SL (Single Let) vs HMO (House of Multiple Occupancy)

One of the big decisions to make as a property investor is the type of property to go for. is your preference for a single let property- a single person, couple, or family, or do you want to enter the house of multiple occupancy market, where multiple people rent a room in a house and share the facilities?

But what are the challenges, opportunities, and risks with both of these propositions, and does one or the other fit your own circumstances and commitment. Or is a blend of both an option in your portfolio?

 

 

House of Multiple Occupancy (HMO). Challenges, opportunities, and risks.

The first and most obvious point to make here is the level of finance that you will need to buy an HMO. To house multiple people you will need a larger property. And it’s not just the number of bedrooms that you need to consider. Could you house three people in a three bedroom house? Yes probably, but the calculation between investment and rental yield won’t be as straightforward as a single let property. And are most three-bedroom houses that are in reach of a reasonable level of investment actually going to have enough space in the rest of the house for the tenants to enjoy their home together. So HMOs require different considerations and a different business model. 

Should you invest in a 4 bed, 5 bed, or 6-bed house of multiple occupancy?

That will depend on your available capital and access to buy to let mortgage finance. And your ability to manage a property with multiple people. Your next consideration is the level of maintenance that will be required. A larger house needs more looking after, and multiple occupants will likely come and go more than a family would do. So your wear and tear will be higher. 

Consider the regulations too. There will be the usual fire, health and safety, and so on. But you may also require a licence to operate a house of multiple occupancy.

You must have a license to operate a large HMO if the following apply:

1. it is rented to 5 or more people who form more than 1 household
2. some or all tenants share toilet, bathroom, or kitchen facilities
3. at least 1 tenant pays rent (or their employer pays it for them)

Your local council can advise you on what you need to do. More information here 

The business case of HMOs

The rental yield for an HMO is higher than a single-let property. Letting to multiple people will, simply, bring in more rent than if the property were let to a family. Compare that to the investment capital and mortgage liability. And then include your costs and expenses. All of these numbers will be higher than a single let. So the balance to make is between the level of risk you want to take and the return on your investment that you can yield from an HMO. 

But don’t forget some worst-case scenarios. 

• The financial impact of losing 1 or more tenants
• Replacement of boilers and other high-value equipment, and higher cost of property management
• Interest rate rises
• Fluctuations in rental values
• Can your existing income support your HMO if your income falls? 

These are just a few examples but there will be numerous others that apply to your own circumstances.

So the biggest consideration is the risk of taking on higher value property with more complex requirements, and multiple people who you will need to deal with individually.

Student HMOs

HMOs for students are a real opportunity for HMO investors. The market is very stable- students go to university every year, and despite Covid, UCAS is reporting applications in record numbers this year. Not only that, but the larger proportion of universities are in the North and Midlands- English regions where property prices are competitively priced, affordable, and with good rental yields and with forecasts showing strong long-term growth, this is an area to look into.

Single Let Properties. 

This type of property investment is the simpler proposition. You let to an individual, couple, or family with one tenancy agreement. Costs will relate to the size of the property, and you have one rent to contend with. Not only that, but the cost of the property at the lower end of the market will be much lower so your exposure to financial risk will also be lower. The business case is not dissimilar to investing in HMOs, except that this type of investment is one-dimensional, rather than dealing with multiple tenants. 

Multiple Property Portfolio

For those investors building a portfolio of multiple properties, the single let property route will allow for a simpler approach. And with the correct balance of investment capital, mortgage finance, and professional advice an investor can build a portfolio of properties. Looking at the right regions to buy is crucial in this case, and the North of England and Midlands are areas where rental yields and long-term returns are forecast to show strong growth over the next few years. 

So should you go for single-let properties or houses of multiple occupancy?

That depends on you as the investor, availability of finance, your commitment, and your ability to manage what could be a complex business. Rental yields and long-term ROI will differ between property types, and between regions. Like any business start with your objectives, and build your network of professional advisors around you. With the right support, guidance, and expertise in your business, you will be able to identify what is right for you and build your portfolio successfully, navigating the challenges, and enjoying the benefits of whichever route you decide to take. And that could even mean a blend of single let and HMOs.

---

If you’re interested in exploring a house of multiple occupancy or single let property as an investment opportunity, get in touch with a member of our team to arrange an initial conversation.