Are you considering investing in property? Whether you’re a first-time property investor or an experienced landlord, it can be tough to decide between HMOs and single-let properties.
In this blog post, we’ll discuss whether you should invest in HMO or Single Let properties by looking at the pros and cons of each so that you can make an informed decision about which option is best for you.
In summary, it depends on the individual investor when deciding between an HMO and a single let. HMOs can offer higher rental yields but require more work and a more significant initial investment. On the other hand, single let’s are more straightforward and have lower up-front costs.
Ultimately, the best choice for you will depend on your budget, the amount of time and energy you can commit to the property, and what kind of return on investment you’re looking for.
Property investment for long-term lets has two main options: HMOs (Houses in Multiple Occupation) and single-let properties.
Both offer potential benefits and drawbacks, so it is essential to understand the pros and cons of each before making a decision.
HMOs are generally more work than single-let properties, as they involve more effective management due to multiple tenants and more stringent legal requirements.
However, HMO investments can also generate higher returns and cash flow than single lets, making them attractive to experienced investors.
On the other hand, single-let properties are often easier to finance and require less ongoing management. They are better suited for the ‘armchair’ investor.
Knowing the key differences between these two buy-to-let property types can help you make an informed choice about which one is right for you.
Advantages of Investing in HMOs
Investing in HMOs can be lucrative for those who have the expertise and experience to do so. HMOs, provide higher returns and cash flow than most single lets, as each bedroom can be let out on individual tenancy agreements.
For example, you might be able to let a four-bedroom house for £1,200 per month to a family. However, if you let the exact property to individual tenants at £400 (one tenant per room) per month, your total rental income would be £1,600 per month.
Also, void periods are not as impactful as single-let properties because if one person leaves, you will have other tenants still paying rent.
With the right strategy in place, an HMO investment can be a great way to secure a steady stream of income and a good return on investment.
Disadvantages of Investing in HMOs
Despite the higher returns that come with investing in an HMO, some drawbacks exist.
Firstly, they require more due diligence regarding tenant selection and management. As an HMO landlord, you must be prepared to screen tenants very carefully, and it can be more difficult to evict tenants if they default on rent payments.
It is also more time-consuming to manage an HMO than a single-let property. You will need to be on hand regularly to deal with any issues arising – from repairs and maintenance to potential disputes between tenants.
If you intend to use a letting agent, it is worth mentioning that not all letting agents work with HMO properties. And those that do will likely charge higher fees.
Finally, as previously mentioned, HMOs require more upfront capital investment than single-let property to make them compliant with local regulations. And you will also need to provide more furniture for the bedrooms and communal rooms.
Advantages of Investing in a Single Let
A single let is an excellent option for landlords looking for a low-maintenance, hassle-free investment. Generally, there are fewer costs associated with running a single let since there is only one tenancy agreement for the property.
Additionally, mortgage rates are also lower for single-let properties compared to HMOs.
This can benefit landlords who want to minimise risk and maximise their investment returns.
Disadvantages of Investing in a Single Let
One disadvantage of investing in a single-let property is that the return on investment is generally lower than in an HMO. Typically, a single let will make an annual ROI of between 4%-7%. While this is still better than leaving the money in the bank, it doesn’t compare to the higher yields achieved with an HMO.
Additionally, void periods result in a total loss of rent until a new tenant is found. This can take time and result in an extended period of lost rental income. During this time, the landlord will still be responsible for paying the associated costs of owning the property.
What Is A Good ROI on an HMO?
On average, you could expect an ROI of between 8-15%, which could vary depending on the location, property specification, and the type of tenants you accommodate.
For example, a property located near a city centre and fitted with en-suite bathrooms in every bedroom would likely attract young professionals who would be willing to pay more rent than a property that has a shared bathroom.
What Is A Good ROI on a Single Let?
The average rental yield for a single-let property is around 4-7%. The rental yield is typically lower than an HMO. However, this does not mean that a single let investment cannot be very profitable.
This is still a great return on investment if the right property is chosen.
Furthermore, there is generally less maintenance and hassle involved with a single let than an HMO, resulting in more time to focus on other investments.
Best for Capital Growth: HMO vs Single Let
Regarding capital growth, it’s hard to say whether HMOs or single-let properties are the best options. There’s no one-size-fits-all answer. Properties in desirable areas tend to appreciate over time, giving you long-term capital gains, regardless of whether the property is let as an HMO or single let.
When investing in property, you want to look for properties that are likely to increase in value over time due to their location, condition, and market demand.
But it’s more than just location – you also need to think about factors like population growth, infrastructure, amenities, and local employment opportunities.
All these factors contribute to the overall growth potential of a rental property, so think carefully before investing.
In conclusion, it is essential to consider all the factors before deciding which type of property would make a better investment for you. HMOs can be more profitable and generate more rent than single-let properties, but they also have higher up-front costs and require more work to maintain and manage.
On the other hand, single lets are easier to maintain and are the best option for novice landlords who are just starting.
Ultimately, it will depend on your budget, experience level, risk tolerance and goals as an investor.