HMOs, generally rented to young professionals and key workers, are intrinsically geared towards maximising rental income by letting each room on an individual basis, according to the report from Platinum Property Partners.

According to Propertywire.com, research for PPP has shown that compared to capital gains, rental income for all types of BTL is by far the most dependable and stable source of return on investment. The firm says that HMOs landlords are therefore best positioned to absorb the higher mortgage costs caused by an interest rate rise, an event which the Bank of England has indicated will take place in early 2016.

It explained that the profits of a standard buy to let investment can be wiped out by a three per cent rise in interest rates, assuming mortgage rates increase by the same amount, as gross rental income is not sufficient to cope with higher mortgage interest repayments.

Even although HMO landlords pay for all household bills, the fact that the property generates a much higher gross rental income means that these costs are easily absorbed. The analysis suggests that the maximisation of income from a given size of property by creating extra rooms and renting them to multiple tenants means HMOs can generate rental income that is up to four times higher than the rents achieved in a standard buy to property.

Previous analysis carried out by PPP has shown that rental income is a far more stable and dependable source of return than capital gains, dispelling the myth that the success of any buy to let investment is mostly about rising house prices.

From 2010 to 2012, investors operating in both the standard BTL and professional HMO market were sustaining capital losses. It was only in 2013 and 2014 that capital gains began to recover but in contrast, rental income consistently increased throughout the same period for both asset classes, albeit at a much higher rate for HMOs, the report says.

It also points out that the best way that landlords can ensure their investment can cope with an interest rate rise, and any other unexpected costs, is by planning ahead and having a good understanding of the financial performance of their portfolio.
Research carried out by PPP in 2014 showed that a severe lack of research and poor planning is preventing many buy to let investors from maximising their income. A quarter of buy to let investors sought no advice and carried out no research before making their property purchases and a staggering 93 per cent had no five year plan for their investment.

Separate research by PPP shows that landlords are also prone to miscalculating their returns. Some 12 per cent landlords do not take any costs into consideration when calculating the financial performance of their buy to let portfolio. In addition, one in four landlords pay mortgage interest but do not take this into account.

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A longer lease term might very well be the best choice for you. But before you commit to one lease term or another, take a moment to consider the pros and cons of each:

Why Choose a One-Year Lease Term?

A one-year lease term is the most popular lease term option for apartments, and for good reason. A year is long enough to get to know whether you like an apartment enough to stay longer, and it’s short enough to give you the flexibility to move after a reasonable amount of time (12 months) without having to break a lease and possibly pay a penalty. If you decide you like your apartment and you’ve been a good tenant, you should be able to continue living there by renewing your lease.

Why Choose a Two-Year Lease Term?

If you’re confident that you’ll stay in your new apartment for a while, consider signing a lease for a two-year term, if it’s available. Although you’ll lose the flexibility of being able to leave without breaking your lease after 12 months if things don’t work out, committing to a two-year term has its benefits.

Most notably, you benefit because if your landlord wants to raise your rent at your next renewal, he’ll have to wait 24 months before doing so, instead of just 12. The savings may be significant if you’re in an economy where rents are expected to climb.

You also gain peace of mind because you know that you’re set in your new home for at least two years. Since your landlord won’t have an opportunity to choose not to renew your lease in 12 months, you can stay for 24 months (short of getting evicted for nonpayment of rent or other serious lease violations).

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