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HMOs vs Buy-to-Lets - What is the best property investment strategy?

If you’re considering investing in property, the chances are you’ve weighed up the pros and cons of becoming a landlord.

An obvious pro is that property is an asset, which provides you with the opportunity of generating recurring, additional income, potentially alongside your existing employment depending on the level of your investment.

The clear con is having to respond to tenant emergencies, where in that situation when the boiler breaks as you happen to be lying on a beach in Mauritius [lucky you], the buck will, of course, stop with you.

But, pros and cons aide, as you embark on your property investment journey, have you actually taken the time to consider your own investment strategy?

For example, are you choosing to invest in property to generate money in order to replace your existing income? Or are you investing in property to build capital, whilst remaining in employment or continuing to pursue alternative business interests?

Your answer to this initial question of ‘why’ will be fundamental to the type of property you choose to invest in, where in the residential sector, landlords often weigh up the decision between HMOs or singular buy-to-lets.

So, which is right for you?

Cashflow

If you’ve read my book, House Arrest, you will know that I decided to invest in and build a property portfolio so that I could spend more time with my family.

Prior to this, I was a full-time police officer who regularly worked night shifts. By making the leap into property, I therefore needed to find an investment opportunity that would enable me to replace my income and quickly – with cashflow as the end goal.

In this situation, HMOs (Houses in Multiple Occupation) offer an ideal solution. With an HMO you can generate multiple income streams with one single investment, whereas with a single buy-to-let property your income stream remains limited.

For example, if the property can be converted to say six bedrooms, this automatically provides you with six separate income streams, providing you with the opportunity to generate more money compared to the one income stream you would receive from a singular buy-to-let.

This also means that if you aren’t able to let all six rooms at one time, you still will have enough income from the other five tenants to cover the costs of the property.

What’s more, with multiple streams of income from one property comes the likelihood of increased profit. With a single buy-to-let property, however, the same level of profit just isn’t possible from one property, meaning you would need to invest in a lot of them in order to replicate a similar level of cashflow or income.

With investment comes time

If you are looking to invest in property while maintaining your existing role in employment or wish to continue to pursue other business interests, then single buy-to-lets are likely to be the better investment decision for you.

Why? Put simply, HMOs can take a lot of time. From the initial due diligence stages, where you have to consider Article 4 Planning, specialist Property Tax Accountants and HMO Licensing, to potentially refurbishing and then marketing the property to achieve capacity. This, of course, all before having to manage your tenants on a monthly basis.

Though there are certain software solutions available to help systemise property management such as Go Tenant!, a buy-to-let property will certainly take up a lot less time, whilst still providing you with the opportunity to build a property portfolio and generate recurring income.

Asset building

On the surface, HMOs provide a better ROI when compared to single buy-to-lets. This is simply due to the level of monthly and annual profit you are likely to achieve from an HMO in comparison to a buy-to-let property.

However, if you are looking to establish a more ‘hands-off’ investment strategy, where quick wins and immediate returns aren’t vital to your income, then single buy-to-lets may deem a more successful route.

With buy-to-lets you can be more strategic in your approach to building your property portfolio, buying low and selling high, to maximise income and capital growth.

Conclusions

For many Landlords, the decision to enter property investment is mostly driven by finance - whether that’s in order to replace existing income or to build assets for capital growth.

Where HMOs offer the perfect solution for some Landlords, they can be burdensome for others.

It is, therefore, key to understand your ‘why’ before making those initial investment decisions, particularly if you plan on investing in property for the long-term.

*Rick Gannon is a serial property investor, HMO specialist and author of number one best-selling property investment book, ‘House Arrest’. He is also the founder of one of social media’s largest property investment communities, the HMO and Property Investment Community Group, hosted via Facebook.

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