Are HMO investments worth it?

Due to rising popularity, real estate investors in the United Kingdom are putting their money on houses in multiple occupation (HMOs). For many, owning a property that generates rental income is not just a financial goal, but a pathway to long-term wealth. HMOs, where multiple tenants share living spaces, offer an attractive investment opportunity. This is due to their potential for higher yields compared to traditional Buy to Let properties. 

To give you a better understanding of the ins and outs of this investment, Mortgage Introducer has listed everything you need to know about HMO investments. We will shed light on what HMO is and its key characteristics. We will also explore how this kind of investment works and talk about its advantages and disadvantages. Curious about financing options for your HMO investment? Want to learn how to manage tenant agreements? Keep reading for more insights. 

For the mortgage professionals who frequent our website, this is the perfect article to share with a client who has a question about HMO investments. Feel free to send this to them! 

What is an HMO? 

An HMO in the UK is a property that is rented out to three or more tenants who are not part of the same household. These tenants share basic amenities such as: 

• common living areas 
• bathrooms 
• kitchen facilities 
• laundry areas 
• outdoor spaces 
• parking areas 

Usually, HMOs are rented by students, young professionals, or individuals looking for affordable housing. Small families sharing a property with unrelated neighbours are also common examples of HMO tenants. 

Key characteristics of HMOs 

HMOs have some key characteristics that make them unique. Here are some: 

Multiple tenants 

At least three tenants must live at the property, with the understanding that they are not part of the same family unit. In short, HMO tenants do not belong to the same household and are mostly strangers. 

Shared living spaces 

HMO tenants typically have their own bedrooms, but they share communal areas like kitchen facilities and toilets. 

Licensing requirements 

Most HMOs in the UK require a specific licence from the local council, especially if they have five or more tenants. This ensures the property meets safety and living standards. However, there are a few locations that allow HMOs to operate without a licence like Woking and Stoke-on-Trent. 

Want to better understand HMOs? Watch this video: 

The demand for high-end HMOs has been climbing since 2022. Not only that, but multi-unit freehold blocks (MUFB) are also in demand. The question is: should you invest in HMOs? Before you decide, let us discuss what this investment type is. 

What are HMO investments? 

HMO investments refer to purchasing and renting out HMOs as a way to generate rental income. Real estate investors can buy HMOs which are designed to accommodate multiple tenants who live independently but share common facilities. 

In this type of investment, you can have one property and rent it out to three or more tenants. This means having more rental yields despite owning just one HMO. Aside from getting rental income, other real estate investors look to ‘flip’ their HMOs and quickly sell them for profit. 

HMO investments often attract various tenants such as young employees and single individuals. It is also a popular choice for renters who prefer shared living arrangements due to affordability or convenience. 

Should investors put their money into HMO investments? 

Investing in HMOs can be a good idea for many people. Like other types of property investments in the UK, HMO investments have pros and cons. For instance, HMOs are proven to have high returns. In 2021, the British Landlords Association reported that HMO investment yields are 7.5% on average. This is almost twice as high as traditional Buy to Let investments, which were 3.63% on average. 

However, managing an HMO requires more work versus passive investing in real estate. You have to handle multiple tenants and make sure that their shared amenities are well-maintained. 

Whether an HMO investment is a good idea depends on many factors such as willingness to manage your direct investments. This can also be based on your understanding of the rental market and if you think that HMOs will help you reach your financial objectives. 

Check out this video to help you get started on investing in HMOs: 

Since HMO investments involve buying a property, it will be beneficial for you to consult with experts in the real estate and mortgage industry. You can look for competent mortgage professionals and more on our Best in Mortgage page. 

What are the advantages of getting an HMO investment? 

Check out some of these advantages when you invest in HMOs: 

1. higher rental yields  
2. reduced total vacancy risks  
3. various kinds of tenants  

Let’s further explore these advantages: 

1. Higher rental yields 

HMO investments are proven to generate higher rental income compared to traditional real estate investments like Buy to Let. Since you can rent out rooms individually, you can charge each tenant a separate rent. This results in a total income that is higher than what you would earn from renting the entire house to one family. 

2. Reduced total vacancy risks 

One of the biggest worries for property investors and portfolio landlords is having a property sit empty. With HMO investments, the risk of total vacancy is lower because you have multiple tenants. If one tenant moves out, you still have others who are paying rent. This means you can maintain a steady income even when one room is vacant. 

3. Various kinds of tenants 

HMOs can attract a wide range of tenants, from students to young professionals to low-income individuals. This variety allows you to choose your niche market and renovate your property to fit your choice of renters. You will also have the opportunity to fill vacancies more quickly. 

Watch this video to learn more about tenant types in HMO investments: 

Different kinds of tenants are looking for shared living spaces as the demand for HMOs continues to grow. In 2022, England’s HMO market had a combined value of almost £26 billion. 

What are the disadvantages of getting an HMO investment? 

Below are some disadvantages that you might face when you go for HMO investments: 

1. bigger management responsibilities  
2. initial setup costs  
3. potential for higher turnover  

Let’s talk about these disadvantages one by one: 

1. Bigger management responsibilities 

Managing an HMO comes with increased responsibilities. You have to deal with multiple tenants, which means more communication and coordination. This can be stressful and time-consuming, especially if issues arise. Also, you should be prepared when maintenance requests or disputes between tenants arise. 

Here's how to manage HMO tenants well: 

2. Initial setup costs 

Converting a property into an HMO can require an expensive amount upfront. You might need to make renovations to comply with safety standards, such as adding fire alarms or additional bathrooms. These initial costs can be substantial and may take time to recoup through rental income. 

3. Potential for higher turnover 

While you can avoid total vacancies with HMO investments, you can still experience high turnover rates. This is despite HMOs being able to attract different kinds of tenants.  

These renters might move frequently as more HMOs are becoming available in numerous places in the UK. As such, it can lead to periods with lower rental income as you search for new tenants. This turnover can also increase your management workload. 

Choosing the right property for your HMO investment 

Selecting the right property is important to your success as a real estate investor. You have to find an HMO that meets the needs of multiple tenants while following the rules and regulations set by the city council. Check out these factors to consider when choosing an HMO property: 

1. size and layout 
2. location 
3. condition 

Let's take a closer look at these factors: 

1. Size and layout 

Look for properties with enough space to accommodate several bedrooms and communal areas. Larger properties are ideal for turning into HMOs. They can be rented out to three or more tenants without your property being too cramped. 

2. Location 

Properties that are near universities, public transportation links, and local amenities are great choices. Look for potential HMOs nearby and do your research about the location. Most tenants will be attracted to areas that are convenient, well-connected, and near their schools or workplaces. 

3. Condition 

Consider the property's condition and the cost of any renovations needed to convert it into an HMO. Factor in costs for safety features such as: 

• fire exits 
• smoke alarms 
• emergency lighting 

Is HMO still a good investment? 

Yes, investing in HMOs can still be a good idea. The demand for HMOs is strong especially in cities and near universities, where many people look for affordable housing. As mentioned above, HMO investments can provide higher rental income than Buy to Let properties. This can allow real estate investors and portfolio landlords to earn more. 

However, HMOs can have some risks and challenges that you should consider. This investment type has specific regulations and licensing requirements which can be complicated. Managing multiple tenants also takes time and effort. You might also need to spend money on renovations on your HMO property to meet safety standards. 

Overall, HMOs can be a lucrative investment if you are prepared to handle the responsibilities and play your cards right. Staying updated with the latest news in the UK mortgage market can also help you succeed in this type of investment.  

Do you think HMO investments will work for you? Let us know in the comments below