What distinguishes residential real estate from buy-to-let?
As the enormous gains that can be achieved by investing in UK real estate become increasingly apparent, and many new individuals begin to put their wealth in such investment, there is a lot of uncertainty regarding the best method to optimise your income from it. Everyone is debating whether to go with a residential single purchase buy-to-let strategy or a House in Multiple Occupancy (HMO) option. There are several advantages and disadvantages to both types of rental properties that each prospective landlord should evaluate before investing. A competent investor always understands how they're going to use their portfolio to their greatest advantage before taking any such moves, and you should do the same to stay ahead of the game.
What’s the difference?
Residential - A residential buy-to-let property is a basic rental property that is normally rented to a single renter or a linked group of tenants, such as a couple or family.
HMO - HMOs have three or more unrelated tenants who rent rooms but share a bathroom, kitchen, and shared space.
Why choose one or the other?
Here’s an outline of the differences between these two types of property with the aim of helping you get a better idea of which route to take.
For property investors, this is the major attraction of HMOs. When you have numerous renters paying rent, you can draw considerably higher yields than if you were letting to a single tenant. With multiple streams of income from one property, you’ll succeed in getting the maximum value for your property!
This is ideal for investors looking to swiftly grow their portfolio since the additional revenue allows you to purchase that second home much faster than you would with income from a residential property.
If you’re planning to stay in employment while using your property investments as a secondary form of income, a singular buy-to-let property might be better than you. The fact of the matter is, that being a property manager takes time. When the boiler breaks on your property it will be up to you to fix it, thus taking up a lot of your precious time.
This is increases when you own an HMO. You must invest time preparing your property for many tenants and promoting it to attain capacity, in addition to addressing these concerns when they arise. You should also think about article 4 planning, hiring specialised property tax accountants, and obtaining HMO licencing.
Though various applications and software solutions can help with this, there is still a substantial amount of effort required to manage an HMO that you would not have to with a residential home.
HMOs have a greater tenant turnover than single-family homes. This is owing to the nature of HMOs, which are sometimes transitory living circumstances in where a student may only require it for term time or a young person may just be residing there till they can get on their feet. In contrast, many people who live in residential houses will stay for numerous years.
This does not mean that an HMO’s rental void is a significant concern. Aside from student properties, which will have periods of expected rental voids that you can prepare for, any income loss from one tenant leaving can be mitigated by money earned by other renters. In this regard, an HMO may be superior to a single-family home since losing a tenant does not result in the frantic effort to fill the vacancy that would occur with a single-family home.
Most investors seeking to enter the property market are motivated primarily by financial considerations. There is a clear advantage to investing in one of the world's most stable markets, with a proven track record of producing steady returns over time. The money generated by such an investment can then be utilised to allow an investor to undertake riskier initiatives that may not provide the same stability but do provide a possibility for significant profits.
The decision to invest in an HMO or single-tenant property should be made on an individual basis. Neither is fundamentally superior than the other since they serve distinct purposes and bring different advantages. Therefore it's critical to consult with an expert financial advisor before making any investments so can go in the direction that best suits you!