Are you a landlord looking to add a House of Multiple Occupation (HMO) to your property portfolio? As with all property investments, there are pros and cons, but the appeal is clear.
HMOs are in high demand and offer higher rental yields than standard buy-to-let. However, they are more complex to manage, incur higher costs and subject to strict regulations. Also, HMO mortgages are more expensive and harder to get, which is why it’s important to seek professional mortgage advice.
Investing in HMOs also requires a clear understanding of the local market and tenant demographics. The success of your investment depends on choosing the right property in a desirable location while balancing the additional responsibilities that come with managing an HMO. From tenant screening to maintaining communal areas, it’s a hands-on process that demands careful planning and ongoing effort.
Read on for Goldmanread’s helpful guide on whether HMO investment properties are worth it in today’s property market.
For advice on securing a landlord mortgage for a buy-to-let or HMO property, then contact the experts at Goldmanread. As mortgage brokers, we can research the market on your behalf for the most favourable terms, helping you to get the best return on your investment property.
What is a House of Multiple Occupation (HMO)?
HMOs are homes with multiple tenants (often three or more tenants) from different families who rent individual rooms but share facilities like kitchens, living spaces and bathrooms.
Popular with students and young professionals in urban areas, HMOs offer landlords typically high rental yields and a large potential market. However, running costs are also typically higher and managing multiple tenants is more complex than standard buy-to-let.
Is an HMO investment worth it?
Generally, HMOs are good investments as they tend to generate higher rental yields than standard buy-to-let properties. Also, as they rely on renting to more than one tenant, they offer a more stable rental income.
There is a steady demand for HMOs among groups like students, professionals, and workers, such as nurses, which helps maintain the profitability of an HMO investment property.
Despite the increased rental income, it’s important to remember that HMO houses require more intense management and have higher running costs. Usually, household bills, such as council tax, utility bills, etc., are included in the rent.
So, it’s important that landlords employ strong cost control measures to ensure that the property continues to make a profit.
Is there a demand for HMO properties?
In recent years, the UK’s increasing population, lack of new affordable housing, and rising property prices have driven up the demand for HMO rental properties.
As local councils have seen their housing stock deplete, they have become increasingly dependent on HMO providers to make up the gap in the housing market.
HMOs are increasingly sought after in city centre locations due to the convenience they offer for commuting to work. London, in particular, has witnessed a growth in HMO properties, which is consistent with trends observed in most major cities throughout the UK.
All of this means that it is relatively easy to attract tenants, making HMO investments increasingly viable.
How profitable is HMO investing?
HMO profitability depends on factors like where the property is located, how much rent you can realistically charge, and the costs involved, such as mortgage payments, utility bills, and maintenance.
To work out if an HMO will be profitable for you in the long term, you need to crunch the numbers and compare the potential rental yield to these costs.
Remember that HMO mortgages come with higher interest rates and fees. Lenders are also stricter on rental yield requirements, so you need to factor these into your planning to make sure the investment is worth it.
What is the average rental yield for an HMO?
In recent years, many property investors have turned to the HMO market to achieve higher rental yields. Yields vary across the UK, but HMOs generally outperform standard buy-to-let.
According to the British Landlords Association, HMOs return over 7.5% on average, which is much higher than the modest BTL average of 3.63%.
Pros of HMO investment
Investing in HMOS offers higher rental yields
One of the biggest benefits of investing in HMOs is the higher rental yields compared to standard buy-to-let. In an HMO, each room is rented out individually, so you can earn multiple incomes from a single property. For this reason, HMOs can provide steady and reliable cash flow – great news for landlords looking to minimise risk and maximise their returns.
Reduced risk of vacancies
In a traditional buy-to-let setup, a vacancy can leave you without rental income until you find a new tenant. With HMOs, even if one tenant moves out, the other rooms in the property remain occupied, giving you income stability.
Increased resale value
Properties that are converted into HMOs can fetch more, making them a good option not just for immediate income but also for long-term investment.
They are particularly appealing to other HMO investors, who will see the immediate value in a property already designed to cater to multiple tenants.
Converting a property into an HMO rental property is obviously costly and may require planning permission, so it’s important to do your homework and make accurate projections to make sure it is worth it.
Strong council and tenant demand
HMOs have become popular due to the steady demand from both tenants and councils. Schemes like Right to Buy and the sale of local authority housing stock have shifted the demand for public housing to the private rental sector.
This has created opportunities for HMO landlords, as councils often prefer renting from the private sector to avoid high maintenance costs. Government contracts are reliable and generally long-term, offering rental stability and security to HMO landlords.
Cons of HMO property investments
Intense management requirements
Managing an HMO can feel more like running a small hotel or guesthouse than a standard rental property. Landlords are responsible for cleaning and maintaining communal spaces in addition to addressing the usual tenant concerns.
This can be especially challenging for student HMO landlords, where turnover is frequent, and the risk of wear and tear and accidental damage is higher. Without professional property management support, the workload can quickly become overwhelming.
Higher wear and tear costs
With multiple tenants living under one roof, HMO properties typically experience more wear and tear compared to single-let homes. Shared spaces like kitchens, bathrooms, and hallways see constant use, leading to faster deterioration.
Landlords need to be proactive about maintenance to prevent the property from declining in quality, which could harm their reputation and have a negative impact on the neighbourhood.
Stringent licensing and regulations
Most HMOs require a licence from the local authority and are strictly regulated, particularly regarding health and safety. Landlords must comply with fire safety measures and ensure proper room sizes, among other legal requirements.
Landlords who fail to meet standards can face severe penalties, including fines and court action. Keeping up with changing regulations requires keen attention to detail and ongoing diligence.
Higher mortgage costs and more limited lending options
Getting a mortgage for an HMO can be more challenging as fewer lenders are willing to take on the perceived risks. As a result, lenders tend to charge higher interest rates on HMO mortgages to mitigate these risks.
The lending criteria are also stricter. Detailed rental income forecasts and proof of a solid management plan are required. This gives the lender confidence that the rental income can cover the mortgage repayments and other expenses.
However, by working with an experienced mortgage broker, you can approach the right lender and find the most favourable terms.
What other things should you consider when purchasing an HMO property?
There are a number of other questions to ask yourself when purchasing an HMO.
Location
Is there a demand for HMO properties in my target area?
Conduct market research on online platforms like SpareRoom and Rightmove to see demand for HMO properties in the area. Speak with local letting agents to gauge tenant interest and competition levels.
Is there an aversion to HMO homes in my chosen neighbourhood?
Check online community forums and speak to your local authority to understand the area’s attitude toward HMOs. Engaging with the community and maintaining high property standards can help build goodwill.
Costs
How much are the running costs?
Create a detailed budget that includes utility bills, maintenance, and compliance costs. Speak to experienced HMO landlords or property managers and get quotes for any services or upgrades you might need to stay within budget.
Management
Do I have time to devote to managing an HMO properly?
If you don’t have time to manage an HMO, consider hiring a reputable property manager to handle day-to-day responsibilities. Create a clear management plan that outlines how you’ll address tenant issues, maintain communal areas, and stay compliant with regulations.
Tenant selection
How will I go about finding the right tenants?
Consider how you will source tenants and on which platforms you will advertise. Where is your target market looking? Consider the help of a letting agent to find suitable tenants, but be sure to factor in the additional cost.
How do I find reliable tenants for my HMO?
To find reliable tenants for your HMO, be sure to carry out background checks, including references, credit history, and employment verification.
Advertise vacancies on trusted and reliable platforms like Rightmove or one that is targeted at your ideal tenant demographic, e.g., SpareRoom, for young professional and student accommodation.
If this is unmanageable, consider employing a reputable property management firm to source tenants on your behalf. This will save time and ensure high-quality tenants, but it comes at a cost that will affect your net rental yield.
Looking for an HMO mortgage? Get in touch with Goldmanread today
At Goldmanread mortgage brokers, we have been arranging HMO mortgages since 2009 and have helped many HMO landlords secure the right funding to maximise their investment. We have access to over 100 HMO lenders, each offering hundreds of products.
HMO mortgages are considered a niche market, so it’s important to take professional advice to ensure you are offered the most appropriate deal for your circumstances.
Get in touch with Goldmanread today, and start your HMO investment journey with confidence.
Frequently asked questions – is it worth buying an HMO?
How much does an HMO license cost?
First, find out from your local council if you need a licence. The government UK website states that you need an HMO license if you rent to five or more unrelated tenants.
The cost of an HMO licence varies from council to council. For example, in Chelmsford, an HMO licence is £900 for up to five units and £900 plus £55 for each additional unit.
Are HMO investments a good way to diversify your property portfolio?
HMO investments can be a great way to diversify your portfolio alongside other property investments. They often offer higher rental yields and cater to a growing demand for shared accommodation, particularly in towns and cities.
While they are largely considered a good investment, HMOs do come with added responsibilities and regulations, so it’s important to research thoroughly before adding one to your investment mix.
Do you have to provide the mortgage lender with rental income forecasts?
Most lenders require a rental income forecast when applying for an HMO mortgage to determine whether the rental income will cover the mortgage repayments. It’s essential to prepare a clear and realistic projection, including fees like property management and licensing.
It’s a good idea to enlist the help of an experienced mortgage broker to present your projections clearly and in the best light.
