While traditional residential properties remain a popular choice, Houses in Multiple Occupation (HMOs) have emerged as a compelling investment strategy, offering superior yields despite higher initial costs.
What is an HMO?
An HMO, or House in Multiple Occupation, is a property rented out by at least three people who are not from one ‘household’ (e.g., a family) but share facilities like the bathroom and kitchen. Common examples include student accommodation or co-living spaces for professionals. They’re particularly sought after due to their ability to generate higher rental income.
The Financial Dynamics: Costs vs. Returns
According to research conducted by Octane Capital, a specialist lender, the average cost of converting a property into an HMO is approximately £41,000. This figure might appear daunting; however, the potential returns justify the initial expenditure.
An average HMO, designed for four occupants, can command a monthly rent of £593 per room or a collective £2,372. Consequently, the average yield (annual return on investment) from a four-bedroom HMO currently stands at an impressive 8.1%. This is a significant leap when compared to the general average yield of 4.4% for standard rental properties.
Jonathan Samuels, CEO of Octane Capital, emphasizes the lucrative nature of HMOs, citing higher rental incomes, increased tenant demand, and the benefit of tenant diversification. However, he cautions that HMOs require higher upfront and operating costs and come bundled with additional compliance and legal obligations.
HMOs Shine Across the Board: Regional Performance
The allure of HMOs isn’t confined to one region but is evident across England. The North East, for example, boasts an average HMO yield of 11.2%, a staggering 6.3% more than the average yield from standard rentals in the area. Yorkshire and the Humber aren’t far behind, with HMOs outperforming regular rental properties by 5%.
Even in regions like the East Midlands and London, known for their steep property prices, HMOs continue to outshine their traditional counterparts. In London, where the difference is narrowest, HMOs still generate yields 2.4% higher on average than standard rental properties.
Is HMO the Right Investment for You?
Despite the attractive financial returns, HMO management isn’t a walk in the park. Potential investors must consider the additional responsibilities, such as compliance with various health and safety regulations, securing the necessary licenses, and maintaining the property to a standard that attracts and retains tenants.
The key to a successful HMO investment lies in thorough research, understanding the legal obligations, efficient property management, and choosing the right location with a high demand for shared accommodation. For those willing to undertake these tasks, HMOs present a potentially lucrative venture, ensuring a robust income stream and a stronger return on investment compared to regular rental properties.