HMO vs Single Let: Which Property Strategy Is Right for You?

If you’re thinking about buying your first investment property or building a collection of properties, one big decision you’ll need to make is whether to go with an HMO or a single let. Both can make you money, but they work in very different ways. The right choice really comes down to what works best for you.

In this article, we compare both these options in order to assist you in making your decision.

Definition of Single Let

The single let is the oldest way to invest in real estate. Your investment unit can be rented out to only one person or family under the Assured Periodic Tenancy (APT). This person or family pays the rent each month, and you must maintain your investment unit.

It is easy to manage and simple to understand.

What Is an HMO?

An HMO stands for House in Multiple Occupation. It is any residential building that is occupied by at least three unrelated tenants and who share amenities like kitchens and bathrooms in the house. An HMO comes with a different tenancy agreement for each tenant and each pays individual rent.

HMOs are very popular among students, young adults and individuals on low salaries. The advantage of HMOs is that landlords earn considerably more money than would be the case if a normal let were done on the same building.

Comparison of the Two Approaches

1. Rent Earnings

It is here that HMOs are far superior. The rental yield earned by you from several renters is generally about 30%-50% higher compared to renting out the property to a single tenant.

For instance, a property with three bedrooms located in a medium-sized town in the UK can earn a rental rate of £1,000 a month as a single let. If the property is turned into an HMO and rented to three separate individuals, then you will be earning a rental rate of £400 to £500 per room, totalling between £1,200 and £1,500 per month or even higher.

However, increased earnings do not come without their costs. The landlord would pay all bills related to gas, electric, water, annual license fee and broadband in an HMO.

2. Void Periods and Risk

If you have one let and your tenant moves out, you lose all income until you find another tenant. This is a huge risk, particularly if the place remains vacant for many weeks.
However, when you use an HMO, you can minimize this risk since there will be other tenants besides the one who moves out. This means that income is not completely lost, making HMOs less risky and one of the biggest reasons investors prefer them.

3. Management Requirements

Single lets involve less hassle. Just one tenant, one tenancy agreement and one maintenance obligation. Single lettings tend to be easily managed by most landlords who do not need help.

When you venture into HMOs, you will notice that there is more responsibility involved. There are more people to manage, conflicts to settle, common areas to maintain and the list goes on. It becomes inevitable that HMOs require some form of help from a property manager.

4. Regulations and Licensing

Single lets have low licensing needs apart from general landlord duties like obtaining gas safety certificates, electrical inspections and deposit insurance.

However, HMOs are governed by many more laws. Based on the building’s size and your local council, you might be required to obtain either a compulsory HMO license or an extra license. Buildings should conform to minimum space requirements, fire regulations and sufficient provision of bathrooms and kitchens according to the number of residents.

5. Initial Investment and HMO Conversion

The purchase and rental of one house involves minimal effort apart from the regular refurbishment process. The expenses are not excessive and can be anticipated and managed.

The conversion of a property into an HMO or the acquisition of a property that is already converted will involve more initial financial input. There might be some installation of bathrooms, fire safety facilities, fire doors, and modification of living areas. The cost of HMO conversion will depend upon the property and the quality intended. It may vary anywhere between £10,000 and £50,000 or even more.
However, due to the increased income potential of HMO, the return on investment will also come at a rapid pace.

6. Higher Finance Cost of Mortgage

In case you invest in HMO property as landlord investing capital partial by loan (mortgage),the lender usually charges higher rate of interest (usually 1% higher) and higher valuation fee / account opening fee.

Resale and Exit Strategy

Single rental units tend to appeal to a wider variety of buyers, including both investors and people looking for a home to live in, which makes them easier to sell if you ever want to get out of property investment. HMOs (houses shared by multiple tenants), on the other hand, mostly interest specialist investors, so your pool of potential buyers is smaller. That said, if your HMO is well-managed and legally compliant, the right buyer will still pay a good price for it.

Which Strategy Suits You Best?

Single lets would be ideal if you:

1. Are a novice investor.
2. Prefer little management intervention.
3. Have limited finances to invest and wish to stick to manageable expenses.
4. Invest in areas where there is a high demand for renting out single households.

If you select HMO, because:

1. You would like to make maximum rental profit on one investment.
2. You do not mind high costs at the beginning and throughout the management process.
3. You have considered the relevant licensing laws and the demand for renting a room in that locality.
4. You are ready to manage through a property manager.

Conclusion

There is no definite solution for this problem. Both approaches can be used in a balanced property portfolio. In fact, most successful investors begin with a single let before venturing into the world of HMO. Either way, the important thing is to conduct proper research and ensure that the figures work for you.