HMOs might yield more – but at what cost?

Posted on 12 Nov

It’s a funny old world. When I was at my busiest, the type of properties that investors now actively seek out were considered sub-prime and to be avoided.

Specifically, these include student lets, lets to sharers, sitting/assured tenancies and Houses in Multiple Occupation (HMOs).

A corollary of the rush into buy-to-let is that many now see BTL as a way of augmenting their income.

Certainly in London most of the ‘total return’ on BTL has come from capital appreciation, but elsewhere income has become important, and possible.

But as yields have suffered, especially in the last five years off the back of unprecedented and market distorting low interest rates, those seeking income have moved into alternative asset classes.

Many would say student housing has been over-played. However, we all know that many renters are now forced to share houses – which has made HMOs look particularly attractive.

This has not gone unnoticed by the authorities, which have brought in a raft of changes, including licensing schemes.

The result will be a step-change in the number of HMOs being registered – but is there a hidden issue here that doesn’t seem to be talked about?

An HMO has historically been considered as being worth less than a standard residential property, being valued up to 25% less.

Once designated as an HMO the local authority would resist the change back to residential because the new rooms within an HMO each count towards their precious number of available ‘dwellings’.

Indeed I used to do deals for clients where we’d buy a centrally placed property with an HMO use, then buy another in a less salubrious part of the same borough, transfer the use and hey presto, a significant uplift on the more valuable property was realised when a reversion to straight residential was granted.

Recently, I sat in front of a highly placed government official with some responsibility in the area of drawing up new legislation, and asked if the same rules would still apply, i.e. that change of use back to residential after a new HMO licence would be resisted – and they weren’t able to answer.

Anyone thinking of venturing into this area should carefully consider their options, or at least ask the right questions.

Losing a large chunk of capital value to gain a slightly higher yield might just be too high a price to pay.

- Written by Ed Mead

This article first appeared on www.propertyindustryeye.com

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