The type of property you should invest in, then, depends largely on what you’re looking to get out of your portfolio; and how much risk you’re willing to accept to get it.

Some investors choose to play it relatively safe with so-called ‘vanilla’ property purchases, while others bet on HMOs, MUFBs and commercial properties to deliver the goods. Let’s break down each of these property types; the pros, the cons and what to expect if you choose to purchase them.

Vanilla buy-to-lets: steady, straightforward returns

• Simple mortgage lending

• Respectable capital growth ROI

• Fairly average rental yields

• More demand from landlords

A vanilla buy-to-let is typically a one-to-three bedroom home or flat apartment, typically let out to a single family or household. In other words, they’re exactly the kind of property most of us picture when we think about buy-to-let investment.

If you’re just getting into buy-to-let property investment for the first time, we’d recommend starting with a vanilla property. 

They offer decent capital appreciation in the long term, and you can find an affordable mortgage deal fairly easily.

Plus, it’s not too difficult to find tenants; and with the right tenant for the right property (eg a small family in a school neighbourhood), you can maintain longer rental terms and avoid rental void periods.

Depending on where you buy, rental yields aren’t bad for vanilla properties; but you can definitely stand to earn more each month with other ‘complex property’ types…

HMOs and MUFBs: more tenants, more money, more stress

• Multiple revenue streams from multiple tenancies

• If one tenant moves out, you’ll have others to cover your bills

• Strong demand from tenants

• Stricter licensing and safety rules

• Higher mortgage rates

Faced with the dwindling returns from vanilla properties, many landlords are turning to HMOs and MUFBs as a more profitable alternative; but they come with extra challenges to consider.

The term ‘house in multiple occupation’ (aka ‘house of multiple occupancy’ or ‘HMO’; more commonly known by tenants as a ‘house share’ or ‘flat share’) describes properties which are split into multiple apartment spaces, yet they share communal facilities (typically bathrooms, kitchens and/or hallways).

‘Multi-unit freehold blocks’ (or ‘MUFBs’) are similar, but instead of featuring shared rooms and facilities, each unit is entirely self-contained and all the units are owned under a single freehold (which means they can be purchased via a single mortgage).

A purpose-built block of flats would be a prime example of an MUFB.

Both HMOs and MUFBs effectively enable you to have tenancies from several different unrelated households under the same roof; but this can be more of a double-edged sword than you might expect.

On the one hand, you’ll be multiplying the rental yield versus a single tenanted property; and while tenant turnover can be high, you’ll still have money coming in from your other tenants even if one or two leave.

HMOs are particularly popular as student lets, where you can expect strong profits and secure tenancies. (Keep in mind, though, that student lets are naturally a revolving door as older students finish their studies and new ones come in; and you’ll likely have some maintenance work to do at the end of the academic year.)

On the other, managing multiple tenancies together is a lot of work. Keep in mind, any maintenance issues at the property can potentially impact all of your tenants at once.

Certain HMOs (particularly larger ones) will require a dedicated license from your local council; and since more tenants often means more fire hazards and more risks to evacuation, you’ll need to install more robust safety equipment and precautions to ensure your property complies with fire safety regulations.

It’s also more difficult to secure a mortgage on a HMO or MUFB property; although certainly not impossible with the help of a specialist mortgage broker.

Commercial property: Risky but lucrative

• Much stronger rental yields and cashflow

• Longer rental periods

• Tenant takes care of upkeep

• More restrictions on certain property types

• More expensive interest rates

By their very nature, commercial properties attract a very different type of tenant. All sorts of companies rely on rental properties to conduct their business; and the rental profits they can bring you can make residential buy-to-let rental yields look like chump change.

Not only that, but commercial property can offer greater security and smoother cashflow too. Commercial leases can last for years or even decades, rent agreements typically enable you to collect rent three months in advance, and you’ll even avoid the 3% stamp duty surcharge that comes with typical buy-to-let purchases.

Plus, since many commercial purchases come ready-to-let and often with business tenants already installed – and those tenants are usually responsible for all maintenance – you won’t have renovation and repair costs eating into your rental income.

There’s also semi-commercial (aka ‘mixed use’) properties, which combine a residential element with a commercial space (such as a flat directly above a shop). These are a good place to start if you’re an experienced residential investor looking to dip your toe in the water of commercial property.

It all sounds too good to be true; so what’s the catch?

As you might expect, commercial property purchases come with a much larger price tag and a lot more paperwork. Without the help of a mortgage broker, finding a mortgage deal that’s compatible with your property – let alone one with affordable interest rates and deposit requirements – can be a serious challenge.

Plus, if your business tenant does decide to move on – or worse, goes bust – lower tenant demand means you’ll likely struggle to find a replacement. 

In the meantime, you could end up paying business rates under rules on empty properties (although your tax advisor may be able to help you find ways around this).

But whichever property type you’re looking to buy, and no matter how complex your mortgage requirements; SPV Mortgages’ specialist brokers can help you find and secure the very best deal for your individual circumstances.

Get in touch via our contact form and start your next big investment journey today.