Do HMOs still work as a good investment in South London?

In recent years, the House in Multiple Occupation (HMO) market has undergone a remarkable transformation. Gone are the days when HMOs were primarily associated with student housing or budget-friendly accommodation. Today, many landlords offer upscale shared living spaces tailored to working professionals, reflecting a surge in their popularity. But what drives this trend, and is investing in HMOs still a lucrative venture for South London homeowners?

The Evolution of HMOs

Over the past 15 years, HMOs have evolved from modest student digs to boutique-style, shared accommodations. What sparked this transformation? Quite simply, HMOs proved to be highly profitable, outstripping the returns of traditional single-home lets. Despite the additional administrative burdens and maintenance demands, landlords found HMOs to be a lucrative investment. These properties commanded room rents that could be two to three times higher than those for family homes, resulting in substantial profits.

However, as the HMO market expanded, regulations tightened their grip. Alongside the general obligations, costs, and tax changes affecting all landlords, HMOs faced additional health and safety regulations, potential planning permission requirements, and mandatory licensing. In October 2018, HMO landlords encountered a 'double-whammy': the introduction of minimum bedroom sizes and the removal of the 'three storeys or more' criterion for licensing, encompassing any HMO housing five or more unrelated individuals.

Navigating the HMO Landscape Today

The HMO landscape has grown more complex, demanding more effort, time, and financial commitment from landlords. Rising interest rates, an obstacle faced by all landlords, further squeeze HMO profits. Adding to this, skyrocketing energy costs over recent years have left few landlords able to pass these expenses on to tenants.

So, are HMOs still a viable investment in South London? The answer lies in understanding the benefits and challenges they present.

Upsides of HMOs

1. Higher Profit Potential: HMOs generally yield greater profits than single-let properties. Tenants are willing to pay premium rates for well-maintained, high-standard private bedrooms in shared homes.
2. Reduced Void Periods: Unlike single-let homes, HMOs can help mitigate the impact of void periods. Even with one room unoccupied, income from other rooms may cover expenses until the vacant room is rented.
3. Value Addition: Larger HMO properties offer opportunities for value addition through extensions and refurbishments, potentially boosting capital value.

Considerations for Prospective HMO Investors

If you're contemplating HMO investments, here are five crucial factors to weigh:

1. Sufficient Capital: HMOs necessitate specialized mortgages with lower loan-to-value percentages, demanding a substantial deposit.
2. Market Demand: Research the local market to ensure robust demand for HMOs among your target tenant demographic.
3. Council Regulations: Local councils wield authority over licensing and planning rules, so consult with them to understand requirements and restrictions.
4. Quality Furnishing: Attract working professionals with upscale amenities, including fast and reliable WiFi, modern appliances, efficient laundry facilities, and ample storage.

Maintenance Planning: Establish a robust maintenance schedule and budget to preserve the property's value and attract high-quality tenants.

Investing in HMOs requires a long-term perspective and prudent planning. While challenges exist, a well-managed HMO can still offer attractive returns, making it a viable investment option for South London homeowners. Remember, the key lies in informed decision-making and diligent management to ensure success in this evolving property landscape.

Contact me today to find out how you can benefit from the current market trends. Or if you would like to know the value of your home check out my online valuation tool.