One of the main reasons landlords invest in HMO ‘s Houses in Multiple Occupation is to generate more rental income than can be achieved with a single tenancy buy-to-let property.
And while the misconception is that all HMO s have at least six lettable bedrooms, the official line is that any property with a minimum of three unconnected tenants sharing kitchen and bathroom facilities is generally defined as an HMO.
This does mean that there is scope for investors with less working capital to buy a property and rent it as an HMO without doing very much work at all, but what are the pros and cons of investing in smaller HMOs vs larger HMOs?
Advantages of smaller HMO s
In theory, you could buy the same three bedroom house that could be rented to a family on the same tenancy agreement but instead, rent the rooms individually on different tenancy agreements and call it an HMO. The rooms would still be subject to minimum size requirements, but there would be no need to obtain planning permission or a licence unless there is an Article 4 Direction in place in the area.
This kind of property could also be cost-effectively converted into a five or six-bedroom HMO by turning spaces such as integral garages, dining rooms and living rooms into bedrooms, as long as there is still space for a generous communal area and kitchen.
The obvious advantages with smaller HMOs, aside from not usually needing planning permission or a licence, is that refurbishment work would be minimal, faster and cheaper, allowing for the property to be tenanted fairly quickly and start generating an income. They are usually easier to manage too, because fewer tenants also means less potential problems and voids to deal with, maintenance issues, wear and tear and neighbour complaints.
However, the less rooms you have in an HMO, the less rental income you are able to generate. The opportunity to add immediate value through development profits will also be reduced if you’re not, on the whole, making major improvements to the property.
Advantages of larger HMOs
On the other hand, larger HMOs undoubtedly generate more income. There is also less competition for suitable properties than there is for the traditional housing stock, such as three and four-bedroom properties. Larger houses with more land or properties such as nursing homes, B&Bs and small hotels are often more suitable and not sought-after by owner-occupiers.
And you need more cash to get started. Not only will the property itself usually come with a bigger price tag, but the refurbishment work required could be significantly more expensive, not least because you need additional bathroom and kitchen facilities, and take months. Planning and licensing applications can be complex and only add to this timeframe.
In addition, instead of four or five tenants to deal with, there could be eight, 10 or even 12 people living in a property, which increases the risk of arguments and personality clashes and means that quarterly checks and general management takes more time.
But while investors might assume that doubling the size of an HMO means doubling the operating costs, that’s not always the case. Broadband infrastructure might cost more, but the monthly bill will be the same, for example. It’s more common that a 12-bedroom HMO will cost 50% more to run than a six-bedroom HMO, but generate double the income, therefore increasing your return on investment.
What’s right for you?
The fact is, there is no right or wrong. Both small and large HMOs work and come with pros and cons. The key when deciding which size of HMO to create is to think about the bigger picture and your long-term goals.
If your goal is to achieve a certain level of income, then investors should take into consideration the income potential of individual rooms, not each property. You could generate the same gross rental income with four 10-bedroom HMOs as you could with eight five-bedroom HMOs, and those smaller HMOs would not necessarily cost you half the initial investment to buy and convert.
The time it takes to manage 12 tenants in one property may also not differ significantly to managing six tenants in two properties, especially when travelling to different properties is factored in.
Having said that, the resale potential of larger HMOs is often limited to investors, whereas smaller HMOs can more easily be converted back into family homes. If you’re not intending on holding your HMO investments for the long-term, or want to increase your chances of achieving a quicker sale in an emergency, having smaller properties in your portfolio is a good idea.
Ultimately, it will come down to how much capital you have to start with and what’s available to buy in your investment location, but having a diverse portfolio of HMOs is never a bad thing. Just remember that larger HMOs are not for the faint-hearted or inexperienced investor.
Ed Bembridge, landlord and Franchise Partner explains the advantages and disadvantages of investing in smaller vs larger HMOs. Watch the video.