10 Minute Read🚀 HMO Property vs Buy-to-Let
So, this is a big question, in this article, lets explore whether you should look at an HMO or buy to let property when starting out in your property investing career. Both options have pros and both options have cons and it really is a mixture of time, money, experience, willingness and risk that can really determine this answer.
The reality is… for everybody reading this – there’s no right or wrong answer, it’s about understanding each option and forming the right property plan that suits you and your goals and also understanding the basics so you don’t make any nasty mistakes.
So – lets jump in and explore the world of HMOs VS Buy to Let property investing and hopefully from this you’ll be able to make a somewhat informed decision on what’s best for you.
🏡 HMO Property Meaning
So lets start with HMO’s. If you’re not familiar with an HMO, it’s known as a House of Multiple Occupancy and at some point in life you may have actually lived in one.
This is typically where you live with multiple other people, whether friends or strangers and you pay for the house by the room, however that can be either on separate contracts or on a joint contract between the house which is more typical in student lets.
HMO’s are a great way to generate strong cashflow from a house mainly because if you had a 4 bedroom house in a city centre that would say bring in £750 a month rent in a northern city or town, as an HMO, each room could potentially let out for £400 a month bringing in a total gross rental income each month of £1600 which is almost double what you could achieve as a single let.
The difference is with an HMO, typically you as the landlord tend to look after the bills and council tax so the tenants live all-inclusive of the bills, it’s really flexible meaning if you let a property out to young professionals, for those looking for somewhere to stay for 6 to 12 months without any long, hard commitments then HMO’s are perfect.
Likewise for students it allows them to stay for 9 to 10 months of the year and live in a house with their friends without having to worry too much about looking after bills for the house.
Now, this does mean that because your costs are higher in an HMO it means that naturally you’ll spend more on it every month, but the trade off is higher rental income and higher costs, the idea being that you should still be able to net around £1000 a month after all your costs, maintenance, voids etc on a 4 bed house depending on the area and rental income.
A lot of property investors focus on HMO’s as a strategy as a way to get out of their 9-5 job because it only takes a few houses to cover the average UK Salary meaning it’s an accelerated out of full time work and instead into full time business. An HMO can be sort of created anywhere however you have to be mindful of Article 4 areas.
This is where the local council put a boundary around usually city centres meaning you can’t change the use class from C3 which is a normal dwelling to C4 which is an HMO without having to go through planning.
If it’s not in an Article 4 area – you don’t need planning and instead it can be done under permitted development, so article 4 essentially removes permitted development rights. A lot of people steer clear of Article 4 areas but it doesn’t mean it’s impossible to get planning accepted.
You just have to understand why an area was given Article 4 in the first place as the particular area that you’re looking to build an HMO might be in a area that isn’t of massive concern to the council although it falls within the article 4 boundary.
🤷♂️ What is an HMO?
To sum up HMO’s – they’re an amazing cashflow strategy and you can get a nice mini-mo with 4 bedrooms or you can work your way up to mammoth 10+ bedroom sui generis style pub conversions and commercial conversions.
Meaning you can really enter in the part of the market that’s most in line with your budget and risk appetite.
But, with all that sounding great, HMO’s are hard work, you’re looking after more tenants which means more problems can crop up and I’ve definitely noticed that GOOD HMO Managing agents are hard to find because you can’t just go to a normal estate agent as it’s likely they won’t be up to speed with all the certificates and licensing requirements meaning they could risk your HMO being essentially… illegal.
And then the HMO managing agents that are out there from what I hear on Instagram are quite few and far between in terms of quality and you need to make sure you can trust and rely on your managing agent otherwise there’s a risk your HMO could be filled with the wrong kind of people and you end up with a trashed property or huge rental voids so knowing whose filling the rooms is crucial.
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✅ Pros of HMO Properties
- Great cashflow strategy compared to Buy to Let
- Replace job quicker if that's what you're looking to do
- Can choose between students or young professionals but don't mix them
- Can start small with 4 bedrooms or go big with 10+
- Some areas outside of Article 4 and if less than a certain amount of bedrooms don't need planning
🛑 Cons of HMO Properties
- Higher risk & cost
- Lots more regulation to stay on top of both on an inspection and safety certificate perspective as well as building regulations like fire doors, fire blankets, integrated systems if you have 3 floors.
- Higher turnover of tenants if young professionals meaning they're more time consuming to manage
- Higher wear and tear due to the number of people in the houses
- Need planning in the best areas like popular city centres
- To get the best mortgage rates, you need 12+ months of landlord experience which usually you'd get from having a buy to let. So interest rates may be higher for first timers.
🤩 Buy to Let Property Overview
Right, so let’s explore good old vanilla Buy to Lets. I assume if you’re watching this you’re already aware but for a quick 10 second summary, it’s where you buy out a house and rent it out to a tenant on an Assured Shorthold Tenancy for a given period of time.
Most landlords in the UK have 1 buy to let, in a survey done in 2015 by homelet, which is a little bit old now showed that 55% had 1 property, usually made up of the casual investor looking to boost their pension or accidental landlords through inheritance or other means.
36% have 2 or 3 properties and very few landlords in the UK actually have more than 3 properties so most people are what I’d call the casual investor who likely, with 3 properties aren’t going to be full time, it’s either a mixture with full time work or retired people who will have more cash over their lifetime to invest to keep their pension going.
Now, Buy to Let’s really are the best way to get started in property investing. IT’s exactly what I’m doing and it can teach you so much about the world of property.
For me, I’m in the process of buying a property that needs a small refurb and is below the market value for the area, so with a £10k budget ready, it should make about £8000 profit on day 1 and then I’ll rent it out for 2 years so bump up the numbers a bit and give the house time to benefit from capital appreciation before either refinancing or selling it to pull more of that money out to re-invest.
Typically, with a buy to let, the average rent in the UK For a decent 3 bedroom house is around £600, mortgage costs about £200, maintenance, voids and management can add up to another £180 so your monthly profit can be anywhere from about £220 to £300 a month depending whether you self manage or not and how much you put away for maintenance and voids, typically these are 5% each to work out the cashflow of a buy to let property.
Obviously – if you have a really nice property kept to a good standard in a great area then it’s rare you’ll have big voids so that 5% is more of a safety net each month.
For the majority, buy to lets are simple, you can buy a done up house, get your electrical, gas and EPC certificates and the house is pretty much ready to rent out. Typically tenants tend to stay for a long time, especially if you have a family who then put kids in school you could have tenants stay for a REALLY long time so providing the house is a good quality you might not even need to think about maintenance too much if the family or tenants look after the house.
Buy to lets are seen as pretty hands off if you do a good job, there are tonnes of scummy landlords out there who have poor quality houses so don’t let them tarnish the industry with the same brush, there are tonnes of people out there who provide beautiful, high quality homes that anybody would be proud to live in.
On the downside of buy to lets, obviously it’s going to take a lot of buy to lets to replace your job if that’s your aim, with a net cashflow of around £250 to £300 a month, it would take 10 properties to replace a £3000 a month salary compared to 3x HMO’s which net £1000 a month meaning you’d need to invest less cash into the properties to get to that point.
Buy to lets are typically seen as the safer and easier option and there’s no shortage of managing agents around which means if you do get a lazy agent, it’s incredibly easy to sack them and find someone better if you’re looking to hand your management over.
In one of the cons of HMO’s I mentioned that lenders typically look for landlord experience for a minimum of 12 months to unlock the better rates, and this is likewise if you do a refurb on the property, this will begin to unlock more complex lending for bigger developments and refurbishments if you’re looking to work your way up the ladder. For me in my first project, I’ll be making a 60% return on cost over 2 years, so I’m putting £41k in and after 2 years if I sold the property would likely make £26k back if you factor in capital growth and the rental profit which isn’t bad, but I’ll be able to show lenders that I can manage a refurb, albeit small but this helps lower my risk profile to lenders to:
A) Unlock things like development finance and
B) Unlock better rates.
Now it’s not always as simple as that and any mortgage broker will tell you there’s tonnes more factors to consider which is true but you get the idea of the benefit of starting simple on a small buy to let with small refurb on how it’ll help you out further down the line.
✅ Pros of Buy To Let
- Easy to get started, requires no previous experience to get a BTL mortgage
- Allows you to do a small refurb project to gain experience to get started in property
- Plenty of managing agents around if you don't want to self manage
- Tonnes of information online to help you go through setting up your first BTL
- Bread and butter for Mortgage brokers, simplest form of lending.
- Quite hands off once rented providing the property is in a good shape
🛑 Cons of HMO Properties
- Cashflow is less per month compared to an HMO
- Would take MANY properties to replace your full time income meaning you'd need to have a lot of cash to build them up
- Usually need to own your own home, it's not impossible but it will unlock the better lenders and rates
- Usually need a minimum income of £25k to get a good mortgage, again not possible but will hugely benefit you.
📝 HMO Property VS Buy to Let Summary
So we’ve explored the pros and cons of HMO’s VS Buy to let but the big question is what REALLY is best… well, fortunately, or unfortunately there isn’t a winner and there isn’t meant to be a winner. It really is up to you and what your strategy is.
IF you’re looking to dip your toes into property if you do your basic homework on buy to lets and surround yourself with a good broker, accountant and solicitor then you can’t really go wrong, it’ll teach you SO much about yourself, about property and managing tenants as well as setting up a company and managing what is an investment.
You’ll learn about regulations and you’ll go through the highs and lows.
With an HMO, it’ll fast track you to financial freedom in the sense that you can quit your job and go full time into property if that’s what you really want because it’ll require less properties to gain the income back into your bank every month.
An HMO is harder if you have no previous landlord experience so naturally it feels like the progression should be to get a buy to let, learn the ropes then move onto an HMO as you’ll be WAY more prepared by doing that.
Some people might not really want to deal with tenants so an HMO might be the idea of a nightmare, tenants fighting and arguing, things being more likely to go wrong versus having a nice quiet family in a buy to let so it really is down to personal preference.
If you’re really looking for some steer and guidance on what you should do if you’re looking to get started in property investing, my recommendation is to get a buy to let first and I’d think most people would say the same thing.
You’ll learn so much from doing that and that’s what I’m going through at the moment.
IF you can find a property that’s a bit below market value and needs a small refurb then definitely consider that because you’ll get refurbishment experience, managing a project, trades and go through the whole process of buying your first investment property.
Because you can grow your money, gain experience and then step into an HMO project in phase 2 with more experience, more money and better lending options which will make your profit margins better on the HMO property.
It’s not impossible to jump straight into HMO’s but if you look at most of the big investors across the property instagram community, most of them started with a Buy to Let or flip first.
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