Investors with HMOs are better placed than other landlords to combat any financial damage caused by future interest rate rises.
Analysis carried out by Platinum Property Partners suggests HMOs are the most stable and profitable form of buy to let investment, particularly if let to young professionals and key workers.
PPP claims that the profitability of a standard BTL investment - an individual apartment, for example - can be wiped out by a three per cent rise in interest rates, assuming mortgage rates increase by the same amount. This is because, typically, gross rental income is not sufficient to cope with higher mortgage interest repayments.
However, the HMO already has higher monthly mortgage interest payments due to limited product availability, the complexity of the model and the amount of tenancy agreements on any one property. But because the HMO generates a much higher gross rental income, these extra costs are easily absorbed, with enough money left over to still earn a profit.
Previous analyses carried out by PPP show that rental income is a far more stable and dependable source of return than capital gains, apparently dispelling the myth that the success of any BTL investment is mostly about rising house prices.
From 2010 to 2012, it says, 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.
In contrast, rental income consistently increased throughout the same period for both asset classes, albeit at a much higher rate for HMOs.