Diversifying your portfolio to include a range of property types can be a successful strategy for property investors to maximise their returns, and HMO property investment has become a popular option for many.
Houses in multiple occupation (HMOs) are properties with at least three tenants living in them, forming more than one household (ie. unrelated and on separate tenancy agreements), with shared facilities such as toilet, bathroom or kitchen.
Also often known as house or flat shares, this property type has soared in popularity among tenants looking for a slightly cheaper way to rent. Added benefits for the tenant include the social aspect, as they bring a variety of people together in one space, and they are often located close to key places of employment or education.
HMO property investment has been on the rise among buy-to-let landlords, and for investors one of the key selling points is the higher yields they generate than non-HMO rental properties. This is due to the fact that each person (or couple) living there has a separate tenancy agreement, so the property is almost always occupied even when one moves out.
According to one recent study by specialist lender Shawbrook, there has been a rise in the number of landlords opting for HMO property investment to diversify their portfolios. The total proportion of the lender’s buy-to-let business made up of HMOs in 2022 and 2023 was 27%, but this has climbed to 34% so far in 2024.
Smaller landlords opting for HMO property investment
Interestingly, Shawbrook’s research has found that there has been a particular rise in non-portfolio landlords – normally those who own one to three properties – seeking out HMO property investment, noting that this side of the business has climbed from 17% to 21% over the same period.
As mentioned above, the increase in tenant demand in recent years could be one factor behind this rise in interest in this property type. Particularly as the cost of living crisis has affected many renters, living in shared accommodation tends to prove cheaper than renting your own flat.
Many HMOs are also offered with bills included with the rent, to remove the complication of tenants who may not know each other or may move in or out at different times working out bills. While this can make the rental more hassle-free for tenants, it also provides more consistency since energy bills have been on the rise.
Yields are also a major thing to factor in when considering HMO property investment. One recent study by Octane Capital, for example, put average UK rental yields at 8.1% for HMOs, compared with an average of 4.4% for a single occupancy property. In the current financial climate, this can make a big difference to investors.
Conversions are becoming more popular
While some investors may opt to purchase a ready-made HMO property investment – sometimes even with tenants in situ – others have been converting single lets into HMOs, according to Daryl Norkett, director of real estate proposition at Shawbrook.
He said: “As landlords have dealt with years of challenges stemming from the pandemic and culminating in the past couple of years of economic uncertainty, HMOs have proven to be a sound strategy for landlords looking to diversify their portfolios, as well as a strong option for non-portfolio landlords entering the market.
“HMO rental yields are more easily able to afford mortgage lending in a higher interest rate environment, and the regular turnover of tenants allows landlords to stay on track with market rents.
“The option to reconfigure properties and the ability to turn lower yielding single lets into higher yielding HMOs has clearly been a strong draw over the past year or so, as landlords adjust their businesses to succeed in a tougher economic environment.
“We have already improved our HMO criteria to enable landlords to secure larger maximum loan sizes. And, whilst we have already seen a modest increase in HMO activity, once the predicted interest rate cuts finally arrive, we’d expect to see significant growth in this sector.”