Mention investing in residential property and most people will either think house flipping, investing in single-family rental dwellings or buying apartment buildings. All are valid options. But another option is investing in houses in multiple occupancy (HMOs). These sorts of properties are unique in many ways. They are well worth investing in for landlords looking to round out their portfolios.
For the record, 'house in multiple occupancy' is a British English term. It refers to a specific kind of UK housing that is subject to equally specific government regulations. The term does not exist in most other parts of the world, nor does the legal designation. For example, the closest scenario in the U.S. is known simply as shared housing.
This post is written from the perspective of the UK definition of HMOs. However, all of its main principles can be applied to shared housing in the U.S., Canada, Australia, New Zealand, etc. The benefits of this sort of property are nearly universal.
1. A Brief Definition
Before we get started, a brief definition is in order. An HMO is a housing unit in which multiple, unrelated people live together in a combination of private and shared space. Each tenant has his or her own private space, usually a bedroom. Shared space generally includes the kitchen and living area. If each bedroom does not have an en suite bath, bathroom space is also shared.
With that definition of the way, let us get to the benefits of investing in HMOs. If you need more information about what constitutes a valid HMO arrangement in the UK, you can find plenty of useful HMO information on the GOV.UK website.
2. Higher Return on Investment
Investors are all about returns, right? Well, investing in HMOs can provide a higher return on investment (ROI) compared single-family homes. It is all based on the amount of rent you can charge each tenant. Let us say you have a single-family home with a monthly rental value of £500. That same home set up as HMO we might be worth £250 per bedroom. Rent to three tenants (one for each bedroom) and your monthly revenue jumps to £750.
Your higher ROI is the result of cumulative rent rather than what you charge each individual tenant. And because tenants can get such low rates on shared housing, it is cheaper for them than renting a single apartment or home by themselves. Everyone wins.
3. Fewer Vacancies
Shared housing makes for a better investment because it tends to reduce vacancies. Again, let us use that same three-bedroom home as an example. One tenant may decide to move out because she has finished school and is going back to her hometown. Your other two tenants remain. Even as you are looking for a new tenant to take the vacant bedroom, your remaining tenants are paying their monthly rent.
Fewer vacancies mean a lower risk of experiencing those months when no rent is coming in. When you rent single-family homes to single families, there is a much greater risk of vacancy and lost rent.
4. Easier Tenant Searches
Investing in HMOs doesn't necessarily make the tenant search easier when you place a property on the market for the first time. But once a house is fully rented, subsequent tenant searches might very well be easier. Why? Because your current tenants know people.
Assuming you have managed to secure good tenants, they will know other people who need housing. And because like-minded people tend to band together, good tenants also tend to know other people who would make good tenants. There are obviously no guarantees here. Nonetheless, your chances of finding good tenants with less effort are greater once you have your property already occupied by tenants you like.
5. Lower Property Damage Risk
Believe it or not, you run a lower risk of extensive property damage under the HMO arrangement. Remember that such an arrangement is a shared housing arrangement in which tenants share public spaces like the kitchen and bathroom. Peer pressure alone is often enough to ensure that those public spaces are not abused.
There are exceptions to this rule - especially when you mistakenly rent to people who love to party. But for the most part, shared housing attracts the kinds of tenants who are more likely to be respectful of property. They know they are all sharing the place together, and no one wants to be the outcast for ruining things for the rest of the residents.
Investing in HMOs is not a bad way to go if you are looking to make money in residential property. It is not wise to build an entire portfolio with these kinds of properties, but every portfolio should have at least a few HMOs in it. They offer a higher ROI, fewer vacancies, easier tenant searches, and less risk of property damage.