Blog: How HMOs Can Increase Rental Yields
You will often hear sports coaches talking about what is called “aggregation of marginal gains”.
It might sound like a complicated economics term, but, put it simply, it’s about trying to find that elusive 1% improvement in performance that can make all the difference between winning and losing.
The idea came from Sir Dave Brailsford, the former British Cycling Performance Director, who felt that if you could get any advantage over your competition, no matter how small or insignificant it seems, why wouldn’t you take it. not ? The result was a period of unprecedented success at the 2008 and 2012 Olympic Games, and the Tour de France.
The same concept could be applied to homeowners. If you are investing tens of thousands of pounds in a property, why not choose the one that offers you the best chance of earning the biggest rental returns?
This may explain why an increasing number of homeowners have chosen to invest in multiple occupancy homes (HMOs) in recent years. These aren’t just experienced owners with years of rental expertise; HMOs are also grabbing the attention of those looking to take their first steps into the buy-to-lease market.
Savvy investors have recognized that HMOs offer the potential to generate higher returns compared to more traditional individual properties, as there are multiple incomes rather than just one.
According to the latest research from BVA BDRC, the average rental yield of an HMO property is currently 7.5%. When it comes to the difference between an HMO rental yield and the overall average rental yield, we’re not just talking about 1% – we’re looking at a difference of 1.5%.
And it looks like the gap is widening, with research from BVA BDRC showing that between Q1 2020 and Q1 2021, the difference increased 0.6%.
In addition to superior performance, HMOs also offer homeowners the peace of mind of knowing that due to separate leases, voids spread and only affect a portion of income, reducing risk. default and late mortgage payments. .
As with any major financial investment, however, there are always other things that need to be carefully considered. Buying and managing an HMO can be more difficult than looking after a single rented property, and investors should always strike a deal with their eyes wide open.
For example, HMOs with five or more unrelated persons forming more than one household and sharing a toilet, bathroom or kitchen are subject to compulsory licensing with all local authorities, while some councils insist that properties with fewer occupants require a license.
Then there are the running costs associated with running an HMO. Start-up costs can rise if conversion work needs to be done or furniture needs to be purchased, while costs for things like rental agents, utilities, and maintenance can soon eat away at those potential rental returns. high praised.
There is also the challenge of finding a lender who can offer homeowners the mortgage they need. Their complex nature means that some lenders are more careful when dealing with HMO applications.
Fortunately, specialty lenders have the ability and experience to review cases that other lenders may not be able to handle. With their flexible approach to underwriting and their ability to review each request individually and make a judgment based on its unique merits, they are uniquely positioned to support your HMO clients.
We welcome applications from experienced owners for HMOs and multi-unit properties up to 10 bedrooms / units, and up to six bedrooms for new owners. We welcome cases from owners of limited liability companies and will consider clients whose credit profile is not perfect.
If your client wants to increase their rental yields, remember that HMOs could offer them that extra 1% (or 1.5% to be more precise!) Of performance. And by making sure they have the right lender on their side, you’ll give them the best chance of getting the return they’re looking for.
Adrian Moloney is Group Sales Director at Kent Reliance for Intermediaries