Best type of property to buy for a HMO?

by Readers Question

9:20 AM, 26th September 2014
About 4 years ago

Best type of property to buy for a HMO?

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Best type of property to buy for a HMO?

I am looking to invest into the rental market and have been considering HMO’s. I was looking at a large 8 room 3 storey property, but to comply with the building regulations, fire escapes and licencing just seems far too complicated and expensive so I have decided to go for a smaller property. Best type of property to buy for a HMO

Question is, which would be seen as a better investment strategy long term?

  • A single four room property worth £200,000 gross annual income £19,760 (would need a mortgage)
  • Two 2 x 2 room properties, each worth £100,000 gross income £19,760 (would need a mortgage)
  • Alternatively I could purchase 1 x 2 room property outright with no mortgage. Max gross income £9360

The 4 bed would mean less setting up costs and overheads than the 2 x 2 room properties, therefore is it down to a simple calculation as to the % of cash left at the end of the year against cash put down or are there other benefits to having more properties even if that means higher mortgage payments/and/or overheads?

The 1 x 2 room property would give the worst net annual returns but no mortgage debt either!

Due to the varied properties on offer I am afraid I am going round in circles!

Any advice would be appreciated.

Thanks

Adrian



Comments

Mark Alexander

9:34 AM, 26th September 2014
About 4 years ago

Hi Adrian

I think you've got yourself all confused.

An HMO needed mandatory licencing will have 5 or more tenants AND three or more stories. Therefore, the 8 bed property would qualify.

No of the other properties you have described fit this category but the 4 bed property could be in an area which adopts Additional Licensing, check with the Council.

The two bed properties are definitely not HMO's whichever way you look at them, even if you let them to sharers. If you can let these properties for the figures you have suggested that's a 9.36% gross yield. That's VERY good and would be well suited to 85% funding using 70% LTV interest only mortgage and 15% equity finance. You could buy more properties on that basis too. See >>> http://www.property118.com/new-btl-mortgage-finance-product/66267/

Before you go jumping into anything though I really think you ought to do a lot more research. I have documented my experiences and strategies over the last 25 years and boiled them down into a series of blogs to help newbies not to make some of the same mistakes I did. My strategies may or may not be best suited to you but they will certainly make you think. Please see >>> http://www.property118.com/how-to-become-a-respected-profitable-landlord/60765/

If you decide you would like one to one consultancy I also offer that, please see >>> http://www.property118.com/consultancy-mark-alexander/61522/
.

Rob Crawford

23:26 PM, 27th September 2014
About 4 years ago

The prospect of complying with Fire Regulations may at first seem rather daunting but an HMO with eight bedrooms could have a much higher yield than the others described. You have not mentioned where you have obtained your knowledge of the fire regulations that would apply. LACORS is still widely used by most authorities, however, Local Authorities may have their own interpretations, i.e. in Bristol they no longer expect fire extinguishers in HMO's. You are unlikely to require a separate fire escape, rather a protected exit route with emergency lighting from each room. So maybe not as bad as you think. Talk to your Private Sector Housing people and get to grips with their expectations. You can then apply your leanings to the property that you are considering and get some rough idea of costs for the work and establish if a larger HMO is a viable proposition.

Joe Bloggs

17:12 PM, 30th September 2014
About 4 years ago

Reply to the comment left by "Mark Alexander" at "26/09/2014 - 09:34":

2 bed properties can be HMO's under additional licensing. if the kitchen is big enough, the lounge can be classed as a bedroom. and small HMO's are defined as having 3 or more unrelated sharers.


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