Houses in Multiple Occupation (HMOs) are the most stable and profitable buy-to-let investments in the UK, according to a new report from a property investment firm.
Platinum Property Partners (PPP) said that HMOs protect landlords from higher costs, potentially forthcoming interest rate rises.
HMOs are often rented to young professionals and are targeted towards maximising rental income by letting each room individually, states the report.
Research from the firm reveals that compared to capital gains, rental income for all types of buy-to-let properties is the most dependable and stable source of return on investment (ROI). PPP says that HMO landlords are therefore better prepared for higher mortgage costs caused by an interest rate increase, which the Bank of England (BoE) has claimed will occur in early 2016.
The study found that the profits of a standard buy-to-let investment could be eliminated by a 3% interest rate rise, assuming that mortgage rates increase by the same amount, as gross rental income is not sufficient
HMOs are a Better Buy-to-Let Investment, Says Property Firm
to cover higher mortgage interest repayments.
Despite HMO landlords paying all household bills, the fact that these investments generate a much higher gross rental income means that these costs are easily covered. The research indicates that the maximisation of income from creating extra rooms and renting them to multiple tenants means that HMOs can generate up to four times higher rental income than that on standard buy-to-lets.
Separate analysis conducted by PPP found that rental income is a much more stable and dependable source of ROI than capital gains, dismissing the belief that buy-to-let success is caused by rising house prices.
From 2010-12, investors in both the standard buy-to-let and HMO markets were sustaining capital losses. In 2013-14, capital gains began to recover, but rental income consistently rose throughout the same period for both asset classes, although at a much higher rate for HMOs.
The report also notes that the best way for landlords to ensure their investment copes with an interest rate rise and any other unexpected costs is to plan ahead and understand the financial performance of their portfolio.
Research carried out by PPP in 2014 reveals that a lack of research and poor planning is preventing many investors from maximising their income. A quarter of buy-to-let investors did not seek advice or conduct research before buying their property. A huge 93% did not have a five-year plan for their investment.
PPP also suggests that landlords often miscalculate their returns. Around 12% of landlords do not take any costs into consideration when calculating the financial performance of their portfolio. Furthermore, one in four landlords pay mortgage interest, but do not take this into account.
Chairman of PPP, Steve Bolton, states: “In recent years, there has been an influx of investors to the buy-to-let market, with bricks and mortar proving to generate returns that outperform all other asset classes.
“However, not all buy-to-let is equal, and our data shows that HMOs generate much higher rental income than standard buy-to-let properties. HMOs will therefore be an attractive option for investors looking for a lower risk strategy that achieves a strong level of income.
“With many changes on the horizon for landlords, including the proposed restrictions to mortgage tax relief and looming interest rate rises, it’s never been more crucial to have a decent cushion of rental income to absorb any rising costs.
“However, many landlords are failing to correctly calculate their returns and our earlier research shows that a worrying number entered the buy-to-let market with very little forward planning. Without a clear picture of what they earn from their investment, a landlord is more vulnerable to market changes. Landlords must have a clear strategy and plan ahead to be able to accurately assess how future-proof their investments are.”1