Platinum Property Partners (PPP) has warned landlords to plan ahead to futureproof their investment. It says standard buy-to-let properties will lose money if interest rates rise while HMOs will remain profitable.
HMOs – rented to young professionals and key workers – are intrinsically geared towards maximising rental income by letting each room on an individual basis.
Recent research for PPP (Investor returns compared: a guide to recent buy-to-let and HMO returns) shows that, compared to capital gains, rental income for all types of buy-to-let is the most dependable and stable source of return on investment.
Its research shows that an investor who bought the average buy-to-let property for £183,391 last year with a £138,594 mortgage would see their monthly interest payments leap from £462 to £809 if interest rates rose by 3%.
With the average gross monthly rental income currently £754, their investment would be operating at a loss.
An HMO landlord who bought a property for £245,486 with a £170,310 mortgage would see their monthly mortgage payment jump from £733 to £1,159 if rates rose by 3%. However, with a highly monthly rent at £3,298 they would still be making a monthly profit of £2,139.
PPP concludes that HMOs landlords are therefore best positioned to absorb the higher mortgage costs caused by an interest rate rise.
The company’s founder Steve Bolton said: “In recent years, there has been an influx of investors to the BTL market, with bricks and mortar proving to generate returns that outperform all other asset classes. However, not all BTL is equal, and our data shows that HMOs generate much higher rental income than standard BTL properties. HMOs will therefore be an attractive option for investors looking for a lower risk strategy that achieves a strong level of income.
“With many changes on the horizon for landlords, including the proposed restrictions to mortgage tax relief and looming interest rate rises, it’s never been more crucial to have a decent cushion of rental income to absorb any rising costs.
“However, many landlords are failing to correctly calculate their returns, and our earlier research shows that a worrying number entered the BTL market with very little forward planning. Without a clear picture of what they earn from their BTL investment, a landlord is more vulnerable to market changes. Landlords must have a clear strategy and plan ahead to be able to accurately assess how futureproof their investments are.”