Are HMOs a Good Investment?
When choosing where to invest your hard-earned cash, it’s always wise not to put all your eggs in one basket. Even within the property sector, there are multiple ways to diversify and manage risk effectively.
From traditional buy-to-let properties to more specialised strategies like HMOs (Houses in Multiple Occupation), investors have a range of options depending on their goals.
How Can You Diversify Within Property?
Choosing different property types is one way of diversifying your portfolio.
From standard buy-to-let, to off-plan new builds, to student rentals and HMOs, having a mix allows you to adapt to changing market conditions and spread risk across different income streams.
The benefits of investing in an HMO
Better Yields
One of the biggest reasons investors consider HMOs is the potential for higher rental yields.
Recent research suggests the average UK HMO achieves around 6.3% yield, compared to 5.5% for standard buy-to-let properties. This is particularly noticeable in areas like Manchester, Liverpool, Preston and Bolton.
In fact, we’ve seen this in practice in projects like this 6-bed HMO conversion case study, where converting a standard property significantly increased both rental income and overall value.
Reducing impact of void periods
The more tenants you have, the more reliable your income. HMOs are occupied by three or more people who are not related, meaning they all have separate tenancy agreements.
If one tenant leaves, you still receive rent from the others — reducing the financial impact of void periods compared to a single-let property.
Things to consider
While there are major advantages to investing in an HMO, there are some important factors to take into account before you take the plunge.
Higher initial cost
Larger properties — or converting smaller ones into HMOs — can require significant upfront investment.
There are several additional costs associated with this kind of property that you must consider beforehand, although for most investors, the returns should offset these.
Costs to consider include:
Specialist HMO mortgages are available, and many investors use brokers to secure suitable rates and lending structures.
Licensing and Regulation
If your property houses five or more unrelated tenants, it will require a mandatory HMO licence to operate legally.
Some councils also operate additional or selective licensing schemes, meaning smaller HMOs may also require licensing.
Regulations can change, so it’s essential to stay up to date with your local authority requirements.
Bedroom sizes
Not every property is suitable for conversion into an HMO.
Since October 2018, minimum room sizes apply:
Local councils may adjust these standards, so always check before committing to a purchase.
Location
As with any property investment, location plays a huge role in success.
HMO tenants are typically:
As a result, strong locations tend to include:
Getting your location wrong could be the difference between a profitable HMO and a cash-sucking failed venture.
Expectations of tenants in a post COVID world
The way people live and work has evolved — and so have tenant expectations.
According to YouGov, 57% of the workforce expect to continue to work from home at least some of the time, and so tenants increasingly look for:
Reliable, high-speed internet
Dedicated workspace within bedrooms
Well-designed communal areas
Failing to meet these expectations could impact occupancy levels, especially in competitive markets.
The Bigger Picture: Are HMOs Worth It?
HMOs can be a powerful way to increase rental income and diversify your portfolio — but they require more planning and management than standard buy-to-let investments.
The key is understanding both the financial structure and operational requirements before committing.
If structured correctly, HMOs can be a great way of diversifying your portfolio while maximising your rental income.
Abbie Dickson-Davies
