Research shows houses in multiple occupation are becoming an increasingly popular option for landlords. In 2023, HMOs made up 27% of all buy-to-let properties in the UK, according to data from specialist lender Shawbrook.
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This figure has already risen to 34% in 2024, as landlords recognise HMOs are more profitable than a standard single let property.
There has also been an increase in the percentage of non-portfolio landlords buying HMO properties – landlords who have fewer than four mortgaged buy-to-let properties, often with different lenders.
In 2023, 17% of non-portfolio landlords took out mortgages on HMOs. This figure has risen to 21% in the first quarter of 2024.
What is an HMO property?
A house in multiple occupation, abbreviated to HMO, describes a rented property shared by tenants from different families.
An HMO can be a house or flat, a number of bedsits in one large building, a hostel, a cluster of self-contained flats or a block of converted flats.
HMO rules define the term as applying to any property that houses three or more unconnected tenants in different households where they share kitchen and toilet facilities.
What are the benefits of HMOs?
Landlords in the UK have weathered continual challenges that began with the Covid pandemic in 2020 and continued through the more recent global economic downturn.
HMOs have become sound investments for landlords due to the greater rental yields. Let separately, they provide multiple income streams for the landlord. For example, renting out a three-bedroom house to one family may generate £1,400 a month rent. However, converting it into a five-bedroom HMO could bring in £2,250 by charging each tenant £450 rent for their room.
Studies show landlords with HMO rental yields find it easier to afford mortgage lending. They also tend to have a more frequent turnover of tenants compared with a single-let property, so landlords are able to keep pace with market rents with each new tenancy agreement.
Market analysts say the trend has escalated as landlords adjust their business practices to achieve success in a tough economic climate. Another benefit is the fact that multiple streams of rent are coming in, so if one tenant falls into arrears, it will not have as big an impact on the landlord financially.
There tends to be a high demand for HMOs, as renters facing economic uncertainty are looking for more affordable rental options and it’s usually cheaper to rent one room, rather than a full house or self-contained flat.
As a landlord, you will also face fewer void periods when tenants move out, as the others will be paying their rent regardless. When you find a new tenant for the vacant room, you won’t have lost as much money as if a whole house was vacant for a prolonged period.
Are there any disadvantages?
An HMO requires a mandatory licence if it’s occupied by five or more tenants who are unrelated, so this can mean more red tape for the landlord.
You must apply to the local council for an HMO licence and there’s an upfront fee. There are regional variations in the cost and landlords should consult their local authority to find out the fee in their area. For example, in the London borough of Hounslow, the cost is £1,480 per licence, but in Sheffield, it is £1,185 for a five-bedroom HMO property. The penalties for renting out an HMO without a licence can include an unlimited fine and a criminal record.
There could be issues surrounding who is responsible for various bills. Utilities are usually covered by whoever is listed as the account holder and this is usually the landlord; as costs increase, profit margins are reduced.
Upfront costs usually include providing landlord furniture, as HMOs are let on an individual room basis, so they’re rented out fully furnished in almost every case. This means preparing a property for the HMO market can be more expensive than an ordinary single let house, for example.
This isn’t necessarily a barrier, since landlords can commission the services of a professional company to supply HMO furniture, including delivery and product assembly, which can work out cheaper and less hassle than having to furnish the property yourself from individual furniture shops.
Many landlords believe that in the longer term, it’s worth any extra outlay to purchase or convert an existing property into an HMO for the financial rewards it can reap in the future.