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  • Buy-to-Let

    Single let vs HMO

    Hi

    I had an interesting debate with a fellow landlord, and I thought I would share it with the tribe to get your input.

    I invest in single let freehold properties that yield around 8%, and I use interest only BTL mortgages, after all expenses, I can achieve £250-£300 per month net cash flow, and the interest rates are usually fixed for 5 years around the 2.5-3% mark.

    The fellow that I was having this debate with says I am not building a safe portfolio that would weather any storms, i.e. interest rate rises would quickly make my cash flow disappear.

    He invests in HMOs with a minimum of 6 bedrooms all ensuite and also has a commercial property that he is converting into 15 bed HMOs.

    His strategy is buying a property usually derelict and then convert to HMO and rent each room for a minimum of £400 per month; he converts the rooms to look like hotel rooms (but on the cheap by using suppliers that offer big discounts)

    He also only uses repayment mortgages over a 15-year term. His view is that investing in HMOs is better as you are hedging against swings in the economic cycles.

    My view is that if the council start to individually band rooms, then the cash flow position is very risky for HMOs and maybe investing in freehold flats would be better (terraced house split into 2 flats)

    It would be great to hear others thoughts on this. Should I carry on focussing on building up my single let portfolio or should I be going down the HMO route and expect the added hassle of managing them and purchasing and converting properties into 6 bed all ensuite cash flow cows?

    Thanks

    Mike

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    Where are you buying these 8% yielders? Does that suggest they are problem properties or with low/no capital appreciation?
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    A mixed portfolio is best that caters for a variety of tenant groups.

    I buy cheap run down properties and refurbish them doing most of the work myself to maximise returns.

    Always use repayment mortgages as then you are building up a nest egg when it's payed off and you retire.

    I'm old enough to remember the days of high interest rates, whilst they have been low since the banking crash they can't stay low forever.

    If you have been using repayment mortgages and have payed off some of the initial purchase cost, not just the interest then the lender is likely to look favourably on reducing repayments for a time, extending the loan period or even a short repayment holiday if you run into financial problems.
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    I've got a mixture of single let's and some hmos - if I was starting again I'd stick with the single let's - less hassle, can spend your time building up the portfolio instead of day to day tenant management.
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    DISCLAIMER just my personal opinion - for legal advice consult a qualified professional grown-up.

    I’m new to this with two single let properties following the same strategy. I’ve had the same question about hmo vs single let’s and for me being a new LL and with a preference for a more hands off approach I decided on single lets. 

    If interest rates increase I’m assuming (and I would hope) that rents would increase to follow to make up for any potential lost profit margins.

    It would be interesting to hear what anyone else would suggest about rent increases if interest rates increased.
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    ManInTheMoon


    Some archive threads on this topic:

    HMO's vs. 2 bed terraces

    Single occupancy vs. shared houses

    HMO vs. single lets

    Property is not a case of "one size fits all".  Whether HMOs are a suitable strategy for you will depend on a number of factors including whether you can access HMO finance (forgive me if you are a cash buyer), whether you have sufficient experience to manage HMOs, whether you have time to manage them etc.

    This thread should assist:

    When to say "no" to an HMO?

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    Have you done a stress test to see how much interest rate movement will really affect you? I have a similar situation to you with a portfolio of single BTL making around 300-350 per month, even though some house values are very different.
    If i look across my portfolio my cheapest mortgage is 99pcm so the interest rate would need to quadruple to wipe out my profilt, on the most expensive the mortgage is 386 so doubling would wipe that profit out.
    What i have done is:
    A) start to overpay the more expensive ones
    B) fix the mortgages on 5 yr deals when remortgaging
    C) move some onto repayment when remortgaging

    The more expensive properties have seen way more capital growth and a better uptick in rent over the years, however i tend to only increase rent when the tenant changes.

    My opinion on hmo is that cashflow is good but you will not find it easy to retire or winddown with a portfolio of HMO without selling and exiting the market.

    In theory rent will rise with inflation and if IR is very high so probably will be inflation
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    Slowly working towards financial freedom


    Hi Mason


    I remember rates being 5-6% just before the crash 2007-08 and the rents on some of mine where around £500-£525 and I was doing okay due to capital appreciation. However, if the rates were to go back to 5% and if the rents were not increasing then the cash flow would soon disappear.

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    Hi, then it looks like you should be restructing your portfolio. However there are many moving parts, so if interest rates increased you may find so do rents and do does capital appreciation, it is never a one element shift
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    Slowly working towards financial freedom

    I have hmos and single lets and the difference in effort required to run is massive.  I self manage and take great pride in what I offer so always go above and beyond hence have waiting list for rooms and houses.  I didn't get into hmos until I had been a landlord for 15 years and do believe you should have experience before getting into this market.  What takes the time is tenant management as potentially you are putting 5 people into rooms who do not know each other.  If you can get this right it is great - when interviewing I tend to look at what job person is in/interests/how they are presented to assess whether they will fit in to house.  I would say to run a 5 bed hmo takes me no more than one hour a day whereas my single lets could be one hour a month which normally is just organising maintenance issues, this is why you need to get  a very good return on hmos.


    My rents are increased by about 3% per year but I always keep track of market rents in my area so I know what "going rate" is

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    Hi Mike,

    Thanks for sharing. Always good to have a healthy debate with fellow landlords but as long as there is a mutual ground and its more of an educational debate. Mike if what is working for you works than I say carry on. Everyone in this industry does things differently and does what suits their needs and circumstances the best. Carry on your doing a great job and are a successful investor.

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