One of the most traditionally profitable buy-to-let options in the UK residential property investment market was the converted house which contained several self-contained rooms rented to individual tenants, otherwise known as “houses of multiple occupancy, or HMOs). However, figures from mortgage broker, Mortgage for Business, show that despite the need for a substantially larger budget, multi-unit apartment blocks, rather than HMOs, are now commanding slightly more rental income, if one has the capital to invest. The average minimum needed to purchase an 8 unit apartment block is £500,000, or £4 million if looking to buy in London.
Based on properties available to buy on Rightmove and Primlocation.com, respectively, the difference in the required level of investment needed to enter the buy-to-let market, particularly the area of multiple tenant properties shows an entirely different level of financial commitment across the board, depending on property type and location.
For example, in Nottingham, to buy a Victorian house converted into 8 small studio rooms (an example of HMO) would cost just under £500,000while in New Malden, London, a detached house with 9 bedrooms will cost £1.2 million.
Mortgage for Business figures show a slightly higher rental return (9.3%) on renting out multiple apartments in a block than the smaller scale investment of installing several separate tenants into a converted house (9%). Traditionally the converted house would have brought in a greater percentage of profit, and although they now occupy second place, they still represent a more realistic potential investment for many. David Whittaker of Mortgages for Business commented on the performance and future potential for the HMO market,
“The fact that yields on multi-units have overtaken HMOs is surprising but can be attributed to a larger proportion of transactions for larger multi-units in the quarter… For a multitude of reasons, not least stagnant wage growth for half a decade, many tenants simply can’t afford an enormous flat with a spare bedroom. As such, the attraction for many of renting a room rather than whole property will ensure that there is a steady yield-boosting demand for HMOs over 2015”.