BTL vs HMO – Which is a better investment?
After a recent influx of calls from investors and landlords asking just that – we thought it was time for a blog! The first thing to understand is what BTL is, and what HMO is:
An HMO (House of Multiple Occupancy) is a property that is tenanted by at least three people from at least two different households (families). They share facilities like bathrooms and kitchens. It’s a completely different proposition to single BTL (buy-to-let) investment properties.
HMOs are attractive to investors in property, largely because it’s possible to earn more rent from them. As a single BTL, an investment property might earn, say, £800 per month in rental income (and that’s key – this is rental income, NOT profit!) Whereas, an HMO, the same property could earn double or even treble this!
On the face of it, letting your investment property out as an HMO looks like a no-brainer. But things are never that simple. As with all investments, there are advantages and disadvantages. That large potential income is going to be tempting BUT, before you fall in love with the idea of becoming an HMO property investor, going on 12 holidays a year driving a Porche – let’s examine the other advantages and disadvantages of HMO investment property!
PROS OF HMO
- As mentioned – rental yields can be a lot higher for HMO’s compared to single BTL. It’s not uncommon for an investor to convert an investment property to an HMO and earn three times the rent!
- Void periods cause less damage to your income. It is because it’s very unlikely your property will be empty. You’ve got to be a terrible landlord or incredibly unlucky to have all your tenants move out at once. If one tenant leaves, you may still have, say, four other tenants still resident. So, you’re down by only 20% of your rental income.
- The demand from tenants for an HMO is likely to increase. The UK is chronically short of homes, and for many (especially young) people, living in an HMO is their first or best option. Especially in Crewe – with student campus’ being situated here, as well as the work ongoing for HS2 and large factories such as AO and Bentley bringing in workers – HMO’s are GREAT.
CONS OF HMO
- Legislation! Although BTL is slowly catching up with legislation, there is a lot more surrounding licensing (which is specific to your area too, so be mindful of this!) Because of this, you’ll more than likely want to outsource your management too
- Overall, tenant turnover is usually higher. It means a whole ream of work and extra costs – you’ll need to vet your tenants in the same way you would for a single BTL. You’ll also have extra advertising and marketing costs.
- Exit strategy – An HMO investment property is harder to sell. If and when you do want to sell, you’ll need to find a buyer in a small, specialised sector of the private rental market
PROS OF BTL
- A single BTL investment property is more straightforward. It can be made with no previous experience of property investment (though you should get investment education first).
- Probably higher capital growth and easier to sell – there’s a higher demand for single BTL properties, as well as being available to sell to potential homeowners.
- They tend to have lower maintenance and management costs – you may even fancy managing the property yourself! In my experience, letting agents working on a ‘tenant find’ only pack will find you the BEST tenants; they won’t want you to come back and have anything to moan about if you find them a bad tenant, it’s in their best interest to find you a good, quality tenant!
CONS OF BTL
- Void periods, when they occur, mean a total loss of rent until a new tenant is found.
- Lower rental income, because you only have one tenant.
Ultimately, while a single BTL produces lower gross rental, it is easier to buy, with a lower initial investment. It’s easier to set up as a rental property, easier to finance, and benefits from longer and more stable tenancies. Running costs are lower, and it’s easier to find an investment property manager to take on the day-to-day landlord duties.