One way to substantially increase your investment yields from buy to let is to invest in, or set up, a shared property and let out the rooms individually rather than as a whole. Shared properties, or houses of multiple occupation or HMOs, as they are known, typically return much higher yields.
In addition, converting a property into a shared property can be an effective way of increasing its capital value, ie. a shared property sold as a going concern with tenants can be worth significantly more than a similar sized property let to a single tenant.
Investing in shared property, however, involves more considerations than when investing in a single buy to let. Here are Insider’s strategies and tips:
* Start by targeting a tenant niche. Successful shared properties almost always target a specific type of tenant and don’t mix tenant types. The main tenant niches for shared property are as follows:
Students. Very much the ‘bread and butter’ for landlords in university towns. However, note that shared properties have come under competition from PBSA (purpose built student accommodation) in recent years and patterns of student demand in many university towns are changing.
Professionals. Generally a growing sector of the shared property market, as increasing rents and mortgage affordability push more young professionals towards sharing. However, demand is usually only significant in cities and large towns.
Contract workers. Workers moving around the county and staying in one place for a few weeks/months (and so where short term lets of an entire flat/house are rarely available) in areas from construction to IT are another growing sector. Demand is, however, by its very nature transient.
Housing benefit sharers. These kinds of shared properties can be amongst the highest yielding, although they are more problematic (though it is not a given) and so require closer management. Housing benefit changes and benefits cuts – and particularly Universal Credit are issues to consider here.
* Check the location. Check that the location you are thinking of investing in has sufficient demand from the type of tenant you are targeting. Remember that the best areas to invest in are those where demand is high but supply of competing property is limited.
* Check (and double check) what planning permission may be needed, as well as a local authority HMO licence, and how likely this is to be granted before shortlisting any location for investing in shared property.
Check to see if a licensing scheme may be planned for the area in the near future.
Does the property you are considering comply with local authority standards for HMOs?
Bear in mind that areas where it is hard to secure the appropriate permissions may involve more ‘hassle’ but demand compared to supply may be much more favourable.
* Calculate rents and expenses carefully. Conduct research into what level of rent you can currently expect to charge in the area concerned, and whether rents are rising or falling etc.
Calculate what your likely yield will be, bearing in mind that room rents are usually inclusive of bills. Ensure that your likely yield compares favourable with what letting the property on a single tenancy would be. (If it doesn’t, the property isn’t suitable for use as a shared property!
* Check carefully that the building you are intending to buy is physically suitable for use as a shared property …. assuming you are intending to convert it.
The main difficulty faced by landlords converting existing residential property is that the available bedroom spaces are of inadequate size to be suitable or attractive to tenants.
* Fit out and equip your rooms, and our communal areas, to appeal to the type of tenants you have in mind. Contract workers, for example, look for totally different things in a shared property compared to students. En suite bathroom facilities are highly preferable for higher-end shared properties.
As a general rule, and although it is important to work within budget, fitting out and equipping your property to a higher standard than similar or competing properties will make it more lettable and produce a higher return than a budget level of fitting out and equipment.
* Consider the issue of house management. To ensure smooth running and to maximise leads all shared properties require careful management.
Consider whether you intend to manage the property yourself or appoint a professional house manager. If self-managing remember that, although you can expect a much better yield 2 yields of 20%+ in some cases are possible for HMOs, compared to 5% for a single let – managing a shared property takes much more time and work than a single residential let. It WILL take time from your job or other business interests.