Everything you need to know about investing in a HMO

• What is a HMO?
• What are the benefits of owning a HMO over a single-unit property?
• What do landlords needs to be aware of when investing in a HMO property?

What is a HMO?  

House in Multiple Occupation (HMOs) have for a long time been of interest to buy-to-let landlords, but this property type has accelerated in popularity over the last year with many professional landlords choosing to invest more heavily in these properties. A property is an HMO if both of the following apply; three or more tenants live in the one property but are classed as more than one household, and the tenants share bathroom or kitchen facilities. 

What are the benefits of owning a HMO over a single-unit property? 

Higher yields

The rise in popularity for HMOs is largely due to the yields that they can generate for buy-to-let landlords. The British Landlord Association  recently found that average yields for HMOs stand at 7.5% compared to single-let properties which tend to average 3.6%, making them a more attractive investment to landlords, particularly when managing rising overheads ^[1].

Increased ability to keep up with rental price inflation

Whereas a single-unit property may see a tenant move once a year at most, HMOs are likely to see greater turnover as each tenant has their own timelines. This allows landlords to raise rents across the year, and with the average UK rent rising 7.2% in the last year according to Zoopla, this could add a substantial boost to landlord’s finances, many of whom will also be contending with increases in their mortgage repayments. 

Tenant demand 

With high demand and limited supply, tenants are often looking for affordable, flexible options and HMOs continue to be a popular choice amongst students and young professionals alike. By converting existing properties into HMOs or purchasing properties with the intention of refurbishing them into an HMO, landlords can help meet demand for suitable accommodation options.

Cost efficiency

While managing an HMO may require more commitment in terms of maintenance and tenant relations, the increased rental income can offset these expenses. Additionally, landlords can often charge higher rent for furnished HMO rooms, making it easier to recoup initial setup costs.

Shared utilities

In many HMOs, tenants share utility costs, which can be a significant cost-saving for landlords. This shared responsibility can encourage tenants to be more mindful of their energy consumption, reducing overall utility expenses for the property ^[2]. 

What do landlords need to be aware of when investing in a HMO property? 

With increasing numbers of landlords diversifying into HMOs, it’s important that they are aware of the challenges of managing this property type. Indeed, managing an HMO will mean stricter regulations, higher initial setup costs and more involvement in property maintenance and tenant management compared to single-unit properties. 

For those considering diversifying, doing your research into the area you plan to invest in and ensuring you are up to date with regulations will help bring plans to fruition smoothly. 

Specialised financing: 

Many lenders offer specialised HMO mortgages tailored to the unique needs of HMO landlords. These mortgages often take into account the potential for higher rental income and may offer more favourable terms compared to standard buy-to-let mortgages. It’s really important to understand the basis upon which the lender will instruct a valuation. Speaking to your broker will help to ensure you are on the most suitable product for your needs. 

Loan-to-Value (LTV) ratio:

HMO mortgages may have different LTV requirements compared to traditional buy-to-let mortgages. With higher rental yield, landlords may be able to achieve higher LTV lending in the higher interest rate environment compared to single lets.

Regulatory compliance:

HMO properties are subject to specific regulations and licensing requirements. For example, a landlord is required to have a licence for each HMO property with five tenants or more, instead of there being one overall licence. It is also a requirement for landlords to notify the local council of their intentions to build an HMO, and abide by regulations on minimum room size requirements.

Property suitability:

Factors such as location, property size, and local demand should all be considered when evaluating potential investments. Taking the time to research other HMOs in your desired area will help you to understand demand and potential yield you may be able to achieve. 

Are HMOs becoming more popular? 

At Shawbrook, HMOs are making up an increasing percentage of our buy-to-let business. In both 2022 and 2023, HMOs made up just over a quarter (27%) of all Shawbrook’s buy-to-let business. However, as landlords place further emphasis on diversifying their portfolios, this number has already risen to more than a third (34%) in 2024.

In part this is because landlords have been looking to diversify their portfolios in the wake of recent economic challenges. When the expected interest rate cut does come, we expect even more appetite from landlords to invest in HMOs. 

^[1] https://thebla.co.uk/are-hmos-a-good-investment-in-2022/

^[2] https://www.zoopla.co.uk/discover/property-news/average-rent-uk/