Houses in Multiple Occupation (HMOs) have become more popular in the buy-to-let market, and for good reason. A significant shift has been observed as more landlords choose to diversify their investment portfolios by venturing into HMOs, which involve renting out individual rooms in a property to multiple tenants. Data from Shawbrook, a specialist lender, highlights this growing trend, showing a notable increase in HMO transactions among buy-to-let businesses.
Rise in HMO Investments
According to Shawbrook’s data, HMOs accounted for 27% of all its buy-to-let transactions in both 2022 and 2023. Fast forward to 2024, and this figure has impressively risen to 34%. The data also reveals an increase in HMO investments from non-portfolio landlords—those who may own just one or a few properties—from 17% to 21% in the same timeframe. This indicates that HMOs are not only attracting seasoned investors but also those newer to the property market.
Why the Shift Toward HMOs?
Daryl Norkett, a director at Shawbrook, explains, “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 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.”
Economic and Financial Benefits
One significant advantage of HMOs is their potential to yield higher returns compared to single-tenant properties. In a higher interest rate environment, where mortgage affordability can be tight, HMOs typically generate more income, helping landlords cover mortgage costs more effectively. Moreover, the frequent turnover of tenants in HMOs enables landlords to adjust rents more regularly to match market rates, enhancing their income stability.
Strategic Property Reconfiguration
Another draw for landlords toward HMOs is the flexibility to reconfigure properties to maximise rental yields. For instance, converting a single-family home into an HMO can significantly increase its income potential by accommodating more paying tenants. This adaptability has been crucial for landlords striving to optimise their properties in a challenging economic climate.
Future Prospects and Enhancements in Lending
Shawbrook has responded to the growing interest in HMOs by adjusting its lending criteria, allowing landlords to secure larger loans, which can facilitate more significant property investments or transformations. Norkett also anticipates further growth in the HMO market, particularly with the expected cuts in interest rates. Such changes would likely make mortgage repayments more affordable, thereby attracting even more investors to the HMO model.