There is more than one way to invest in a buy-to-let property, with houses of multiple occupation (HMO) an alternative to a traditional single-let property. But why do some landlords choose HMOs over the other options available?
Houses of multiple occupation (HMO) provide an alternative to traditional single-let buy-to-lets. And with multiple tenancies, there may be the opportunity for landlords to earn higher rental income as they rent out each room to individuals rather than one household.
The question is, do HMOs really offer higher yields than other buy-to-let options? That’s the purpose of this guide, which looks at an HMO’s potential to earn higher yields than single-let properties.
What is an HMO?
An HMO, or house in multiple occupation, is a property rented out by at least three people who are not from one ‘household’ but share facilities like the bathroom and kitchen. HMOs are often used by students or young professionals, offering a more affordable housing option.
Learn more about HMO:
Understanding rental yields
Rental yield is a measure of potential earnings from property investments via rent. It’s expressed as a percentage, obtained by comparing the annual rental income against the property’s value. This metric is important for landlords and investors to gauge the performance of their property investments and portfolios.
Which factors influence yields in HMO?
As with any buy-to-let property, there are mitigating factors that contribute to the achievable yield.
- Location: The geographical location can affect demand and rental prices, impacting yields in the process.
- Property size and condition: Larger, well-maintained HMOs often command higher rents, influencing overall yield.
- Tenant demographics: Different tenant groups, like students or professionals, can affect rental stability and affordability.
- Regulatory compliance: Adhering to HMO regulations, like getting the correct certificate, can incur costs and affect the net yield.
- Market conditions: Fluctuations in the housing market impact rental demand and property value, influencing yields.
- Management efficiency: Effective property management can reduce costs and void periods, boosting yield.
- Initial investment costs: The initial purchase and setup costs can impact the long-term yield of an HMO property.
What is the average HMO yield?
Generally speaking, HMOs achieve higher yields than single-let properties. This is mainly because HMOs can generate higher rental income from several tenants, as opposed to single-let properties that are rented out under just one tenancy.
For example, you might have an HMO with five bedrooms and five different rental contracts, whereas a single-let five-bedroom house rented to a family would fall under one tenancy agreement. In most cases, the rental income potential would be higher in the HMO, as you can charge per room rather than the entire house.
According to data from the British Landlord Association, an HMO property averages a yield of 7.5%. This is significantly higher than single-let properties, which average 3.63%, according to the British Landlord Association.
Of course, it’s not quite that black and white. Like single-let properties, HMO yields largely depend on several factors, including location and property type. But as far as comparing the average with other types of buy-to-let, HMOs historically enjoy higher average yields.
80 LTV mortgages
- Borrow up to 80% of the property’s value
- Get a mortgage as an individual or limited company
- An online mortgage application that takes place entirely online.
Are average HMO yields higher in every part of England?
The data shows that HMO yields are higher in all parts of England when compared to single-let properties. The study found that HMOs yield higher returns across England, with the North East leading at 11.2%, 6.3% above the region’s regular rental yield of 4.9%.
Yorkshire and the Humber show a 5% higher HMO yield compared to single-let properties, and the East Midlands has a 4.7% higher yield. In London, the difference is smallest, yet HMO yields still surpass regular rentals by 2.4%.
Comparing HMO with single-let properties
Having a higher average yield doesn’t mean that it’s a straightforward decision between HMOs and single-let properties. There are many factors landlords should consider before investing.
Managing an HMO can be more challenging due to additional legal requirements. These properties must comply with specific safety regulations and often require special HMO licensing, which varies across different areas. Beyond that, HMOs often require more regular maintenance due to more people living in them and the higher tenant turnover.
HMOs, while more profitable due to higher rental yields, typically come with more expensive initial setup costs and ongoing management complexities. Again, you need to consider the potential financial impact of losing tenants and higher property management costs. Conversely, single-let properties have lower rental yields but may also come with lower maintenance and repair costs, and longer tenancy agreements.
HMOs typically command higher rent due to the room being let out rather than the entire house. However, they also present challenges such as higher maintenance and repair costs, difficulty in finding suitable tenants and potential noise and disturbance issues.
While HMOs can be lucrative, they’re not without challenges. Investors may face stringent regulatory requirements and increased responsibilities in maintaining property standards. On the flip side, potential higher rental income from multiple tenants can offset these challenges if you find the right HMO property.
As a landlord, you need to decide if you want to manage the property yourself or use a property management company. Employing a professional offers numerous advantages, from trusted maintenance contacts to a better understanding of the legal aspects. Agencies act as an intermediary with tenants and provide expert guidance, ensuring landlords meet all regulatory requirements. However, it comes at a cost, with property managers typically charging 10% to 15% of the annual rental income.
Final thoughts: Multiply
Venturing into HMO investments may bring significant returns, although it’s not without its hurdles. Investors often grapple with rigorous regulatory requirements and a heightened duty to maintain property conditions. Nevertheless, the prospect of higher yields from several tenants could offset these difficulties if you successfully pinpoint the right HMO property.
80 LTV mortgages
- Borrow up to 80% of the property’s value
- Get a mortgage as an individual or limited company
- An online mortgage application that takes place entirely online.
