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An increasing number of BTL landlords set sights on high-yielding HMO market

Buy-to-let landlords currently looking to buy property are targeting Houses in Multiple Occupation (HMO) more than any other property type, according to fresh research.

According to Paragon’s Q4 2019 PRS Trends report, of the landlords planning to buy property in the next 12 months, almost a third - 31% - plan to acquire HMOs, up from 12% just three months earlier.

This is the highest level since Q2 2017 and reflects a greater propensity for portfolio landlords to purchase. 

A quarter of landlords said they plan to purchase flats, with 18% targeting terraced housing.

The research revealed that 9% of portfolio landlords – those with four or more properties – plan to add to their portfolio over the next quarter, compared to just 1% of non-portfolio landlords.

HMOs are typically purchased by portfolio landlords as they offer a higher yield, although they are typically are more complex to manage.

Paragon research shows HMOs achieve a yield of 6.5%, compared to an average yield across all property types of 5.6%.

Richard Rowntree, director of mortgages at Paragon, said: “The private rented sector needs to grow to meet increasing levels of tenant demand and it’s clear that portfolio landlords will drive that growth. Not only are they looking to build their portfolios, they are also looking at more complex types of property that will deliver higher yields, such as HMOs.”

Overall, landlord confidence generally remained weak during the quarter, although there was a slight uptick in landlords’ confidence compared to Q3 2019. 

Paragon’s Confidence Index, produced by landlords ranking confidence out of 10, recorded a score of 6.2 during the period, the highest level for a year and up from 5.8 on the previous quarter.

Rowntree added: “Although still fragile, hopefully we are starting to see some green shoots with regards to landlord confidence. 

“Landlords have encountered significant regulatory and fiscal changes in recent years and we hope to now enter a more settled period.”

Poll: Do you own an HMO property?

PLACE YOUR VOTE BELOW

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    In Scotland, an HMO licence is needed to let to 3 or more unrelated adults, even in a 3 or 4 bedroom property. This costs over £1900 for the first 3 year licence and over £900 for subsequent 3 year periods, in addition to costly alterations like fire doors, mains smoke alarms and emergency lighting. On the upside, the yields can easily exceed 8% and there are usually 3 or more solvent guarantors who are more concerned about credit ratings, honouring agreements etc. than their often pretty feckless offspring. Another bonus is that no single tenant can end the lease without all tenants agreeing, so void periods also tend not to happen for the better properties. I now only have such HMO properties, having converted other flats into 3 or 4 bed HMO's and seen rents treble over the last 10 years as a result of the demand for such HMO properties among students with solvent guarantors.

  • Paul Barrett

    So a single homeowner who has a 4 bed house and takes in 3 unrelated lodgers has to comply with this daft legislation!???
    How would the Scottish Govt know how many lodgers a homeowner has?
    It would seem therefore that a homeowner may only take in two unrelated lodgers to avoid this daft legislation.
    Makes having anything more than a 3 bed house a bit pointless if intending to take in unrelated lodgers.
    Having a third lodger would require extensive unviable works in a homeowners home.

    So in a 4 bed house no point in taking in 3 lodgers.
    The SNP are absolute lunatics!

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    I don't think it would apply to lodgers,but how could I have several properties as my main residence at the same time? Surely that is the only time that tenants would counter as lodgers?

    Totally agree about the SNP! Looking forward to forthcoming trial in Edinburgh in March, but can't comment further on that just now!

     
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