Are people still buying tenanted HMOs in 2024?
The cost of living and the cost of lending have seen the average HMO cash flow much less in 2024 than many investors have been used to in previous years.
With the exception of the VOA (single council tax banding for HMO rooms) victory, it seems that everything else has gone against HMO landlords and their bottom line.
So, do people still see HMOs as a viable option?
We know that there is still a buoyant BRR (buy, refurbish and refinance) industry – we don’t need to look further than the courses on offer or our Instagram feeds to confirm this.
But, raising Angel Investment, with the purpose of creating a capital uplift through the process of an HMO development and then paying back these private loans upon successful refinance, aside, there is a very active section of the HMO sales marketplace that props up the sales of established and up-and-running HMOs.
These are the investors with their own capital and the ones who have budgeted to plough at least 25% equity into straightforward HMO purchases.
Through my own business and daily conversations with investors looking to purchase tenanted HMOs, many of these buyers are not ‘property people’ but successful in other fields, employed or through businesses they own.
Doctors, directors, engineers, executive chefs, restaurateurs, IT professionals, university lecturers – these are just a few of the varied mix of people who have approached me this year looking for their own multi-let investment.
So what are they looking for?
A large portion are still after ‘high yields’ – this is usually coupled with the phrase “up North”.
Southern-based individuals have the capital to raid a post-industrial town in Yorkshire for 1 or 2 established HMOs and feel pretty good about themselves and the yields they’ve secured.
Why are they buying now when it is tougher operationally to make a decent profit than it ever has been?
First of all, prices are lower than in 2022 for the average HMO sale.
Like-for-like HMOs in Northern areas are trading at 1-2% gross yield higher than they were. This little bit of value is all the buyers are looking for and gives them justification to trade in this market, with higher interest rates, arrangement fees and utility bills.
If you are one of these investors, it doesn’t always make sense to sit and wait for ‘tomorrow’ – most single HMO transactions like this go to newish investors. They aren’t too concerned about market cycles or being too savvy. They’ve got some cash now and they want a decent HMO to make that cash work hard for them, it’s that simple a lot of the time.
It doesn’t always mean that the landlords are getting less for their properties, either, and this has been a real fillip in stimulating sales in this market. We’ve discussed that gross yields have had to go up in order to give the buyers a ‘bit back’ but if rents have gone up (like most quality HMOs in the UK across 2022-24), then the asking prices haven’t gone down – they’ve just not gone up.
Example:-
In 2022, I valued an HMO in the North West at 12% gross yield. The income then was £32,000 PA. Therefore, the sale price was £266,000.
In June 2024, I was asked to revalue this same property. I explained to the landlord that I need to be at 13.5% now in order to account for the extra running costs. Good news, the rent was now £36,500. Therefore, the 2024 sale price was £270,000.
The price has gone up for the landlord while offering a better deal in terms of yield to the buyer. A win/win?
So, assuming that you can still demonstrate value, and discuss the full breakdown with each investor, HMOs are still very popular and I’m faintly bullish about this 2024 market.
We all expect interest rates to go down, we all expect bills to go down and we all expect rents to remain consistent (if not increase), so we’re saying to our active buyers, “if you can make it work across this first 3-year fixed period and make a profit that works for you, you’ll see things get easier and easier as you enter towards 2027/8 and your refinance.”
It’s not the time to buy if you need to live off your HMO income or you see HMO ownership as a short-term win.
The last comment is on the Southern markets, where HMOs are largely valued against high bricks and mortar prices and investors look beyond gross yields and more towards a combination of high rental growth, capital appreciation and ROI.
2024, and the higher lending costs, have not slowed down activity and popularity of HMOs valued against bricks and mortar – the South East, in particular, is performing very well in terms of enquiries and offers for us.
There are a lot of buyers who don’t rely on the HMO lending ‘household names’ – your Shawbrook’s or Kent’s of this world – small funds, HNWs, family offices, general cash buyers.
Are they still buying tenanted HMOs too?
Yes, is the short answer. But they are much more gun-shy, thanks largely to a few high-profile disasters in late 2022/early 2023.
We find that the deeper the pockets, the more our buyers are happy to give away a few percentage points on their gross yield expectations in place of added certainty and confidence.
This pushes a lot away from standard AST HMOs (unless robust management is in place and can be evidenced) and towards the student market, or social housing space, or out of HMOs altogether and towards the promised land of the ‘freehold block’.
If valued correctly, fully compliant and regulated, and with the right structure in place for a new owner to enjoy a smooth transition, tenanted HMOs are performing well in the resale market…and that’s a relief to many who have found their own rugs pulled from under them for various reasons.
What those reasons are is another article…