive mortgage offer for their needs. Learn more about our knowledge and expertise here:
