The rising demand for HMOs

Investing in HMO (House in Multiple Occupation) properties has been of significant interest for a few years now due to higher rental yields. Octane Capital reported that the average HMO yield stands at an impressive 8.1%, significantly overtaking the regular rental yield average of 4.4%* in single occupancy properties. Whilst these figures are impressive and could present great opportunities for landlords, recent changes in tenancy and lending trends have made HMOs an even more attractive investment.

Traditionally, HMOs have predominantly housed students, but one recent change fueling landlord interest, is the rising demand for shared housing from professionals and young professionals. The main reason for this is the rising cost-of-living which is hindering opportunities for professionals to rent on a singular occupancy basis.

There is a belief that professionals are also more open to residing in HMOs because they believe they are now of a higher standard. If these tenants are more likely to reside in a HMO, this could result in increased revenue for landlords holding these properties, due to a reduction in rental voids whereby the difficulty in finding a new tenant for a room should reduce.

Another reason for increased interest in HMOs is that these opportunities are not restricted to experienced landlords, primarily because there are several lenders now allowing new investors to proceed straight into the HMO sector with no previous experience required. This could further elevate the growth in HMO properties if new investors are not being restricted through lending choices.

Prior to an individual entering the HMO market, there are significant areas which need to be reviewed regarding the property they’re either striving to convert or purchase. There are specific licenses and regulations required within the sector. If your HMO is occupied by five or more unrelated tenants, there is generally a requirement to have a license, and the council also has the ability to demand additional documentation. There are severe penalties for an unlicensed HMO property, which could result in a fine.

Additionally, another notable topic which has a significant influence on the HMO field is concerning Article 4 restrictions; a regulation that authorises a council to facilitate planning permission when converting a single residential property (C3 use class) into a HMO (C4 use class). Before converting, landlords should always check if their property falls under Article 4 restrictions.

Despite the additional regulation, the rise in tenant demand may prompt more new and current landlords to add a HMO property to their portfolio over the coming months.

*HMO conversion could cost north of £41k but strong yields outweigh cost (Octane Study)