Analysis carried out for Platinum Property Partners (PPP), comparing HMOs rented to professionals and other asset classes, shows that HMOs were by far the best performing investment over the four year period from 2010-14.
The research shows that HMOs rented to key workers and young professionals had an average return on equity of 108% between 2010 and 2014. This is over 40% more than the return for standard BTL (77%).
Every £1,000 invested in HMOs in 2010 would have grown to £2,080 in 2014 – compared to £1,770 in standard BTL.
PPP says HMOs offer far higher returns than other asset classes including UK equities, commercial properties, gilts and cash investments.
UK equities – as measured by the FTSE All Share Total Return Index – was the best performing asset class after BTL with a total return of 46% over 2010-14 followed by commercial property at 41%.
Returns from UK government bonds (gilts) were significantly lower at 23%. Unsurprisingly given the low interest rate environment, the worst returns came from cash (as measured by 1 month Libor) which returned only 2% between 2010 and 2014, failing even to keep pace with inflation.
The average price paid for a standard BTL property in 2010 was £166,726, with an equity investment of £46,683. This resulted in a total return of £35,817.
The average initial investment in an HMO was much larger: the typical price paid in 2010 was £213,988 (with equity investment of £118,508). This reflects the larger size of a typical HMO and the higher refurbishment costs usually required to convert an ordinary property into a high quality HMO – for example, installing en-suite bathrooms. However, despite the higher investment, HMO investors received a considerably higher return over four years: £127,781 on average.
Steve Bolton, founder and chairman of Platinum Property Partners (PPP) said: “Buy-to-let has proven itself to be the top performing investment over the past four years, with returns from bricks and mortar investments outpacing other asset classes like stocks and shares considerably. However, not all types of buy-to-let property offer equal investment return: our research shows that HMO properties let to young professionals and key workers have the potential for substantially higher returns than vanilla or standard buy-to-let properties.
“One of the main reasons for this is the HMO investment is intrinsically geared towards maximising rental income. HMO properties are strategically converted and refurbished to increase the size of communal areas and number of rentable bedrooms, therefore allowing for a higher number of tenants on individual rather than shared tenancy agreements. This results in greater returns for landlords despite the higher price initially paid.
“However, HMOs aren’t all about benefitting landlords: they also fulfil a growing social need for high quality rental properties that are affordable for tenants. The cost of renting a room in an HMO is far lower than renting a one bedroom flat. For the UK’s increasingly mobile workforce, who are delaying putting down roots for longer, it makes financial sense to live in a high quality HMO and still be able to save for long-term goals rather than spending all of a pay packet on rent.”
The research was carried out by Rob Thomas, former Bank of England economist and CML policy advisor, on behalf of Platinum Property Partners.
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