Should I buy a HMO in Leeds? Lots of people who are interested in property are asking this question right now.
HMO’s have always been popular for investors seeking high yields but recently we have seen interest skyrocket from investors.
Why is that?
There’s a number of reasons, I’ll explain a few.
- The ‘Section 24’ tax changes. The government are taking away the tax break investors and landlords used to get by off setting their mortgage payments against tax. This includes interest, capital repayments, and finance costs. This began to be phased out in 2017-2018 and by 2020-2021 none of these costs will be tax deductable.
- Stamp duty hike for investors. From April 2016 the government have increased the rate of SDLT on property purchases by 3% (where the property isn’t being used as your only home and residence, i.e on all rental property).
- The rise of property investment training companies. This is big business with day courses selling for around £500 and weekend courses selling for around £1500. The big training companies teach various property investing strategies, including HMO’s as one of their main ones.
- High entry price and low returns in the south east and London. High returns and low entry price in the north. Lots and lots of cash is coming from the south are investors head up the M1 to benefit from this!
The effect that points 1 and 2 have is that investors are now often making a lower return with reduced incentives for continuing with their existing strategy, which may often, for example, by standard buy to lets. In order to turn back the tide, many are turning to HMO’s.
Point 3 – the training companies are very good at selling and very good at pointing out the benefits of their strategies. They show all the up side and usually very little of the down side. Delegates come away full of excitement in anticipation of their new property career, financial freedom, and eager to quit their J.O.B’s. Whilst this works well for the few that are focussed, dedicated, and work very hard to achieve their goals, unfortunately it doesn’t work out for many more. My advice would be not to quit your day job on the Sunday of completing the course!
Whilst I strongly advocate research, knowledge, education, and training in property investment BEFORE getting started in property, this should also include questions around ‘What are the downsides?’ I think this is particularly pertinent for HMO investing right now, and my experience is that many would-be investors are not exploring this sufficiently first.
In my next article I’m going to look at the pros and the cons of HMO investing. There are many pros and many cons and both arguments need careful consideration before diving in and purchasing a property. Don’t buy a HMO until you have read this next article!