HMO Investment (UK): A HMO Property Investment Guide [2024] (2024)

The number of HMOs (Houses in Multiple Occupation) has indeed seen a recent decrease. While some may be discouraged by this trend, savvy investors can view it as an opportunity.

UK-wide, rents are expected to increase annually by 3-4% between 2023 to 2026.

So, let’s talk about why HMO investment in UK property and real estate still remains a compelling option in 2024 for building a secure and profitable portfolio in the long term.

What is the meaning of HMO in investment?

HMO stands for Houses in Multiple Occupations. In investment, it refers to properties with at least three unrelated tenants sharing amenities like kitchens and bathrooms.

HMO investment Pros

• Higher rental income- Due to having multiple tenants, the potential for income is higher.
• Higher occupancy rate- It is easier to fill individual rooms at a lower rent than renting a whole property with a higher rent.

HMO investment Cons

• Management challenges- You need to deal with multiple tents and resolve potential conflicts.
• Higher maintenance cost- With multiple tenants, more wear and tear often comes, which may require more repair and maintenance.

What are the benefits of HMO property investment in the UK?

While there are a lot of arguments about whether HMO properties are worth your time and efforts, here are some reasons that justify why HMO properties are beneficial.

Higher Returns

According to Castle Trust Bank, the average rental yield of an HMO property is 7.5%, which is 1.5% above the overall average rental yield of other property investments.

It is because you generate income from multiple tenants for a single property. Plus, with individual rooms, you can cater to a wider range of budgets compared to renting the entire property to a single family.

Students, young professionals, or sharers might be willing to pay a premium for a well-maintained room with shared amenities, potentially increasing your overall rental income.

Lesser Vacancy

In 2022, after a 2.4% decline, the number of available HMOs in the UK came down to 489,701. Plus, according to 2023’s Q1 report on the HMO property market, it was found that there were just 34,085, while the number of renters looking for property was 245,351.

This indicates that the supply and demand of good quality HMOs is still very unbalanced. If you secure the right location, you may never have to worry about void periods.

Now, the keyword you must focus on here is “good quality” because a recent report suggests that amongst all the different classes of HMOs, the high quality or Professional HMOs are in most demand.

Besides, it is evident that with the increasing home rents in the UK, it is easier for renters to move into an HMO, than a two-bedroom flat. It will be another reason for HMO owners to not worry about vacancies.

Potential For Capital Growth

Based on the location you choose, your HMO property can appreciate in value much faster than you think. As mentioned earlier, the UK is already going through an affordable housing shortage. With a history of housing rents only getting high, this demand is only expected to grow, making it a stable income option.

Plus, a good portion of the HMO market belongs to students or fresh graduates who are in the early stages of their careers. According to the news, there is an increase in international student enrollment for the 2023/24 academic year. This can lead to a significant rise in the demand for HMOs in locations near universities.

Areas with high student populations, limited housing availability, and a growing young professional segment are more likely to see strong HMO capital growth.

Is HMO Investment Still Considered a Profitable Property Investment Strategy?

Due to the sudden decline in the number of HMOs, the most common question has been – Is HMO a good investment strategy? Our verdict would be yes. The rental returns are far more than what you can get from a traditional rental system.

Currently, looking at the HMO market of UK, there are two key factors you need to consider to make your HMO property a success.

1. A prime location for your property. With a good location comes high demand. With high demand, you will be able to charge more.
2. Noteworthy management and aesthetics. HMOs are often criticised or compared with slums due to the sharing culture. However, if you are able to present your HMO property as a top-class and well-managed one, then you’ll easily attract high-paying tenants.

Is HMO an investment or trading?

HMO investing is a long-term strategy for steady income through rent. It requires more upfront capital and management. It is very much different from trading.

Property trading involves buying and selling assets like stocks for potentially quicker profits.

What is a good ROI for an HMO?

A good ROI for an HMO investment in the UK typically falls between 15% and 35%. This considers both rental income and potential capital growth. However, it’s highly dependent on location, property type, and management efficiency.

However, HMOs are not like typical buy-to-let properties. So while this ROI seems very attractive, you should also remember associated factors like like workload, risk tolerance, and long-term goals.

Are HMOs the best way to maximise yield?

HMOs are considered one of the best ways to maximise yield, but calling them the best would be an exaggeration.

On the plus side, you do get to enjoy multiple rents from a single property and worry less about absolute void periods, but there are some downsides, too.

To be an HMO owner, you have to manage multiple tenants, which can be time-consuming. However, this can be solved by outsourcing professional help.

Plus, more occupants generally lead to faster wear and tear on the property. So, the maintenance cost could be higher than a typical buy-to-let.

Compared to other rental properties, the licensing and regulations for HMOs can appear stricter. Therefore, all these factors should be considered when judging.

What kind of location is good for investing in an HMO?

The largest target demographic for HMOs in the UK is students. For them, it is more affordable than renting a studio or one-bedroom apartment. Plus, for international students, the HMO setting tends to be more sociable than living alone.

Therefore, the best locations for investing in HMOs would be cities with large universities. For example-

• Manchester
• Liverpool
• Leeds
• Newcastle Upon Tyne
• Bolton
• Birmingham
• Stoke-on-Trent
• Bristol
• Milton Keynes
• London
• Barking and Dagenham
• Walthamstow
• Cardiff
• Edinburgh

The next target demographic for HMOs is young professionals. With inflation rates skyrocketing, the majority of them prefer living in HMOs to save money. To cater to this demographic, you need to look for areas with a tight rental market. Areas with a general housing shortage can be a good place for HMOs, as they provide an alternative to traditional single-family homes.

What are the upfront costs of acquiring an HMO or converting an existing property?

The upfront costs for acquiring or converting an existing property are mostly different but also have some commonalities. So, let’s look at each one by one.

Upfront Cost For Acquiring and HMO

1. Property Purchase Price: This is the highest upfront cost and will vary depending on location, property size, and condition.
2. Stamp Duty Land Tax (SDLT): It is a government tax levied on property purchases. The rates could be higher in the case of different BTL properties, like HMOs.
3. Legal Fees: These are the costs associated with conveyancing (legal transfer of ownership) and potentially HMO licensing applications.
4. Survey Fees: This fee is for getting a professional property survey to identify any potential issues with the building.

Upfront Cost For Converting An Existing Property To HMO

1. Building Works: Costs for any modifications required to meet HMO safety standards and create additional bedrooms or living spaces. This might include fire doors, escape routes, additional bathrooms, and kitchen facilities.
2. Planning Permission: Depending on the extent of the conversion, you might need planning permission from your local council, which can incur fees.
3. Building Regulations Approval: Building works typically require approval under building regulations, involving fees and inspections.
4. Architect/Surveyor Fees: Hiring professionals to design the conversion and ensure it meets regulations can add to the upfront costs.

Common Upfront Costs For Both Acquiring Or Converting

1. Initial HMO License: Most HMOs require a license from your local council, with application fees and potentially ongoing renewal charges.
2. Safety Certificates: Obtaining gas and electrical safety certificates for the property before letting it out.
3. Furniture and Equipment: Furnishing the individual rooms and shared spaces with essential furniture and appliances.
4. Letting Agent Fees: If you choose to use a letting agent to find tenants and manage the property, they will charge a set-up fee.

Is HMO investing risky?

Just like any other property investment option, HMOs do have some risk factors associated. And the most common ones would be rental market downturns and property value fluctuations.

If there are any economic downturn, the rental demand might decsres, potentially impacting your ability to find tenants and maintain desired rental yields.

And the property market, despite being a steady one, can still fluctuate. In such cases, your property might not appreciate as expected. This could affect your potential capital growth.

Apart from these two uncontrollable risks, you can handle almost any challenge.

For example, you can solve the challenge of managing multiple tenants by hiring professionals.

Or the risk associated with property selection can be mitigated by consulting experts who can do the market research on your behalf.

What are the key considerations for HMO investment in a competitive market?

To maximise your returns, you need to be strategic about your HMO. Here are some tips you can apply to stay afloat in the competitive HMO market.

Pick The Right Location

Prioritize areas with a proven track record of high HMO demand, especially from students or young professionals. Look for areas facing housing shortages, driving competition for any available accommodation, including HMOs.

If Aquiring Choose A Good Property

Research the typical HMO size in your target area. Don’t go overboard with cramming in too many tenants if a comfortable layout with slightly fewer occupants might attract higher-quality renters.

Add Attractive Amenities

Don’t settle for a standard HMO layout. Consider offering unique features like en-suite bathrooms for some rooms, high-speed internet, or on-site laundry facilities to attract tenants willing to pay a premium.

Invest in maintaining a clean and well-maintained property with modern furnishings. High-quality photos and virtual tours can significantly impact online listings and attract potential tenants.

Optimize The Rent

Research average HMO rents in your area for similar properties. While undercutting competitors might seem tempting, ensure your rent covers expenses and offers a good return on investment. Consider offering competitive rent with additional perks like bills included.

Good Management

Respond promptly to inquiries and provide excellent customer service to tenants. Consider offering online rent payments and a clear communication system to build trust and encourage tenant retention.

Have A Financial Buffer

Maintain a strong financial buffer to cover potential vacancy periods and unexpected repairs. Competition can make finding new tenants take longer, so a buffer ensures smooth cash flow.

How does Pluxa help you maximise your return from property investments?

We at Pluxa offer a number of services that maximise your returns while minimising your hassle. Here’s how Pluxa Property makes your HMO investments more secure.

• Guaranteed Rent: Pluxa offers a guaranteed rental income irrespective of whether your property is occupied or not. This eliminates the risk of rental voids and ensures a steady income stream.
• Property Management: Pluxa takes care of all aspects of property management, including finding tenants, carrying out repairs, and handling inspections. This frees you from the hassle of day-to-day management and allows you to focus on other aspects of your investment portfolio.
• Expertise: Pluxa has a team of experienced professionals who can help you with all aspects of HMO investment, from sourcing the right property to complying with regulations.

If you have any further queries about our process and offerings, contact us now, and our team will guide you.