The concept of a house share is nothing new in the UK rental market, but HMO investments are seeing a resurgence in popularity among landlords.
The UK buy-to-let market remains a popular choice for property investors looking to achieve ongoing returns through rental payments, while benefiting from rising property values over time. For medium to long-term investors, the UK housing market has proven to be a resilient and lucrative asset class over the years.
In terms of property type, there are numerous options to choose from in the UK housing market, depending on your investment goals as well as how you hope to purchase and manage the property. Houses in multiple occupation (HMOs) are one option, and appetite for HMO investment has been on the rise.
HMO investment explained
HMOs are properties that are rented out to three or more people who are not from the same household, also commonly known as a house share. The tenants could be friends, but often each tenant (or couple) comes to the property separately, as each room tends to have its own tenancy agreement.
For tenants, HMOs can be a cheaper option than renting out a whole property. They offer shared facilities, such as toilet, bathroom, kitchen and sometimes living room, while some will also come with private amenities such as an en-suite.
Young professionals are a prime target tenant type for an HMO investment, who might opt for a house share that allows them to live in a more convenient location – such as close to a place of employment – than they may otherwise be able to afford. They can be a long-term option, but most tenancy agreements will initially be for one year.
Over recent years, standards in HMOs have improved, partly due to greater regulation. For example, owners of ‘large’ HMOs, which is one that is rented to five or more people from separate households, must have a licence in order to operate legally. There are also a number of stipulations they must follow, such as minimum room sizes.
Should you invest in an HMO?
There are a number of reasons why HMO investment has become more popular in recent years. One of the main draws for many landlords is the higher yields they can generate compared with a standard buy-to-let.
This is supported by the fact that there tends to be multiple separate tenancy agreements, meaning each tenant comes and goes independently – this means that while one room may be empty for a period between tenancies, you are still generating an income through the other rooms.
According to the latest research from Paragon, rental yields across the UK have increased for a third consecutive quarter in Q1 2024. Average gross rental yields reported by landlords are now 6.1%, which is the highest level since the second quarter of 2018.
In HMOs specifically, Paragon’s report found that HMO investments generated even greater yields, reaching an average of 7% in the first quarter of this year – although depending on the location and other factors, they can be significantly higher than this for some landlords.
Thanks to this increase in interest in the property type, lenders have responded by broadening their range of mortgage products available for HMO landlords. This makes the borrowing landscape easier, which may attract more investors to the asset class.
Diversifying your portfolio
HMO investment is an increasingly popular way for investors to diversify their portfolios. Particularly as house price growth has slowed from its accelerated rate post-Covid, and mortgage rates remain higher than they were during the historic lows in interest rates we had seen, yields are a major focus for many investors.
There is also a widely reported shortage of rental stock versus tenant demand across many parts of the country, and this is a gap that HMOs can aim to fill. Many landlords are reporting being inundated with enquiries when they list a property, and the same goes for larger house shares.
One consideration when looking into HMO investment is the property management, which is more complex due to the fact that there tends to be multiple tenancy agreements. Many landlords opt for a management company to deal with their property, although others – often non-portfolio landlords – will self-manage.
Richard Rowntree, Paragon Bank managing director of mortgages, said: “Against what has been a challenging economic backdrop, landlords are naturally looking for ways to maximise returns, but they are also attempting to mitigate the impact of a tax burden that has increased in recent times.
“Alongside their yield generation potential, HMOs appeal to investors because of strong demand for affordable homes, particularly in areas where tenants would perhaps not be able to afford to buy or rent a whole property.
“This is particularly evident at the moment, with high levels of rental inflation. Alongside a stabilisation of house prices, it is likely that this has contributed to improving yields.”
If you’re a portfolio landlord looking to diversify into HMOs, or a brand-new investor considering HMO investment in some of the highest yielding locations in the UK, get in touch with BuyAssociation today. You can also browse some of our current and past projects here.
