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Buy-to-let demand is falling! But could HMOs still make you rich?

For the government, at least, its programme of driving a coach and wagon through the buy-to-let sector could hardly be going better. The last couple of years has seen an exodus of landlords and an evaporation of would-be proprietors who are now electing to invest their cash elsewhere.

Latest numbers released by UK Finance underlined the scale of the decline in Britons’ appetite for buy-to-let, the body advising that just 4,800 new home purchase mortgages for rental properties were completed in February. This was down 7.7% year-on-year and was what UK Finance described as “due to tax and regulatory changes.”

A combination of stamp duty hikes, lost tax relief and cost increases are hammering returns for landlords, while legislators’ attempts to transfer powers from property owner to tenant are reducing the appeal of buy-to-let still further. It’s a cycle that seems to be bringing bad news almost on a weekly basis, the latest round of law changes this month alone reducing the power to evict and requiring a great many landlords to spend a small fortune to bolster the energy efficiency of their homes.

HMOs: are they A-OK?

Are we being too hasty in abandoning the buy-to-let sector en masse, though? A recent report by the National Landlords Association suggests that there is one sub-segment of this investment arena — houses of multiple occupation (or HMOs) — where returns continue to impress.

According to the body, average rental yields for multi-let properties stand at a juicy 6.9%, a figure that also outstrips the 5.6% yield received by non-HMO landlords.

It’s not all a bed of roses, though. As the trade association states, investing in HMOs provides difficulties of its own, from bigger licensing fees and planning regulations to lower buyer interest when it comes to selling up because of the specialised nature of the accommodation. And this is on top of the increased tax liabilities and regulatory hoops I mentioned earlier.

Better property options

So why bother with the hassle when you can get much better exposure to the property market via the stock market?

Take Civitas Social Housing, which invests in the construction of social homes in England and Wales. This business sports a gigantic prospective dividend yield of 6.1% and is has a forward P/E ratio of just 16.3 times.

Or what about Primary Health Properties? It carries a chubby forward payout yield of 4.3% and is likely to deliver excellent profits growth and thus increasingly large payouts as an ageing population drives demand for its facilities and prompts it to continue expanding.

Brickmaker Ibstock, meanwhile, carries a chubby forward dividend yield of 5.1% and is well placed to capitalise on Britain’s growing need for new homes, while Tritax Big Box is set to see demand for its huge warehousing and distribution facilities surging as internet shopping grows and the need for automation in the retail sector increases. This company boasts a big 4.6% yield.

To me, it’s clear that investing in shares is a much easier, and if done correctly more lucrative, way to make your money work for you. I believe the glory days of buy-to-let are over, and fully expect the costs and the regulatory pitfalls for landlords to keep on rising.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Primary Health Properties and Tritax Big Box REIT. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.