Buy To Let – HMO or AST?
When it comes to residential investment property there are generally two choices over the type of property you invest in, being either a traditional property with a single tenant (AST – Assured Shorthold Tenancy) or an HMO (House of Multiple Occupancy).
So, which one do you go for?
If it is about income then the HMO generally provides a greater level of income. The choice is not just financial, there are other considerations which could make you change your decision.
Let’s look at both options.
Single Tenancy – AST
Single tenancy properties are the most common type of investment choice for those starting out in property investment. A single let property is typically a house or flat which is being let to a single person or family. There is one AST in place. The property can be managed yourself or via an agent.
This type of property suits those looking for a family home or where there is sufficient income to afford the whole property. For the new or part time landlord then the single tenancy option makes life simpler. You have one tenant, one rental and one person to deal with.
The downside is that your income yield is typically lower however it can be a good fit for landlords looking for capital growth over additional income.
Typically an HMO is a larger property where rooms are let individually to professionals and/or students. The property is let out on a per bedroom basis with shared use of bathrooms, kitchens, gardens etc.
Because there is a shared use of utilities then landlords will typically charge a rent inclusive of utilities. Because utilities are not being paid on a per use basis then the usage tends to be higher and should be worked into the total rent.
There is the potential to earn more from an HMO. A recent survey showed that the yield on an HMO averages at 12.4%, that is against a standard buy to let which is close to 4%.
It’s not all about the money though.
With an HMO you have multiple tenants which means multiple problems. The problems include disputes between occupants so be aware what you are getting into. You also have far more rules and regulations to follow so a level of experience and support is essential. Always check the local authority rules and whether a licence is required.
For the experienced landlord then an HMO can offer real benefits.
In areas where there is a transient population, university or volume of young professionals then HMOs can be hugely popular.
Financing Buy To Let
A single occupancy AST property is straightforward to mortgage. There are always considerations, with limited company purchases growing in popularity. You also need to consider where the property is located, flats above restaurants or the type of tenant all impact on lender choice.
When it comes to HMOs, there is a belief that they are harder to finance. They aren’t. They just require a little more consideration as lenders need to understand the property and it’s uses in more detail.
With any investment property finance it is worth using an experienced property finance broker, as always if you have any questions we can help.
By Dave Farmer
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