A Guide to Buying a Tenanted HMO
Investing in tenanted HMO property can be a great way to generate passive income from the get-go, while building wealth over time. Here are some key points to consider when evaluating the potential of a tenanted property investment:
- Location: As with any real estate investment, location is key. Properties in desirable areas with strong rental demand are more likely to be consistently occupied and command higher rental rates, while it’s also important to look at the average yield of a HMO property in different locations.
- Rental income: The rental income from a tenanted property can provide a steady stream of cash flow, which can be used to cover expenses and, in some cases, generate a positive cash flow. Be sure to research the current rental market for comparable properties in the area to get a sense of what you can expect in terms of rental income from your HMO property.
- Tenant quality: The quality of your tenants can have a big impact on the success of your investment. Look for tenants who are reliable, pay their rent on time, and take care of the property. Consider using a property management company to screen potential tenants and handle the day-to-day management of the property.
- Tenant type: There are a vast range of tenant types which look to live in a HMO, such as students, health-care professionals, and supported living individuals. You can gain an understanding of your tenant type by looking into the type of employers within your investment area or if your property is near a university or hospital.
- Property condition: The condition of the property is also an important factor to consider. Properties that are well-maintained and updated are more likely to attract and retain tenants, and may command higher rental rates.
Buying a tenanted investment property can have both advantages and disadvantages. Here are a few key points to consider:
- Immediate cash flow: One of the biggest benefits of buying a tenanted investment property is that it can generate immediate cash flow in the form of rent. This can be especially attractive for investors who are looking for a steady stream of passive income.
- Lower vacancy risk: When a property is already tenanted, the risk of it sitting vacant for long periods of time is significantly reduced. This can be beneficial for investors who are looking to minimise their risk.
- Established tenancy: In many cases, the tenants in a tenanted investment property will have a history of paying rent on time and taking care of the property. This can be beneficial for investors who are looking for a low-maintenance investment.
- Limited control over tenant selection: When you purchase a tenanted investment property, you will typically inherit the existing tenants. This can limit your ability to screen potential tenants and select those who you believe will be the best fit for your property.
- Limited ability to increase rent: With existing tenants, it can be difficult to increase the rent beyond what they are currently paying. This can limit the potential return on your investment.
- Maintenance and repair issues: If the previous owner did not properly maintain the property, it could have underlying issues that may require repairs and maintenance. These could be costly and can cause interruptions to the cash flow.
- Tenant issues: Even if the tenants seem to be good, they may cause issues later on. For example, tenants might not be happy with the new ownership and can cause problems such as non-payment or not following the terms of the lease.
Should you buy a tenanted property?
Overall, buying a tenanted investment property can be a good option for investors who are looking for immediate cash flow and a lower vacancy risk, but it’s important to weigh the potential downsides as well before making a decision.
It’s always advisable to have proper due diligence, take a look at the contract, lease agreement, go through the property history and if necessary, consult with a lawyer and one of our experts to get a better understanding of the property you’re thinking of buying.
We’ve put together a useful Investor Guide which breaks down the process of investing in HMO properties.