An extensive new report has revealed some interesting changes in the HMO market, including shifting tenant types and more appetite for high-end HMOs.
Almost half (48%) of landlords polled in Paragon Bank‘s new ‘HMO Report’ said they’d seen a rising demand for high-end HMOs [houses in multiple occupation] over the past year. While once often regarded as a lower-quality rental option, such properties are now upping their game to match the rest of the market.
The property type refers to a rental home where at least three people from separate households or families live together with shared facilities including kitchens and living spaces. However, the report found that 53% of landlords had noticed an increase in demand for en-suite bathrooms.
Alongside this, high-end HMOs featuring larger rooms had increased in appeal for 39% of respondents, with a 56% rise in demand for faster broadband and 39% more tenants looking for better quality furnishings.
With the increase in home-working, 35% of landlords also noted that tenants were increasingly seeking office space in their homes.
Who’s looking for high-end HMOs?
The target tenant type for regular HMOs has often been students, who typically share large properties among many friends to make their university lives cheaper. While students still appear to make up the largest proportion (47%) of tenants overall, the report also noted a shift here.
Almost half of landlords (45%) said there had been an increase in demand from young professionals over the past year, while 23% had spotted a rise in older, more affluent tenants. This goes some way towards explaining the growing appetite for high-end HMOs.
While young single tenants reportedly make up around 46% of the market, this is closely followed by professionals (41%). Manual workers account for around 27% of tenants, and older singe people make up around 15%.
Weighing up the figures
There are plenty of pros and cons to landlords opting to operate an HMO, and weighing these up is key to deciding on whether it is worth investing, compared with a standard buy-to-let or even a short-term or holiday let.
The cost of setting up an HMO can be higher than for a standard buy-to-let. They can also be more time-consuming if you self-manage, as each tenant tends to have their own tenancy agreement rather than one for the whole house. Landlords seeking mortgages can also find it more tricky to access finance.
However, as the findings from the report supports, there are multiple benefits that mean many landlords are extremely optimistic about the sector – even with the increased demand, and of course cost, of providing high-end HMOs.
Paragon found that 47% of landlords think HMOs offer better rental yields than other residential rentals. A further 40% said they offered better financial protection, due to the lack of void periods; meaning that the negative of sorting out separate tenancies can in fact be a benefit further down the line.
In terms of capital gains achieved upon sale, 53% of landlords said there was no material difference between single units and HMOs. Meanwhile, an impressive 42% achieved net yields of over 10%, and 64% were getting yields of 8% or over.
Plans for the future
While the advent of high-end HMOs could be daunting for some landlords, it could be something worth investing in. Those wanting to attract a particular tenant type, such as affluent older tenants or young professionals, could consider adding in some additional features to increase the appeal.
Overall, the report found that at the moment landlords are more likely to buy more HMOs than to sell them. As many as 43% intend to buy an additional HMO in the next six months, while just 4% say they will sell their HMOs and exit the sector.
A further 22% are planning to buy an existing HMO, while 21% wish to invest in another property type but then convert it.
The optimistic outlook among the sector’s landlords, along with the shift towards a new breed of HMO, could serve to entice more buy-to-let landlords looking to increase their yields in the near future.
BuyAssociation has a range of HMO property investment options available, as well as traditional buy-to-lets and other property types. Get in touch for more information.
