The research showed that while BTL outperformed all other asset classes, HMOs rented to young professionals and key workers had a total Return on Equity of 108% over four years, compared to 77% for a standard BTL property (with a 75% loan-to-value mortgage).
Each £1,000 invested in HMOs in 2010 would have grown to £2,080 by 2014, while for a standard BTL property this would have reached £1,770: a difference of £310.
Average gross yields for the 2010-14 period for HMOs were 12.4%, compared to 5.0% for a standard BTL property.
The average price paid for a standard BTL property in 2010 was £166,726, with an equity investment of £46,683. This resulted in a total return of £35,817.
The average initial investment in an HMO was much larger: the typical price paid in 2010 was £213,988 (with equity investment of £118,508). This reflects the larger size of a typical HMO and the higher refurbishment costs usually required to convert an ordinary property into a high quality HMO – for example, installing en-suite bathrooms. However, despite the higher investment, HMO investors received a considerably higher return over four years: £127,781 on average.
Steve Bolton, Founder and Chairman of Platinum Property Partners comments:
“Buy-to-let has proven itself to be the top performing investment over the past four years, with returns from bricks and mortar investments outpacing other asset classes like stocks and shares considerably. However, not all types of buy-to-let property offer equal investment return: our research shows that HMO properties let to young professionals and key workers have the potential for substantially higher returns than vanilla or standard buy-to-let properties.
“One of the main reasons for this is the HMO investment is intrinsically geared towards maximising rental income. HMO properties are strategically converted and refurbished to increase the size of communal areas and number of rentable bedrooms, therefore allowing for a higher number of tenants on individual rather than shared tenancy agreements. This results in greater returns for landlords despite the higher price initially paid.
“However, HMOs aren’t all about benefitting landlords: they also fulfil a growing social need for high quality rental properties that are affordable for tenants. The cost of renting a room in an HMO is far lower than renting a one bedroom flat. For the UK’s increasingly mobile workforce, who are delaying putting down roots for longer, it makes financial sense to live in a high quality HMO and still be able to save for long-term goals rather than spending all of a pay packet on rent.”
Over the four year period between 2010 and 2014, 52 percentage points of the total return of 77% for standard BTL came from net income, with the remaining 25 percentages points came from capital gains. For HMOs of the total return of 108%, 76 percentage points came from net income with 32 percentage point from capital gains. So the return from net income alone was 46% higher for HMOS.
A key characterisation of HMOs is the maximisation of income from a given size of property, making HMOs attractive for those looking for an income but also, because of the uncertainty of capital gain, for those seeking reliable returns.
Steve Bolton comments:
“There has been an intense focus on house prices since the 2008 recession, and as the housing market has recovered many seem to believe that capital gains are the biggest contributor to overall returns when investing in property. It is true that capital appreciation has a role to play: however, the housing market is notoriously volatile, as evidenced during the recent financial crisis when short-term capital gains were completely eradicated. Net income provides far steadier returns, and consistently growing consumer demand for rental properties suggests this trend won’t change any time soon.”
